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City of London Building Society v Flegg [1988] 1 AC  54 House of Lords

Mr & Mrs Maxwell Brown purchased Bleak House in 1977 for £34,000. Half the purchase price was funded by the parents of Mrs Maxwell Brown, Mr & Mrs Flegg.  Bleak House was registered in the names of Mr & Mrs Brown who held the legal title on trust for sale. The Fleggs and the Maxwell Browns occupied the house. In 1982 the Maxwell Browns, in breach of trust, mortgaged the property for £37,500 to City of London Building Society. The Fleggs were unaware of this mortgage and the Maxwell Browns used the money for their own purposes. The Maxwell Browns subsequently defaulted on the mortgage payments and City of London Building Society brought a action seeking possession of Bleak House. The Fleggs defended on the grounds that they had a beneficial interest in the property through their contribution to the purchase price and this was an overriding interest under s.70(1)(g) Land Registration Act 1925 since they were in actual occupation when the mortgage was taken out. City of London Building Society claimed that the Flegg’s interest had been overreached since they had paid the capital moneys to two trustees. The trial judge found for the Building Society. This decision was reversed by the Court of Appeal. City of London Building Society appealed to the House of Lords.

Held:

The Flegg’s interest had been overreached. Their right existed only in the proceeds of sale. Once overreaching operated to detach the beneficial interest from the land to the proceeds of sale there is no longer an interest in land capable of being an overriding interest. City of London Building Society therefore took free of the Flegg’s interest.

Lord Oliver

“If it be the case, as the Court of Appeal held, that the payment by the appellants in the instant case to two properly constituted trustees for sale, holding upon the statutory trusts, provides no sensible distinction from the ratio of the decision of this House in Boland's case, the legislative policy of the 1925 legislation of keeping the interests of beneficiaries behind the curtain and confining the investigation of title to the devolution of the legal estate will have been substantially reversed by judicial decision and financial institutions advancing money on the security of land will face hitherto unsuspected hazards, whether they are dealing with registered or unregistered land.”

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