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Judgment was heard this month in the case of Credit & Mercantile plc v Kaymuu Ltd and others  All ER (D) 49 (Jun).
The claimant held a charge over a property, which had been occupied by the second defendant. It sought to retain a sum of money from the net proceeds of the sale of the property. The second defendant contended that he was entitled to that sum as the beneficial owner of the property. The Chancery Division held that, whilst the second defendant had been the beneficial owner of the property, on the facts, he could not assert his beneficial ownership of the property in priority to the claimant's charge. The claimant was entitled to retain the amount it held from the proceeds of sale of the property. The second defendant was entitled to the surplus paid into court in respect of the balance of the proceeds of sale.
The proceedings concerned a mortgagee's action for possession of a residential property in Kent (the property). The property had been formerly occupied by the second defendant (W). The claimant held a charge over the property. The charge had been entered into in 2010 to secure monies borrowed from the claimant by the first defendant (Kaumuu), the legal owner of the property. Kaymuu was controlled by S, a bankrupt businessman. The third defendant was S's trustee in bankruptcy (the trustee). The property was sold in 2012 for £1.1m. The claimant sought to retain £694,072.75 from the net proceeds of sale to realise its security. W laid claim to that amount, contending that he had beneficial ownership of the property which overrode the claimant's charge. W's case was that he and S had undertaken various property development projects together and that it had been agreed that that each of the relevant business partners would take from the profits generated by the sale of interests in a project and that, in W's case, that that sum would be used to purchase the property for him and his partner. The property had been purchased in April 2010. In May, S, through Kaymuu, had applied to the claimant for the loan, which had been secured on the property. W contended that he had been unaware of that loan. W further contended that the property had been bought with his money and that it was a clear case of a common intention constructive trust. W and the trustee claimed the surplus from the sale. The claimant claimed its costs from the surplus that was paid into court in respect of the balance of the proceeds of sale.
The issues for determination were: (i) whether, applying Pallant v Morgan  2 All ER 951, W was the beneficial owner of the property; (ii) if so, whether his beneficial interest overrode that of the claimant; (iii) whether, if the claimant's charge was enforceable, the claimant was entitled to its costs from the surplus, under the principles derived from Parker Tweedale v Dunbar Bank plc (No 2) 2 All ER 588 (Parker-Tweedale) or pursuant to the terms of the mortgage deed; and (iv) whether the trustee was entitled to reasonable remuneration, costs and expenses from the surplus. In respect of issue (ii), consideration was given to Rimmer v Webster[1900-3] All ER Rep Ext 1364(Rimmer) which held that, where an owner of property gave all the indicia of title to another person with the intention that he should deal with the property, the principles of agency apply, and any limit which he had imposed on his agent's dealing could not be enforced against an innocent purchaser or mortgagee from the agent, who had no notice of the limit.
The court ruled:
(1) In establishing beneficial interest, the following propositions applied. There had to be a pre-acquisition arrangement or understanding between the acquiring party and the non-acquiring party about the manner in which interests would be held in a property to be subsequently acquired. It was unnecessary that the arrangement or understanding should be contractually enforceable. The pre-acquisition arrangement or understanding should contemplate that one party, the acquiring party, would take steps to acquire the relevant property; and that, if he did so, the non-acquiring party would obtain some interest in the property. It was necessary that the non-acquiring party, in reliance on the arrangement or understanding, should do or omit to do something which conferred an advantage on the acquiring party in relation to the acquisition of the property. It was not necessary that there had to be both an advantage to the acquiring party and a disadvantage or detriment to the non-acquiring party (see , -,  of the judgment).
Applying settled law to the facts, the beneficial ownership of the property had been vested in W on completion of the purchase. He was, therefore, entitled to, at least, the surplus, though subject to the competing claims against it. All the elements of the Pallant v Morgan equity were present on the facts (see ,  of the judgment).
Pallant v Morgan  2 All ER 951 applied; Banner Homes Group plc v Luff Developments Ltd  2 All ER 117 applied; Thompson v Foy; Mortgage Business v Foy  All ER (D) 207 (May) applied; Crossco No 4 Unlimited v Jolan Ltd  2 All ER 754 applied.
(2) The principle in Rimmer applied in the instant case. W's abstinence from any involvement at all in the mechanics of the purchase of the property meant that he had given S the means of representing himself as the beneficial owner of the property, with full authority to deal with third parties as owner. Accordingly, W could not assert his beneficial ownership of the property in priority to the claimant's charge. It had been incumbent on W to bring his interest to the attention of the mortgagee, if he had wished to establish the priority of his beneficial interest to the claimant's subsequent charge (see , ,  of the judgment).
It followed that W was bound by the claimant's charge and, accordingly, the claimant was entitled to retain the sum of £694,072.75, being the amount, including interest, required to discharge the debt owed to it by Kaymuu (see  of the judgment).
Rimmer v Webster [1900-3] All ER Rep Ext 1364 applied; Paddington Building Society v Mendelsohn 50 P & CR 244 considered; Governor and Co of the Bank of Scotland v Hussain  All ER (D) 95 (Nov) considered; Skipton Building Society v Clayton 66 P & CR 223 distinguished.
(3) The terms of the mortgage deed did not assist the claimant as against W. The claimant was not entitled to recover from the surplus its costs of defending against W's claims. However, it was, in the ordinary way, entitled to recover its initial costs of the proceedings against Kaymuu to obtain possession of the property. Those costs had been incurred in the ordinary course of enforcing the mortgage contract and realising its security, and fell within the first category of costs identified in Parker-Tweedale (see  of the judgment).
The claimant was entitled to retain the amount it held from the proceeds of sale of the property. W was entitled to the surplus paid into court in respect of the balance of the proceeds of sale. The claimant was not entitled to add to the mortgage debt and recover from the surplus its costs of the instant proceedings (see  of the judgment).
Parker-Tweedale v Dunbar Bank plc (No 2)  2 All ER 588 applied.
(4) It was settled law that the court had an inherent jurisdiction to require persons beneficially interested in property to subject their beneficial entitlements to a right of payment to persons who had come otherwise than by officious intermeddling into the position of fiduciaries in relation to the relevant fund, and had incurred time and cost in realising the fund and identifying the entitlements of the beneficiaries and paying out to those beneficiaries their entitlements. However, the discretion would not normally be exercised in favour of a person pursuing or investigating whether to pursue, an interest adverse to that of the beneficiary, namely, where the person seeking the allowance maintained that the beneficiary was not entitled to the property from which the allowance was sought (see ,  of the judgment).
The instant case was not one in which the court should exercise its discretion to grant an allowance. It would be most unusual to grant an allowance because of the trustee's decision to enter the arena and take sides in the argument. The circumstances were not so exceptional that an allowance should be granted (see  of the judgment).
The trustee was not entitled to recover from the surplus any amount by way of remuneration, costs and expenses (see  of the judgment).
0330 161 1234