UNITED BANK OF KUWAIT V SAHIB & OTHERS
(1996) Times, 13 February
Deposit of deeds does not create charge
COURT OF APPEAL
Published 13 February, 1996
Before Lord Justice Leggatt, Lord Justice Peter Gibson and Lord Justice Phillips
Judgment February 2, 1996
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, which provided that a disposition of an interest in land had to be in writing in a document signed by both parties incorporating all the terms of the agreement, abolished the long established rule that a mere deposit of title deeds relating to a property by way of security created a valid equitable mortgage or charge of the property without more.
The Court of Appeal so held in a reserved judgment dismissing the appeal of the third defendant, Societe Generale Alsacienne de Banque SA (“SoGenAl”), from part of the judgment of Mr Justice Chadwick (The Times July 7, 1994; (1995) 2 WLR 94) in the Chancery Division when he granted a declaration that, as between SoGenAl and the plaintiff bank, United Bank of Kuwait plc, SoGenAl did not hold any equitable mortgage or charge over the undivided share belonging to the first defendant, Hadi Haji Sahib (“S”), in the proceeds of sale of the property known as 37c Fitzjohn’s Avenue, Hampstead, London.
Mr Christopher Pymont for the third defendant; Mr James Munby, QC, for the plaintiff; the first and second defendants did not appear and were not represented.
LORD JUSTICE PETER GIBSON
said that since Russel v Russel ((1783) 1 Bro CC 269) a deposit of title deeds relating to a property by way of security had been taken to create an equitable mortgage of the property without any writing, notwithstanding section 4 of the Statute of Frauds 1677 and its successor, section 40 of the Law of Property Act 1925.
The plaintiff in September 1991 obtained judgment in the Queen’s Bench Division against S in the sum of £229,815.17, being principal and interest due from him in respect of banking facilities granted to him by the plaintiff.
In October 1992 the plaintiff obtained a charging order nisi, made absolute in November 1992, in order to secure and enforce that judgment debt, together with costs and statutory interest from the date of judgment against, inter alia, S’s interest in the freehold property.
The present proceedings were brought to enforce the charging order, but neither S nor the second defendant, his wife, joint owner and person in possession of the property, had taken any substantial part. The real issue was therefore between the plaintiff and SoGenAl which claimed an equitable mortgage over S’s interest.
That claim was based on, inter alia, an advance of £130,000 made by SoGenAl to S in September 1990 which was treated as between them as a series of successively renewed time deposits by SoGenAl with S. At no time did the wife authorise S’s lawyers to hold the land certificate to the order of SoGenAl. Consequently, SoGenAl did not have security over the interest.
They asked S’s lawyers to act for them in order to regularise the security arrangements in respect of the property. No legal mortgage was executed by S and his wife, although by August 1992 correspondence contained a clear indication that S accepted SoGenAl was secured in respect of the time deposit current for the time being since he held the legal certificate for the property to SoGenAl’s order.
The judge below assumed S would have been estopped from denying an agreement between SoGenAl and him that the property should stand as security. He held that an agreement to charge what S could not charge, namely both the legal title and beneficial interest in the property, in the absence of some statutory prohibition, would be effective to create an equitable charge over S’s undivided share, but that section 2 of the 1989 Act was such statutory prohibition.
His Lordship said that section 2 was enacted to give effect to that part of the Law Commission’s report on transfer of land Formalities for Contracts for Sale etc of Land (Law Com No 164; June 29, 1987) which recommended repeal of section 40 of the 1925 Act and abolition of the doctrine of part performance, proposing new requirements for the making of a contract for the sale or other disposition of an interest in land.
Thus, by section 2, a contract for a mortgage of or charge in any interest in land or in the proceeds of sale of land could only be made in writing and only if the written document incorporated all the terms which the parties had expressly agreed, and was signed by or on behalf of each party. It was not suggested that there was any such document in the present case.
The judge had correctly concluded (at p 110) that the courts had consistently treated the rule that a deposit of title deeds for the purpose of securing a debt operated, without more, as an equitable mortgage or charge as contract-based, and the courts were concerned to establish, by presumption, inference or evidence, what the parties intended, and then to enforce their common interest as an agreement.
His Lordship emphasised the essential contractual foundation of the rule as demonstrated in the authorities, more recently in In re Wallis & Simmonds (Builders) Ltd ((1974) 1 WLR 391) and In re Alton Corporation ((1985) BCLC 27).
The deposit by way of security was treated as prima facie evidence of a contract to mortgage, and as part performance of that contract equity regarded that as done which ought to be done.
Mr Pymont submitted, inter alia:
1 That nothing in the 1989 Act expressly or by necessary implication repealed the 1925 Act and later legislation recognising and extending the scope of a security by deposit of title deeds. He drew attention to modern commentators’ conclusions that section 2 was not intended to repeal the rule: see Snell’s Equity (29th edition (1990) pp 444–445); Cheshire and Burn’s Modern Law of Real Property (15th edition (1994) p 670) and “Informed dealings with land after section 2” Bently and Coughlan ((1990) 10 Legal Studies p 325, 341). His Lordship differed with reluctance from such distinguished lawyers but was not persuaded their views were correct. The citation and reference to earlier legislation was now subject to and in the light of the 1989 Act. The new formalities required by section 2 governed all dispositions of interests in land. 2 There was nothing in the Law Commission’s report to suggest that security by deposit of title deeds was intended to be affected or was even considered. His Lordship said that the inclusion of contracts to grant mortgages in the report’s proposals was made plain in paragraph 4.3, and as security by deposit of title deeds took effect as an agreement to mortgage, in logic there was no reason why security by deposit of title deeds should have been excepted from the proposals. In any event, if the wording of section 2 was clear, as his Lordship believed it was, the absence from the report of a reference to security by deposit of title deeds could not alter the section’s effect. 3 That the rule that a deposit of title deeds created a mortgage was not dependent on any actual contract between the parties, although, if there was one, that contract would govern the parties’ rights. It had to comply with section 2 but that did not affect the legal presumptions or inferences which arose when there was a mere deposit.His Lordship said that it was clear from the authorities that the deposit was treated as rebuttable evidence of a contract to mortgage. To allow inquiries, such as evidence to establish whether or not a deposit was intended to create a mortgage security over the land and whether or not the original deposit was intended at the outset to be security for further advances, after the 1989 Act was quite inconsistent with section 2, requiring as it did that the contract be made by a single document containing all the terms of the agreement if it was to be valid.
It seemed clear that the deposit of title deeds took effect as a contract to mortgage and fell within section 2. His Lordship agreed with the judge below (at p 111) that the Law Commission’s recommendation that contracts relating to land should be incorporated in a signed document containing all the terms was clearly intended to promote certainty, and that the new legislation was likely to have the effect of avoiding disputes on oral evidence as to the obligation which the parties intended to secure.
Therefore, by reason of section 2, the deposit of title deeds by way of security could not give a mortgage or charge.
Lord Justice Phillips gave a concurring judgment and Lord Justice Leggatt agreed with both.
Solicitors: Radcliffes & Co; Clyde & Co.
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