Friday, 2 February 1996
LORD JUSTICE PETER GIBSON: Since 1783 a deposit of title deeds relating to a property by way of security has been taken to create an equitable mortgage of that 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 main question that arises on this appeal is whether this much criticised but well-established rule has survived the coming into force of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
This is an appeal by the Third Defendant, Société Générale Alsacienne de Banque S.A. ("Sogenal"), from part of the order of Chadwick J on 24 June 1994, whereby he declared that as between Sogenal and the Plaintiff, United Bank of Kuwait plc ("UBK"), Sogenal does not have any equitable mortgage or charge over the undivided share of the First Defendant, Hadi Haji Sahib, in the proceeds of sale of 37c Fitzjohn's Avenue, Hampstead, London NW3 ("37c"). The Judge's judgment is reported at [1995] 2 WLR 94 and contains a full and careful statement of the facts. It is therefore unnecessary for me to do more than recount the salient facts to make the issues in this appeal intelligible.
Mr Sahib is the husband of the Second Defendant, Raja Saad Hashim. Mr Sahib and Mrs Hashim are the legal and beneficial owners of 37c. On 30 June 1987 Sogenal, at Mr Sahib's request, guaranteed to National Bank of Abu Dhabi ("NBAD") repayment by Mr Sahib to NBAD of all moneys outstanding under banking facilities granted to him by NBAD up to £325,000. The amount of the guarantee was increased on 7 October 1987 to £400,000, and by payments on 15 August and 19 September 1990 £400,000 was paid under the guarantee by Sogenal to NBAD. It is not in dispute that Mr Sahib impliedly agreed to indemnify Sogenal against any payments which it made under the guarantee. Sogenal initially took no security from Mr Sahib for the guarantee, but on 25 November 1988, Mr. Sahib's solicitors wrote to Sogenal confirming that he had instructed them to hold the land certificate of another property owned by Mr Sahib alone to Sogenal's order to cover the guarantee. On 3 August 1990 the solicitors wrote again to Sogenal, saying that they understood that Mr Sahib was prepared for the land certificate to 37c to be held as additional security to the order of Sogenal pending a possible sale or refinancing of that property. In a fax to the solicitors on 14 August 1990, Sogenal referred to its understanding that the solicitors would hold as additional security on Sogenal's behalf the land certificate to 37c. On 10 September 1990 the solicitors wrote to Sogenal confirming that they would in future hold that land certificate to the order of Sogenal.
Part of the moneys for which Mr Sahib was liable to Sogenal under his implied indemnity in respect of the guarantee was repaid by Mr Sahib and immediately after 19 September 1990, when £240,000 was paid by Sogenal to NBAD under the guarantee, that net liability was £103,872.61. The position was covered by an advance of £130,000 made by Sogenal to Mr Sahib on 21 September 1990. The advance was treated by Sogenal as a time deposit made by Sogenal with Mr Sahib. The deposit matured on 21 December 1990, and was renewed successively throughout 1991, interest being debited to his account on each renewal. Time deposits were thereafter renewed in differing amounts; by June 1993 the time deposit had increased to £144,000. On 10 June 1993 with the addition of interest the amount owed by Mr Sahib to Sogenal was £151,266.
At no time did Mrs Hashim authorise Mr Sahib's solicitors to hold the land certificate in respect of 37c to the order of Sogenal. Consequently, Sogenal did not have security over the freehold interest in 37c, as Sogenal became aware in 1991. Mr Sahib's solicitors were asked to act for Sogenal "in connection with regularising the security arrangements in respect of 37c" and they requested Mr Sahib and Mrs Hashim to execute a legal mortgage to secure Mr Sahib's indebtedness to Sogenal. But no mortgage was executed, though correspondence in August 1992 contained a clear indication by Mr Sahib that by then Sogenal was secured in respect of the amount due on the current time deposit and on the balance of Mr Sahib's account with Sogenal.
On 20 September 1991 UBK obtained judgment in the Queen's Bench Division against Mr Sahib in the sum of £229,815.17, being principal and interest in respect of banking facilities granted to Mr Sahib by UBK. On 12 October 1992 a charging order nisi on Mr Sahib's interest in 37c was granted to UBK to secure and enforce that judgment debt together with costs and statutory interest from the date of judgment. There is nothing to indicate that UBK had any knowledge of Sogenal's dealings with Mr Sahib in relation to security over 37c. On 19 October 1992 UBK gave notice to Mrs Hashim as well as Mr Sahib of the charging order nisi. On 25 November 1992 that order was made absolute at a hearing at which Mrs Hashim was represented. It is common ground that the order left Mrs Hashim's beneficial interest in 37c unaffected, nor did it charge the freehold of 37c.
On 27 November 1992 UBK commenced proceedings against Mr Sahib and Mrs Hashim by originating summons to enforce the charging order. UBK sought payment of the amounts claimed under the charging order, possession of (inter alia) 37c and directions for sale. On 16 July 1993 Sogenal was joined as the Third Defendant and UBK amended the originating summons to claim a declaration that Sogenal did not hold any equitable mortgage or charge over 37c or, if it did, that such mortgage or charge did not take priority over UBK's charging order absolute. Neither Mr Sahib nor Mrs Hashim appeared or was represented at the hearing before the Judge. The issue contested before the Judge was the declaration claimed by UBK against Sogenal.
There is no evidence that Sogenal gave notice to Mrs Hashim of the interest which it claims until after the present proceedings were commenced. The first question dealt with by the Judge was whether if Sogenal had an interest as mortgagee or chargee of Mr Sahib's undivided share in the proceeds of sale of 37c, the rule in Dearle v. Hall (1828) 3 Russ. 1 applies. If it does, then UBK, by reason of the prior notice given to Mr Sahib and Mrs Hashim, will have priority over Sogenal. The Judge held that the rule in Dearle v. Hall had no application on the facts of the present case, and that if Sogenal became entitled to a mortgage or charge over Mr Sahib's beneficial interest in 37c before the charging order nisi was made, that mortgage or charge had priority over UBK's charge created by the charging order.
The Judge then turned to whether Sogenal did have such a mortgage or charge before 12 October 1992. He made the assumption that Mr Sahib would have been estopped from denying an agreement between Sogenal and him that 37c should stand as security for the advance on 21 September 1990 of £130,000 and interest. He expressed the view that an agreement to charge what Mr Sahib could not charge, namely both the legal title and beneficial interest in 37c, in the absence of some statutory prohibition would be treated as effective to create an equitable charge over Mr Sahib's undivided share. But he held that there was such statutory prohibition in section 2 Law of Property (Miscellaneous Provisions) Act 1989, and that the rule that the deposit of title deeds by way of security created an equitable mortgage of the property had not survived the coming into force of the section on 27 September 1989.
In case he was wrong on that, the Judge gave two further reasons why no charge over Mr Sahib's interest could have been created in favour of Sogenal by the holding of the land certificate to Sogenal's order. The first was that a deposit of title deeds could not operate as an equitable charge unless the deposit was effective, and the deposit by one joint tenant without the consent of the other was ineffective because the creditor had no right to retain custody of the title deeds against the other joint tenant. The second was that if the deposit was otherwise effective, it would have been a disposition of a subsisting equitable interest within section 53(1)(c) Law of Property Act 1925, and as such it would be void because the dispositive act was not in writing.
Sogenal now appeals. UBK by a Respondent's Notice challenges the Judge's decision on the applicability of the rule in Dearle v. Hall, and further challenges the correctness of the assumption that Mr Sahib was estopped from denying that 37c should be security for the advance of £130,000 and interest. Mr Pymont for Sogenal has helpfully identified five issues from the Notice of Appeal and Respondent's Notice:
(1) Can a deposit of title deeds operate as a mortgage or charge over an interest in land since section 2 of the 1989 Act came into force ("the section 2 point")?
(2) Subject to (3) below, was the deposit on behalf of Mr Sahib, being one of two joint tenants of the title to the property, effective to mortgage or charge his beneficial interest in the proceeds of sale of the property?
(3) To the extent that a mortgage or charge over that interest would otherwise have been created by the deposit, is that mortgage or charge invalid or ineffective for want of writing under section 53(1)(c)?
(4) If the deposit did not succeed in creating any mortgage or charge, was Mr Sahib nevertheless estopped from denying the mortgage or charge by reason of the dealings between him and Sogenal?
(5) If Sogenal had the benefit of a mortgage or charge, should that interest take priority over the interest of UBK?
That fourth issue was developed by Mr Pymont before us in a way not argued before the Judge nor foreshadowed in the Notice of Appeal, nor, as appears from the wording of issue (4), even adumbrated in his skeleton argument. Mr Pymont submitted that, not only was Mr Sahib estopped, but also that UBK as the successor in title to Mr Sahib, was also estopped by reason of the estoppel against Mr Sahib. I shall call this enlarged issue "the estoppel point".
The section 2 point
Section 2 of the 1989 Act was enacted to give effect to the substance of that part of the Law Commission's Report on Transfer of Land: Formalities for Contracts for Sale etc. of Land (1987) (Law Com. No. 164) which recommended the repeal of section 40 of the Law of Property Act 1925 and the abolition of the doctrine of part performance and proposed new requirements for the making of a contract for the sale or other disposition of an interest in land. The material parts of section 2 are:
"(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where the contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
...
(5) ... [N]othing in this section affects the creation or operation of resulting, implied or constructive trusts.
(6) In this section -
"disposition" has the same meaning as in the Law of Property Act 1925; "interest in land" means any estate, interest or charge in or over land or in or over the proceeds of sale of land.
...
(8) Section 40 of the Law of Property Act 1925 (which is superseded by this section) shall cease to have effect."
"Disposition" in section 205(1)(ii) Law of Property Act 1925 includes a conveyance, and "conveyance" includes a mortgage or charge. Section 40, which replaced section 4 of the Statute of Frauds 1677, contained provisions less stringent than the 1989 Act governing formalities relating to contracts for the sale or other disposition of land or any interest in land, and by sub-section (2) had preserved the law relating to part performance.
The effect of section 2 is, therefore, that a contract for a mortgage of or charge on any interest in land or in the proceeds of sale of land can only be made in writing and only if the written document incorporates all the terms which the parties have expressly agreed and is signed by or on behalf of each party. In the present case it is not suggested that there is any such written document.
Mr Pymont argued before the Judge and before us that it was unnecessary for Sogenal to rely on any contract. He submitted, no doubt rightly, that the confirmation given by Mr Sahib's solicitors in their letter of 10 September 1990 to Sogenal, that they would hold the land certificate to the order of Sogenal was to be treated as a notional deposit of that title deed with Sogenal just as much as if there had been actual delivery to Sogenal. He relied on the rule which has operated since Russel v. Russel (1783) 1 Bro. C.C. 269 to which I referred at the beginning of this judgment. He did not dispute that the basis of the rule, as expounded in the authorities, is that the court infers an agreement to mortgage in the absence of contrary evidence.
On this part of the case the Judge expressed his conclusion in a way which is in my opinion entirely correct:
"Whether or not the enforcement of the agreement which is to be inferred or presumed from the deposit of the title deeds was properly to be regarded as an example of the operation of the doctrine of part performance, as Lord Selborne LC suggested in Maddison v. Alderson, 8 App Cas 467, or as a sui generis exception to the Statute of Frauds 1677 which was outside the proper scope of that doctrine - in that the act of part performance relied upon was not the act of the mortgagee who was seeking to enforce the agreement - there can, in my view, be no doubt that the courts have, consistently, treated the rule that a deposit of title deeds for the purpose of securing a debt operates, without more, as an equitable mortgage or charge as contract - based, and have regarded the deposit as a fact which enabled the contract to be enforced notwithstanding the absence of evidence sufficient to satisfy the Statute of Frauds. It is impossible to distinguish those cases, of which Ex parte Langston, 17 Ves. 227 is an example, in which the court, having inferred from the fact of the deposit an intention to create security, let in oral evidence to identify the scope of the obligation which was to be secured from cases in which there was no evidence beyond the fact of the deposit. In all those cases, the court was concerned to establish, by presumption, inference or evidence, what the parties intended, and then to enforce their common intention as an agreement."
I would emphasise the essential contractual foundation of the rule as demonstrated in the authorities. The deposit by way of security is treated both as prima facie evidence of a contract to mortgage, and as part performance of that contract. It is sufficient to refer briefly to the more recent of the multitude of authorities. In Re Wallis & Simmonds (Builders) Ltd [1974] 1 WLR 391 Templeman J held that the equitable charge resulting from a deposit of title deeds was contractual in nature and specifically rejected an argument that the charge arose by operation of law. In Re Alton Corporation [1985] BCLC 27 Sir Robert Megarry V-C, said in relation to a loan accompanied by the deposit of title deeds (at page 63):
"... I have to remember that the basis of an equitable mortgage is the making of an agreement to create a mortgage, with the deposit of the land certificate and, since Steadman v. Steadman [1976] AC 536 ... probably the paying of the money as well, ranking as sufficient acts of part performance to support even the purely oral transaction. But some contract there must be."
Mr Pymont made seven submissions as to why section 2 did not apply to a deposit of title deeds.
(i) He submitted that there is nothing in the 1989 Act which expressly or by necessary implication repeals the provisions of the 1925 Act and later legislation recognising and extending the scope of a security by deposit of title deeds. He relied on four statutory provisions to the following effect: (a) section 13 Law of Property Act 1925, which provides that that Act is not to affect prejudicially the right or interest of any person arising out of or consequent on the possession by him of any document relating to a legal estate in land; (b) section 97 of that Act relating to unregistered land which excepts from the operation of the section (governing the priority of legal and equitable mortgages) a mortgage protected by the deposit of documents relating to the legal estate affected; (c) section 66 Land Registration Act 1925, which allows the proprietor of any registered land to create a lien on the registered land by deposit of the land certificate, such lien to be equivalent to a lien created in the case of unregistered land by the deposit by a legal and beneficial owner of the registered estate of the documents of title; and (d) section 2(4) Land Charges Act 1972, which excepts from general equitable charges requiring registration under Class C(iii) any equitable charge secured by a deposit of documents relating to the legal estate affected.
Mr Pymont submitted that it was significant that none of those provisions was referred to in the 1989 Act as having been repealed or otherwise affected by section 2. He drew attention to the fact that some commentators have concluded from this that section 2 was not intended to repeal the rule relating to the creation of security by deposit of title deeds: see Snell's Equity (1990) 29th Edition page 445, Cheshire & Burn's Modern Law of Real Property (1994) 15th Edition page 679, and Bentley and Coughlan (1990) 10 Legal Studies 325 at page 341.
I differ with reluctance from such distinguished property lawyers, but I am not persuaded that their views on this point are correct. The presence of section 13 in the Law of Property Act 1925, as Mr Munby for UBK submitted, would appear to indicate that, without it, the Act, with its requirements of formalities for dispositions of interests in land, might have affected prejudicially the right or interest of a person with whom title deeds had been deposited. Significantly the 1989 Act, with its new and stricter requirements, contains no corresponding provision. Section 97 relates not to the requirements governing the validity of a mortgage but to priorities between mortgagees. Section 66 of the Land Registration Act 1925 begs the question what lien is created by the deposit by a legal and beneficial owner of the documents of title to unregistered land. Section 2(4) of the Land Charges Act 1972 relates not to the validity of a charge, but to the way in which the deposit of the title deeds operates as a substitute for registration. In the scheme of the legislation, all mortgages must be registered unless protected by deposit of title deeds.
In any event, earlier legislative references to rights or interests created by the deposit of title deeds, must now be read in the light of the 1989 Act. The new formalities required by section 2 govern the validity of all dispositions of interests in land. I cannot see that the references relied on by Mr Pymont in the earlier legislation can displace what otherwise is the plain meaning and effect of section 2 on contracts in whatever form to mortgage land.
(ii) Mr Pymont pointed to the fact that there is nothing in the Law Commission's report which initiated the reforms effected by the 1989 Act to suggest that security by deposit of title deeds was intended to be affected or was even considered.
I accept that there is nothing in the report that expressly refers to the deposit of title deeds by way of security, or suggests that it created a problem that needed attention. But the intention of the Law Commission to include in its proposals contracts to grant mortgages was made plain (see paragraph 4.3), and as a deposit of title deeds by way of security takes effect as an agreement to mortgage, in logic there is no reason why the creation of security by deposit of title deeds should have been excepted from the proposals. This is all the more likely when one considers the part played by the doctrine of part performance in the recognition by equity judges of the Russel v Russel doctrine (see further (v) below). In any event, if the wording of section 2 is clear, as I think it is, the absence from the Law Commission's report of a reference to security by deposit of title deeds cannot alter the section's effect.
(iii) Mr Pymont then reverted to section 2(4) Land Charges Act 1972 excepting equitable charges not secured by a deposit of documents from the requirement of registration. He said that if a deposit of title deeds prima facie takes effect as a contract to create a mortgage, such a security would be registrable as a Class C(iv) land charge, notwithstanding the exception from the requirement of registration as a Class C(iii) land charge, and that cannot be right.
The wording of section 2(4) is to my mind a clear indication that, for the purposes of that Act, a deposit of title deeds gave rise to a general equitable charge which would have been registrable as a Class C(iii) land charge, but for being excepted. I accept that it was plainly not envisaged in that Act that it might also come within class C(iv). As I have already said, it was part of the scheme of the legislation that all mortgages should be registered unless protected by deposit. It would be inconsistent with that scheme that a deposit of title deeds by way of security should be an estate contract registrable as a Class C(iv) land charge. It may be that, as Mr Munby submitted, the contract to grant a mortgage inherent in the deposit of title deeds by way of security was not considered to be a mere estate contract. But whether or not that is right, I do not see that this statutory provision can affect the meaning of section 2 of the 1989 Act.
(iv) Mr Pymont then said that the rule that a deposit of title deeds by way of security creates a mortgage is not dependent on any actual contract between the parties, though, if there is one, that contract will govern the parties' rights; if there is an actual contract, it must comply with section 2; but that does not affect the legal presumptions or inferences which arise when there is a mere deposit.
I accept that there need not be an express contract between the depositor of the title deeds and the person with whom they are deposited for an equitable mortgage to arise (subject to section 2). But I have already stated why it is clear from the authorities that the deposit is treated as rebuttable evidence of a contract to mortgage. Oral evidence is admissible to establish whether or not a deposit was intended to create a mortgage security, whether or not the original deposit was intended at the outset to be security for further advances, whether or not it was agreed subsequently that that deposit should be security for further advances and whether or not any memorandum of agreement accurately stated the terms of the contract or was complete. To allow enquiries of this sort after the 1989 Act in order to determine whether an equitable mortgage has been created and on what terms seems to me to be wholly inconsistent with the philosophy of section 2, requiring as it does that the contract be made by a single document containing all the terms of the agreement if it is to be valid.
(v) Mr Pymont then submitted that it is well-established that an act of part performance could only be relied upon if it were an act done by the person seeking to enforce the contract. He said that that requirement is not fulfilled if a plaintiff, with whom the title deeds are deposited, seeks to rely on the defendant's act of depositing the title deeds.
It is clear that the rule relating to the creation of an equitable mortgage by deposit proceeded on the footing that the act of deposit constituted a sufficient act of part performance of the presumed agreement to mortgage. I accept that that is contrary to the normal rule that an act of part performance can only be relied upon if done by the plaintiff and not the defendant. But in Maddison v. Alderson (1878) 8 AC 467 at page 480, Lord Selborne LC said that the law of equitable mortgage by deposit of title deeds depended upon the same principles as the cases of part performance to which he had been referring, and in each of which a valid contract was an essential feature. In Re Beetham, Ex p. Broderick (1886) 18 QBD 380, the Divisional Court considered whether certain facts were sufficient to establish an equitable mortgage by deposit of title deeds. Cave J (with whom Wills J agreed) said (at pp. 382,3):
"The law on the subject ... forms a branch of the equitable doctrine of the specific performance of oral contracts relating to land based on part performance. It has been held that there is an inference from the mere deposit of title deeds that it was intended to give an interest in the land, and in that way there is something more than a mere oral contract, something in the nature of part performance, so as to take the case out of the Statute of Frauds."
Further as Smith J pointed out in Francis v. Francis [1952] VLR 321 at pages 339 and 340, although Lord Eldon repeatedly criticised the way in which the doctrine of part performance had been applied in the case of mortgages created by deposits of title deeds, this criticism was based, not on the view that in such cases there is no act on the part of the mortgagee, but on the equivocal significance of the act of deposit. But even as early as Lord Eldon's time, the recognition by the courts of an equitable mortgage created by the mere deposit of title deeds was too settled to be challenged.
To the extent that part performance is an essential part of the rationale of the creation of an equitable mortgage by the deposit of title deeds, that too is inconsistent with the new philosophy of the 1989 Act. As the Law Commission said in its report, "Inherent in the recommendation that contracts should be made in writing is the consequence that part performance would no longer have a role to play in contracts concerning land" (paragraph 4.13).
(vi) Mr Pymont then submitted that in other situations equity treats void dispositions (for example, void leases and void mortgages) as agreements to dispose of what the disponor can dispose. He said that there was nothing in the Law Commission's report or in the problems there addressed to suggest that section 2 was intended to affect such agreements.
I have already referred to the express reference in the Law Commission's report to the intention to include in its proposals contracts to grant mortgages. In the same paragraph (4.3) it was made clear that contracts to grant leases were also to be included. In my judgment for the like reasons to those given in (ii) above, the absence from the report of express mention of the effect of void dispositions as agreements to dispose cannot alter the effect of section 2.
(vii) Mr Pymont submitted that although equity will presume to infer an agreement from the deposit of title deeds, it does not follow that for all purposes the parties' rights are to be treated as if they lie in contract.
He sought to derive support for this proposition from the remarks of Hoffmann J in Spiro v. Glencrown Properties Ltd. [1991] Ch 537 at 544. There that judge was considering how, for the purposes of the 1989 Act, an option to buy land should be characterised. He pointed out that an option was neither an offer nor a conditional contract, not having all the incidents of the standard form of either of those concepts, and said that each analogy is in the proper context a valid way of characterising the situation created by an option. He continued:
"The question in this case is not whether one analogy is true and the other false, but which is appropriate to be used in the construction of section 2."
He concluded not that the option fell outside the scope of section 2 but that it came within it. In the present case, for the reasons already given, it seems to me clear that the deposit of title deeds takes effect as a contract to mortgage and as such falls within section 2.
The Judge said at page 111:
"The recommendation [of the Law Commission] that contracts relating to land should be incorporated in a signed document which contains all the terms was, clearly, intended to promote certainty. There is no reason why certainty should be any less desirable in relation to arrangements for security over land than in relation to any other arrangements in respect of land. The present case itself illustrates the need to be able to identify the obligation which is to be secured. I do not find it surprising that Parliament decided to enact legislation which would be likely to have the effect of avoiding disputes on oral evidence as to the obligations which the parties intended to secure".
I agree. Indeed, it seems to me that the whole of the Judge's reasoning, to which I would pay tribute, on the section 2 point cannot be faulted. Like him, I am fortified by the support for the same conclusion given in Emmet on Title, paragraph 25.116. I therefore conclude that by reason of section 2, the mere deposit of title deeds by way of security cannot any longer create a mortgage or charge.
The estoppel point
In the light of the foregoing conclusion on the section 2 point, it is appropriate to consider the estoppel point next. It is Mr Pymont's submission that in the circumstances in which the notional deposit of the land certificate on 10 September 1990 was made in substitution for an earlier charge, and the acknowledgment by Mr Sahib of the efficacy of the security in the correspondence in August 1992, Mr Sahib was estopped against Sogenal from denying that he agreed with Sogenal that 37c or Mr Sahib's interest therein, should stand as security. That estoppel, he said, is available as a defence to any reliance by Mr Sahib on section 53(1)(c) of the Law of Property Act 1925, requiring the disposition of a subsisting equitable interest to be in writing.
He further submitted that the estoppel was equally available where there has been an absence of compliance with section 2, and pointed to Part V of the Law Commission's report. This expressly contemplates that equitable remedies, such as promissory estoppel and proprietary estoppel, might be available to do justice in cases where there has been a failure to comply with the recommended formalities. Thus far I can follow the argument, based as it is on equitable rights asserted by Sogenal against Mr Sahib personally.
But Mr Pymont then went on to say that the estoppel also operated against UBK. He referred us to a number of authorities: Ives Investments Ltd v. High [1967] 2 QB 379; Re Vandervell's Trusts (No.2) [1974] Ch 269, Hodgson v. Marks [1971] Ch 892, and Ashburn Anstalt v. Arnold [1989] Ch 1. I intend no discourtesy to Mr Pymont when I say that none of these authorities seems to me to come anywhere near establishing any principle upon which a third party like UBK could be estopped in circumstances of a case such as the present, or have a proprietary interest established against it. The only estoppel case among those authorities was the Ives case, and that was a case of the joint application of the principles of benefit and burden and of proprietary estoppel. I do not see that either of these principles is applicable to give Sogenal an interest binding on UBK.
As I understood him, Mr Pymont was submitting that an estoppel or a constructive trust arose against UBK as a successor in title of Mr Sahib. But unlike, for example, the personal representatives of the settlor in the Vandervell case, who did stand in the shoes of the settlor, UBK, as assignee, was an independent third party and there is nothing in the facts of the present case to point to UBK's conscience being affected or to UBK acting unconscionably by taking the stance that it does. Mr Pymont further suggested that by the time UBK obtained its charging order Mr Sahib had already lost the ability to charge his interest in 37c because of the equity that had arisen in favour of Sogenal and he said that the same reason that led the Judge to hold that the rule in Dearle v. Hall did not apply governed the present point and supported Sogenal's claim. Thus, although that reasoning depended on the assumption of a valid equitable mortgage arising out of a valid contract between Mr Sahib and Sogenal, the same consequences, if he is right, would flow, notwithstanding that there was no valid contract. It would appear to follow that in every case of a deposit which is invalid as an equitable mortgage by reason of section 2, an effective security would nevertheless arise by reason of estoppel or constructive trust.
I cannot agree with these submissions which seem to me to be contrary to principle. In the absence of a valid contract to mortgage, Sogenal had and has no proprietary right in Mr Sahib's interest in 37c, unless and until the Court declares what right Sogenal has. At the time of the charging order, Sogenal had not even asserted any claim in any proceedings. As UBK's conscience was in no way affected by the actions of Mr Sahib, it seems to me impossible to say that it was estopped in equity or that otherwise some property right has by way of a constructive trust arisen to defeat or take priority over its charging order.
Conclusion
These conclusions are sufficient to dispose of this appeal. It was unnecessary to hear and we have not heard any argument on the other issues.
For these reasons, which owe much to the cogent arguments of Mr Munby, I would dismiss this appeal.
LORD JUSTICE PHILLIPS: I agree that this appeal should be dismissed and would simply add a few words on the section 2 point.
Mr Munby has referred us to a lengthy line of authorities spanning the period from 1783 to 1985. In these cases, the Court consistently recognised that the basis of the equitable mortgage that was created by the deposit of title deeds, was a contract. Indeed, to state that the deposit created the mortgage is an over-simplification. The mere deposit of title deeds was never of itself an act which created a mortgage. It was an act which led the Court, despite the statute of frauds, to receive parole evidence to prove that it had been agreed that the deeds should be deposited by way of security for a loan. The agreement was no legal fiction.
It is true that in the most extreme case the Court would infer the agreement when the evidence showed no more than that the deeds had been deposited with a creditor, who had advanced a loan to the depositor. In most cases, however, evidence was adduced of a specific agreement reached before, or at the time that the deeds were deposited, or of a variation of it thereafter. Often, the issue was as to the precise terms of that agreement.
Mr Pymont sought to persuade us that while in some cases the agreement in question had all the elements of a contract, this was not necessarily so, and that the Court did not adopt the approach of identifying the necessary elements of a contract: offer, acceptance, consideration and certainty. No doubt, the Court did not. That is not an approach that the Court adopts in a dispute about a contract, save where an issue is raised as to the existence of one or more of those elements. I have found nothing in the cases which supports the submission that the agreement to which the Court looked was something other than a contract.
In my judgment, the cases fully support the following clear and succinct statement of the law in Halsbury's Laws of England (4th Edition) vol 32 at paragraph 429:
"A deposit of title deeds does not in itself create a charge, and the mere possession of deeds without evidence of the contract under which possession was obtained, or of the manner in which the possession originated so that a contract may be inferred, will not create an equitable security. The deposit is a fact which admits evidence of an intention to create a charge which would otherwise be inadmissible..."
That passage states the law as it was before 1989.
In Ex parte Mountford (1808) 14 Ves R 606, where the extent of the debt secured by a deposit of deeds was in issue, Lord Eldon LC complained:
"The mischief of all these cases is, that, we are deciding upon parole evidence with regard to an interest in land within the Statute of Frauds. The evidence is quite contradictory."
That was a frequent complaint of Lord Eldon in such cases. It was a complaint which could properly have been made in many of the equitable mortgage cases over the last 200 years. The clear intent of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 is to introduce certainty in relation to contracts for the disposition of interests in land where uncertainty existed before. Section 2(5) contains a list of contracts expressly excluded from the operation of the section. I can see no basis for implying a further exclusion in respect of contracts for the grant of a mortgage which are secured by a deposit of title deeds.
LORD JUSTICE LEGGATT: I agree that, for the reasons given by the Judge as well as by my Lords, this appeal fails.
Order:Appeal dismissed with costs; leave to appeal to the House of Lords refused.
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