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Cite as: [1996] EWCA Civ 696, 75 P & CR 298, [1997] 1 EGLR 153, (1998) 75 P & CR 298, [1997] 06 EG 152, [1996] NPC 136

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CHATTEY and Another v. FARNDALE HOLDINGS Inc and Others [1996] EWCA Civ 696 (11th October, 1996)

IN THE SUPREME COURT OF JUDICATURE No CHANF 96/0828/B

IN THE COURT OF APPEAL (CIVIL DIVISION )

ON APPEAL FROM ORDER OF MR JUSTICE BLACKBURNE

Royal Courts of Justice

Strand

London WC2

Friday, 11th October 1996

B e f o r e

LORD JUSTICE KENNEDY

LORD JUSTICE MORRITT

LORD JUSTICE POTTER

-----

CHATTEY and Another

Appellants

- v -

FARNDALE HOLDINGS Inc and Others

Respondents

(Handed down transcript prepared by

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR J McDONALD QC and MR N LE POIDEVIN (Instructed by Davies Arnold Cooper of London) appeared on behalf of the Appellant.

MR K LEWISON QC and MR J WARDELL (Instructed by Jay Benning & Peltz of London) appeared on behalf of the Respondent.

J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

LORD JUSTICE MORRITT:

Each of the plaintiffs, Mr Chattey and Mr Strebel, contracted to buy from the then owner of the former West London Air Terminal one of a number of flats being constructed in it. Each of them paid to the vendor deposits totalling 20% of the purchase price. The construction work necessary for the creation of the flats was paid for out of the deposits paid by the plaintiffs and purchasers of other flats and money borrowed from banks on the security of the development. These sources proved to be insufficient and the vendor became insolvent. The development was then sold at the instance of the banks holding the security over the development and the plaintiffs and others claimed to recover their deposits from the subsequent owners of the development, ultimately the first Defendant Farndale Holdings Inc., in priority to the banks and their successors in title by means of the purchaser's liens to which they claimed to be entitled or a constructive trust they claimed to bind the owner of the development from time to time. The plaintiffs claims were dismissed by Blackburne J on 21st May 1996 and this is an appeal by the plaintiffs from his decision.

Though the nature of the action may be simply described the facts, though not in dispute, and the issues the judge was called on to decide are a good deal more complicated. In this court the areas of dispute have been narrowed and four of the parties previously concerned have settled their differences, leaving only the plaintiffs and Farndale Holdings Inc. to contest those which remain. In those circumstances the material facts may be more shortly stated.

On 12th February 1987 Manhattan Development PLC was registered in HM Land Registry as the proprietor of the headlease of West London Air Terminal, being a lease for 140 years from May 1986, and two small freehold plots which formed part of the Terminal, subject inter alia to a sublease of part to Sainsbury's PLC. By an Underlease dated 25th March 1987 ("the Underlease") in consideration of a substantial premium Manhattan Development PLC let those parts of the Terminal not occupied by Sainsbury's and known as the Pointwest Apartments to Pointwest Apartments PLC ("PWA") from March 1987 to September 2113 at a rent equal to the occupation rents for the flats to be constructed and the cost of insurance. There were to be some 398 flats, together with a car park, health centre and commercial areas in that part of the old terminal building.

The flats were marketed for sale by PWA on the basis of a standard form contract to grant a sub-underlease of a flat and an associated parking space in consideration of a premium and an annual rent. The contracts were in terms conventional for such a transaction. However it is necessary to refer to three provisions. First, Clause 3 stipulated for a deposit of 10% on the signing of the contract and a further 10% on 25th March 1988 to be paid to the vendors' solicitors as agents for the vendors. Second, it was provided by Clause 11.01 that the agreement was conditional upon the vendor obtaining a satisfactory planning consent, as defined, prior to 29th September 1988. Third, Clause 21 provided that the purchaser would not "at any time register or cause or permit to be registered any caution notice or other entry on the Vendor's title or any title superior thereto".

On 1st April 1987 Mr Chattey contracted with PWA for the grant of an sub-underlease of Flat 941W and the associated parking space for a total premium of £381,500. In accordance with the terms of the contract he paid a 10% deposit on signing the contract and on 25th March 1988. This was before the solicitors for PWA applied for registration of the title to the Underlease on 27th May 1987. That application disclosed, as required by Form 3F as prescribed by the Land Registry Rules, incumbrances arising from agreements for underleases entered into by PWA as set out in an attached schedule. In fact there was no such schedule but there is no doubt which agreements were referred to nor that they included that with Mr Chattey.

The agreement between Mr Strebel and PWA was made after the application for registration of the title to the Underlease. On 28th May 1987 Mr Strebel contracted to buy a sub-underlease of Flat 373E and its associated parking space for the total sum of £329,500. He duly paid the two deposits required by the contract amounting to £65,900.

By an agreement made on 14th September 1987 Manufacturers Hanover Trust Co. agreed to provide a facility of £15m to PWA as working capital to assist in the acquisition and development of the former terminal. The facility was secured, as required by the agreement, by a debenture ("the Debenture") granted by PWA conferring fixed and floating charges on all its property including the benefit of contracts with purchasers of flats and the deposits paid or payable thereunder. It was further secured by a guarantee supported by a fixed charge over the headlease granted by Manhattan Developments plc and the guarantee of a major shareholder in PWA, Land and Property Trust Ltd. The charge and Debenture were lodged for registration in HM Land Registry on 27th October 1987 and 8th June 1988 respectively.

On 11th August 1988 planning permission for the construction of the flats complying with the contractual definition of a satisfactory planning consent was granted and notice to the effect that the contract was unconditional was sent later that month to Mr Chattey and Mr Strebel.

In view of the submission of the plaintiffs relating to a constructive trust it is necessary to trace briefly the subsequent history of the development. In June 1989 Manufacturers Hanover Trust Co called for repayment of the facility from PWA and each of the guarantors. The debt was paid in full by one of the guarantors, Land and Property Trust, and the benefit of the charge over the headlease and the Debenture granted by PWA were transferred accordingly to Land and Property Trust in August 1989. PWA was compulsorily wound up on 25th October 1989.

The development and its finance was restructured by Land and Property Trust in October 1989. Land and Property Trust enforced its rights under the charge and Debenture by transferring the headlease for £1m to Pointwest Properties Ltd ("PWP") and the Underlease for £35m to Pointwest Developments Ltd ("PWD"). The respective recipients of the headlease and the Underlease charged them to secure a syndicated loan facility of £95m. to PWD. In November 1989 there was a confirmatory deed entered into between Land and Property Trust and PWD to the effect that the transfer of the Underlease included the benefit and burden of the flat purchasers' contracts. But the development so restructured was no more successful and on 7th December 1990 receivers were appointed of, inter alia, the property and undertaking of PWD and PWP. By then the development was 75% complete. On 6th January 1993 the headlease and the Underlease were transferred by the chargees thereof to the defendant Farndale Holdings Inc.

The writ in this action was issued on 3rd November 1993 claiming against Farndale the return of the deposits paid by the plaintiffs to the original vendor PWA. On 13th October 1995 a further writ was issued by a further 239 flat purchasers claiming similar relief. Of the many issues originally raised and decided by Blackburne J only four now survive. They are

1. whether in view of the fact that the contracts were (a) conditional until the grant of satisfactory planning consent on 11th August 1988 and (b) for the grant of leases not previously in existence the plaintiffs could ever have been entitled to a purchaser's lien to secure the return of the deposits paid exercisable in priority to the Debenture and those, such as Farndale, claiming under it; and if so
2. whether such lien was modified or excluded by the provisions of Clause 21 of the contracts entered into by the plaintiffs; and if not
3. whether Rule 40 Land Registration Rules or s.70(2) Land Registration Act 1925 requires there to be noted on the title to the Underlease (which will confer priority over Farndale) not only those flat purchase contracts, such as that of Mr Chattey, as were concluded before the application for registration of the title to the Underlease was submitted but also such of them as, like Mr Strebel's, were not concluded until after the application was made; and if not
4. whether Mr Strebel, as well as Mr Chattey, is entitled to the return of his deposit because Farndale, as the successor in title of PWD to the Underlease, is bound to give effect to the constructive trust found by Blackburne J to be binding on PWD.

Blackburne J decided the first issue in favour of the plaintiffs and second, third and fourth issues in favour of Farndale. Each party contends that the judge was wrong in respect of such of those issues as he decided against them.

The first issue necessitates consideration of the basic principles on which the purchaser's lien is founded. Farndale submits that it is essential that the equitable interest in the property contracted to be purchased should have passed to the purchaser. The rationale of that requirement, it is suggested, is that in that event if the contract goes off otherwise than through the default of the purchaser he should be entitled to retain the property until moneys paid by him in respect of the contractual price for it have been repaid. Farndale submits that if the contract is conditional it is not specifically enforceable until the condition has been satisfied so that until then the beneficial or equitable interest in it cannot have passed to the purchaser and, in consequence, there cannot be a purchaser's lien. Starting from the same proposition Farndale also submits that there can be no lien if the contract was for the grant of property not previously existing, such as a new lease, for there can have been no subsisting beneficial interest capable of being vested in the purchaser even if the contract was unconditional and therefore susceptible of specific performance.

Farndale supports each of these submissions by reference to the decision of the House of Lords in Rose v Watson (1864) 10 HLC 671. In that case the purchaser had paid deposits under an unconditional contract for the sale of land induced by the misrepresentations of the vendor. On discovering the falsity of the representations the purchaser rescinded the contract and successfully resisted a claim for specific performance made against him. In subsequent proceedings against the vendor's successors in title to the land contracted to be sold the purchasers claimed a lien over that land to secure the repayment to them of the deposits paid under the contract. The purchasers' claim was upheld. Lord Westbury, at page 678 said

"I think that your Lordships will agree with me that the case is determinable by principles which are very simple and very clear, and which have long been established in the Courts.

When the owner of an estate contracts with a purchaser for the immediate sale of it, the ownership of the estate, is in equity, transferred by that contract. Where the contract undoubtedly is an executory contract, in this sense, namely, that the ownership of the estate is transferred, subject to the payment of the purchase-money, every portion of the purchase-money paid in pursuance of that contract is a part performance and execution of the contract, and, to the extent of the purchase-money so paid, does, in equity, finally transfer to the purchaser of the ownership of a corresponding portion of the estate.

My Lords, that being so, we have only to inquire under the terms of the present contract whether the sums of money paid by the Respondent were, or were not, paid in pursuance of that contract. About that, my Lords, there is no controversy whatsoever. They were bona fide payments made by the Respondent, in conformity with the contract which required such payments to be made in part of the purchase-money; and they were accepted by the vendor as portions of that purchase-money. In conformity, therefore, with every principle, the purchaser paying the money acquired an interest in the estate by force of the contract and of that part performance of the contract, namely, the payment of that portion of the purchase-money.

Then, my Lords, if that contract fails, and the failure is not to be attributed to any misconduct or default on the part of the purchaser, the obvious question arises, is the purchaser to be deprived of the interest in the estate which he has acquired by that bona fide payment? And yet, my Lords that he ought to be so deprived is the whole controversy of the Appellants at your Bar.

At page 683 Lord Cranworth said

"There can be no doubt, I apprehend, that when a purchaser has paid his purchase-money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is, in equity, considered as the owner of the estate. When, instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary, that, to the extent which he has paid his purchase-money, to that extent the vendor is a trustee for him; in other words, that he acquires a lien, exactly in the same way as if upon the payment of part of the purchase-money the vendor had executed a mortgage to him of the estate to that extent.

It seems to me that this is founded upon such solid and substantial justice, that if it is true that there is no decision affirming that principle, I rejoice that now, in your Lordships' House, we are able to lay down a rule that may conclusively guide such questions for the future."

In addition, in relation to the argument based on the conditionality of the contract, Farndale supports its argument with the decision of this court in Sainsbury v O'Connor (1991) 1 WLR 963. In that case the court was concerned with the question whether the taxpayer remained the beneficial owner of certain shares notwithstanding the existence of an unexercised option to purchase them given to another. It decided that it did. At p. 679 Nourse LJ said

"Then take the previous example [company A enters into an unconditional contract to sell shares in company B to company C], but suppose that the contract is subject to a condition precedent. Until the condition is satisfied the equitable interest in the shares will not pass to Company C. It will remain in Company A. What ground is there for thinking that the beneficial ownership of the shares will also not remain in company A? In order to answer that question we must look to Wood Preservation Ltd v. Prior [1969] 1 W.L.R. 1077. That is a difficult decision. Goff J. at first instance did not distinguish between the beneficial ownership of the shares and the equitable interest in them. In my view he was right not to make that distinction. However, he thought that, because the purchaser could obtain specific performance of the contract by waiving the condition precedent at any time, "

the beneficial interest had sufficiently passed to the purchaser." I respectfully think that that was an error on the part of the judge. Unless and until the condition was either waived or satisfied there could be no right to specific performance and no passing of the equitable interest."

Farndale does not contend that it is necessary that the contract should be specifically enforceable at the time the benefit of the lien is claimed nor when the money for which it is claimed to be security was paid, rather that unless and until the contract is specifically enforceable by the purchaser the lien cannot arise. Thus Farndale accepts, subject to its other submissions, that a lien arose when the contract became unconditional on 11th April 1988 but by then it would necessarily be subject to the Debenture. They also accept that if the contract is once specifically enforceable so that the purchaser's lien arises the lien is not lost if the right to specific performance is subsequently lost by, for example, delay.

The plaintiffs submit that a lien arises in favour of one who has a contractual right, whether present, future or conditional to call for the transfer to him of the legal estate in the land in respect of all sums paid by him on the faith of that contract and as part of the purchase price. They rely on the well-known statement of Sir George Jessel, M.R. in London and South Western Railway Company v Gomm (1882) 20 Ch.D.562 at page 581 that

"The right to call for a conveyance of the land is an equitable interest or equitable estate. In the ordinary case of a contract for purchase there is no doubt about this, and option for repurchase is not different in its nature. A person exercising the option has to do two things, he has to give notice of his intention to purchase, and to pay the option money; but as far as the man who is liable to convey is concerned, his estate or interest is taken away from him without his consent, and the right to take it away being vested in another, the covenant giving the option must give that other an interest in the land."

The plaintiffs submit that the statements of principle in Rose v Watson (supra) were directed to the facts of that case and were not exhaustive. So far as what has been described as the conceptual objection is concerned the plaintiffs adopt the decision of Blackburne J that

"the reasoning in Rose v Watson was directed to the case, there being considered, in which the subject matter of the sale was an existing estate which, if the contract is completed, would pass to the purchaser but if the contract went off would remain in the vendor. Whereas, if the contract is to create and convey a derivative interest, the lien attaches to whatever interest the vendor has, if any, out of which the derivative interest is to be created so that the vendor's interest becomes encumbered by that obligation in favour of the purchaser when the contract is made and the deposit paid. This means that where the contract is to grant a lease of a freehold plot the lien attaches to the vendor's interest in that plot. That seems to me to be entirely in conformity with the approach of Lords Westbury and Cranworth in the passages that I have quoted."

I propose to deal with the conditionality argument first. It seems to me that the argument for Farndale would give rise to anomalies. First, the lien would not be directly related to the purchaser's payments sought to be secured and would be denied in those circumstances where such protection was most required. Thus on the facts of this case no lien would have arisen when the deposits were paid on the exchange of contracts and on 25th March 1988, notwithstanding that in accordance with the statement of Sir George Jessel MR the plaintiffs then had an equitable interest in the property by virtue of their respective conditional rights to call for the legal estate in their respective flats. Second, if, as Farndale contends, the lien arises at the time of and in consequence of the accrual of the right to specific performance of the contract it is hard to understand why the lien does not cease if the right to specific performance is subsequently lost. That the lien is not lost is conceded by Farndale and in any event established by the decision of Stirling J in Levy v Stogdon (1898) 1 Ch.478. In that case the claim for specific performance of the contract by assignees of the purchaser was dismissed on the grounds of delay but the claim for the lien was upheld. It is true that a similar anomaly would arise on the plaintiffs' rival submission, but that does not detract from the anomalous nature of the case for Farndale. Third it is hard to see why the substantive right of the purchaser to a lien should depend on the availability to him of a remedy, particularly one which if successfully invoked would negate the need to rely on the right at all.

In my view both principle and authority support the argument for the plaintiffs. The statement of Sir George Jessel shows that the purchaser has an equitable interest or estate in the land if he has a right to call for the legal estate, albeit future and conditional, which the vendor has no right to refuse. In this case the vendor was contractually bound to use his best endeavours to obtain a satisfactory planning consent on the grant of which the contract became unconditional. The equitable interest or estate of the purchaser was one which entitled him to seek specific relief in the form of injunctions so as to protect that right notwithstanding that a claim for specific performance might have been premature.

Rose v Watson (supra) clearly establishes that the purchaser's beneficial or equitable ownership of the property arising in consequence of a contract to purchase land which is from the outset specifically enforceable is sufficient for the creation of the purchaser's lien. In my view it does not establish that such an interest is not only sufficient but necessary for the establishment of a lien in favour of the purchaser. The necessity for such an interest was not in issue and no consideration was given to the lesser interest or right to which Sir George Jessel referred.

Further, the decision of this court in Whitbread & Co Ltd v Watt (1902) 1 Ch 835. establishes that the decision in Rose v Watson was not an exhaustive statement of principle and, in my view, indicates the tacit acceptance of the Court of Appeal of the submissions for the plaintiffs made in this case. In that case the purchaser contracted to purchase a plot on a building estate belonging to the vendor. The contract provided that "the purchase is to be completed as soon as 300 houses shall have been erected on the said estate". Thus the contract was one under which completion was conditional. It also contained a provision entitling the purchaser to rescind the contract by giving notice to that effect "if 300 houses shall not be erected on the said estate within two years from the date of this agreement". The purchaser rescinded the contract and claimed a lien to secure repayment to him of the deposit paid by him on signing the contract. The vendor contended that there was no lien as the contract had not gone off due to any default of his. At first instance Farwell J said [1901 1 Ch 911, 915]

"The lien is created by the contract under which the money is paid as part of the purchase-money, and on the faith that the contract will be carried out, and not by default of the vendor. The default gives rise to the necessity for enforcing the lien, but the lien arises from the contract. I see no reason why a condition that, if 300 houses are not built, the purchaser may rescind should be held to differ in any way from the ordinary condition in a contract that, if the purchaser makes or insists upon any requisition or objection to the title which the vendor is unable or unwilling to comply with, the vendor may rescind."

In the Court of Appeal the judgment of Farwell J was specifically approved. All three Lord Justices accepted that it was not necessary for the contract to go off because of the default of the vendor, thus going further than the statements in Rose v Watson . In addition Vaughan Williams and Stirling LJJ recognised a far wider principle than that expressed in Rose v Watson . Thus, at page 838 Vaughan Williams LJ said

"The lien which a purchaser has for his deposit is not the result of any express contract: it is a right which may be said to have been invented for the purpose of doing justice. It is fiction of a kind which is sometimes resorted to at law as well as in equity. For instance, when an action is brought for money had and received to the use of the plaintiff, it is not true that the money has been so received, but that is the way in which the law states the case in order to do justice. When Lord Westbury in Rose v. Watson speaks of a "

transfer to the purchaser of the ownership of a part of the estate corresponding to the purchase-money paid," and Lord Cranworth speaks of the purchaser being exactly in the same position of a mortgagee of the estate to the extent of the purchase-money which he has paid, those expressions are merely verbal vehicles to carry the right which justice demands that the purchaser should have. Having read the report of Rose v. Watson, I must say that, speaking for myself, I agree with Mr. Brinton to this extent, that the decision does not expressly carry the purchaser's lien beyond a case in which the contract has gone off through the default of the vendor."

Similar points were made by Stirling LJ at page 804 where he observed that

"It is, I think, quite true, as Mr. Brinton has contended, that the question of the existence of the purchaser's lien for his deposit arises in the present case in circumstances which differ from those of all previous reported cases. The contract has here been brought to an end, not by any act or default of the vendor, but by reason of the purchaser's exercising a power of rescinding it which is reserved to him by the contract itself. This does not seem to have occurred in any previous case. Nevertheless, in the judgments in the two leading cases on the subject, Wythes v. Lee and Rose v. Watson, the rule is stated in terms which cover the present case. And, if we look at that which is really the foundation of the doctrine, namely the desire to do justice as between vendor and purchaser, it appears to me that reason applies no less forcibly in the present case than in the ordinary case in which the rescission of the contract takes place by reason of some default on the part of the vendor. In a case in which the vendor had rescinded under a power reserved to him, it would, I think, be absolute injustice if the purchaser were not allowed to have a lien for the purchase-money which he had paid, and by which was the security on his part for the performance by him of the contract. I think also the justice of the case requires that the purchaser should have a lien when the contract reserves to him a power to rescind."

In my judgment the circumstances in which a purchaser's lien will arise are not limited to those in which the contract is or has been specifically enforceable but include those in which there is or has been a right to call for the legal estate whether presently, in the future or conditionally so as to give rise to the equitable interest or estate to which Sir George Jessel referred. I accept the submissions for the plaintiffs in this respect. This conclusion is in line with that of Blackburne J in dealing with the issue of conditionality. I have not previously referred to the judge's conclusion for he did not deal with the point expressly in connection with the submission for Farndale that the existence of the lien depended on the specific enforceability of the contract. At page 76, having referred earlier to London and South Western Railway Co Ltd v Gomm and Whitbread & Co Ltd v Watt he said

"In my view, the plaintiffs became owners in equity of the premises (of which they were contracting to take subunderleases) as soon as their contracts were entered into and, subject to the effect of clause 21, became entitled to liens on those properties on payment of their initial deposits, and it matters not that, until August 1988, their contracts remained purely conditional."

Provided that ownership in equity is understood to refer to the equitable interest or estate to which Sir George Jessel referred in London and South Western Railway Co.Ltd v Gomm I agree with the judge. My conclusion is supported by the decision of the majority in Hewitt v Court (1983) 149 CLR 639. I have not referred to it earlier because the decision was reached by a bare majority and the relevant issue appears to have been conceded in the opposite sense to the majority decision.

I can deal with what was described as the conceptual objection more shortly. The objection, which arises from Rose v Watson , is to the effect that because the leasehold interest contracted to be sold had no previous separate existence, for it was to be granted on completion of the contract, the purchaser never could have been the beneficial owner of such a term even when the contract became unconditional and therefore specifically enforceable. Once it is established that the existence of the lien is not restricted to cases where the purchaser has been entitled to specific performance the concept on which the objection is based disappears too. What is important is that the purchaser shall have had the right, whether present, future or conditional, to call for the legal estate. It would be absurd if the lien should be denied merely because that legal estate did not exist but another out of which the vendor would grant it did.

In Middleton v Magnay (1864) 2 H&M 233 the vendor agreed to grant a 21 year lease over certain land. In fact he only had an eight year lease in half the land. When the contract went off on account of the inability of the vendor to grant the lease contracted for the purchaser claimed a lien to secure repayment to him of certain expenditure on improvements undertaken by him pursuant to a term in the contract. The claim for a lien was upheld by Page-Wood V-C in respect of that interest which the vendor did have. It is true, as counsel for Farndale submitted, that in law the contract took effect as one to assign such interest as the vendor did have. I entirely agree with the conclusion of Blackburne J, at page 49, that

"that consequence cannot, as it seems to me, affect the vendor's contractual obligation. That obligation was to grant a 21 year term. The agreement went off because the vendor could not fulfil that obligation. In my view, whilst it is true that the conceptual difficulty which has been raised in argument before me does not appear to have been considered in that case, the decision is nevertheless an example of a lien over an interest which was not itself the subject matter of the contract but out of which a derivative interest was agreed to be created. I cannot think that the decision would have been any different if the vendor's interest had been a freehold in a moiety only of the premises or a 22 year term in such moiety."

For all these reasons I would answer the first issue in the affirmative. Accordingly the second issue on the basis of which the judge dismissed the action arises. That issue depends on the effect of clause 21 of the contract which I have already quoted. The judge's conclusion, at page 44, was that

"a lien arises by implication of law for the purpose of doing justice between vendor and purchaser. The essence of the matter is that the bargain between PWA and Mr Chattey was that the rights he acquired in the underlease should not be protectable, and should not therefore be capable of being asserted, against subsequent disponees because protection against such persons could only be achieved by the entry of a caution notice or other entry on PWA's title, which is what Mr Chattey was prohibited by clause 21 from causing or permitting. Whilst, therefore, it would be perverse, in my view, that the law should imply a lien to protect Mr Chattey's rights in the underlease against the very persons against whom the contract has impliedly stipulated that he should have no protection, I can see no reason why, for what it is worth, the law should not continue to imply a lien to protect his deposit against PWA."

The judge had earlier defined subsequent disponees as "persons acquiring for value an interest in the underlease under a registrable disposition and those claiming under such persons".

The plaintiffs submit that Blackburne J was wrong. They contend that he confused the substantive right to a lien with the statutory machinery for its protection by registration. They criticise the judge for accepting that one reason for the inclusion of Clause 21 must have been the common intention of the parties that the vendor should be able to offer an unincumbered title to a secured lender when the other reason, to ensure that the vendor would not have to warn off cautions registered by all other purchasers in respect of the Underlease as a whole when completing the contract to one of them for the grant of a sub-underlease of a specific flat and parking space, was correct and sufficient.

Farndale supports the decision of the judge for substantially the reasons he gave. They maintain that the substance of the right and the machinery for preserving its priority are so closely allied that by agreeing not to cause or permit registration the purchasers must be taken to be agreeing to the modification of the lien rather than to its postponement where registration is necessary to the preservation of its priority. On the assumption that the third issue is decided in their favour they take the case of Mr Strebel and point out that because of the date of his contract it could not be protected by notice on the title pursuant to the request of PWA. They conclude that Mr Strebel must, therefore, have accepted that his lien should not have priority over a subsequent disponee for value under a registered disposition and should be modified accordingly.

I have no hesitation in preferring the submissions for the plaintiffs. It is not disputed that the purchaser's lien arises by operation of law from the contract unless it is modified or excluded by express agreement of the parties or by necessary implication from the contractual arrangements the parties have entered into. The lien so arising is an unqualified equitable right. In common with all other equitable rights it is capable of being subordinated to the rights of a subsequent purchaser for value of a legal estate without notice of the equitable right. But that inherent weakness is no reason to modify the nature of the right itself. That is particularly so in this case where the contract precludes the registration of any caution, notice or other entry and the effect of clause 21 contended for by Farndale would involve a modification of the contract from which the purchaser's lien arises.

Obviously there is no express agreement that the lien itself should be modified and I can see no necessary implication from the terms of the contract. The information pack supplied to the purchasers stated that the title of PWA to the underlease "is presently the subject of registration at" the Land Registry. In that event it would have been the duty of PWA as the applicant under Land Registration Rule 19 and the prescribed form to disclose, as incumbrances, at least all contracts for sub-underleases concluded at the time of the application and, as conceded by Farndale, for the Registrar to note them on the Register. Such notice would have protected such incumbrances against subsequent disponees. Thus Clause 21 would not necessarily result in all purchase contracts being subordinated to subsequent disponees.

But, in any event, I see no reason to give to clause 21 any greater effect or force than that which is entailed by its express terms. If the result of complying with clause 21 is that the rights of the purchaser are subordinated to those of the subsequent disponee so be it; but that is no reason for going further and treating it as a sufficient reason for modifying the right itself. In that event it is unnecessary to do so. If, contrary to the assumption, compliance with clause 21 does not have that effect in all circumstances then that is good reason for not attributing a common intention that the right itself should be modified. Clause 21 assumes an unqualified right so that it would be inconsistent with the terms of the contract that the purchasers' right should be modified as contended for by Farndale.

Further I agree with the criticisms levelled by the plaintiffs at the reasons suggested by the judge for justifying his conclusion. In a development scheme such as this I do not think that it can be predicated that it must have been the intention of the parties that the title available to a secured lender to the vendor should be unincumbered by any purchase contracts capable of binding a lender. In many cases, as in fact happened in this, the lender will wish to have a charge over the purchasers' contracts. He could not achieve this if the contracts themselves were modified rather than the rights thereunder postponed. Accordingly I agree with the plaintiffs that the first reason given by the judge as accounting for the inclusion of clause 21 does not in fact do so. I also agree that the second reason accounts for the presence of clause 21 but does not lead to the conclusion that the purchasers' rights, rather than their priority, were intended to be modified. In my view the judge was wrong on this issue which I would answer in the affirmative.

I turn then to the third issue. It was not disputed that the judge was right to have concluded that if he was wrong on the second issue then the rights of purchasers whose contracts preceded the application of PWA for the registration of its title to the underlease were incumbrances which the Registrar was entitled and bound to note on the register when he completed the registration of the title of PWA. The only dispute on this issue was whether that right and duty extended to rights arising under contracts concluded after the application to register the title to the Underlease. Reliance was placed on Land Registration Rule 40 and, not unprompted by the Court, s.70(2) Land Registration Act 1925. I will consider Rule 40 first.

The Land Registration Rules, which include the prescribed forms (Rule 74), have the same force as if enacted in the Land Registration Act 1925. s.144(2). Rules 19 to 42 cover the registration of the Underlease for which PWA applied on 27th May 1987. The scheme provided for requires the applicant to use one of the prescribed forms, in this case Form 3A, and to send with it "all such original deeds and documents relating to the title as the applicant has in his possession. see Rules 19 and 20. Form 3A requires the applicant to disclose any agreement for a sub-lease entered into by him. In the case of a first application, which that of PWA was, rule 24 prescribes that on delivery of the application it should be allotted "a title number" and dated as of the day on which it is deemed by that rule to have been delivered. Rules 25 to 29 deal with examination of the title "shown by the documents accompanying the application". Rules 31 to 35 require advertisements in certain cases "before any registration is completed" inviting objections to the registration. Any objections thus elicited must have been withdrawn or otherwise disposed of before the title is registered. Rules 40 and 42 provide

"40. Incumbrances, conditions, and other burdens (including fee farm grants, or other grants reserving rents or services) to which the land may be subject, shall be entered in the register and may be entered either directly, or by reference to the instruments by which they are created or by setting out extracts therefrom."

"42. When -
(a) all objections (if any) have been disposed of,

(b) the time fixed for the advertisements and notices (if any) has expired,

(c) it has been determined with what title the registration is to be made, and the requirements of sections 14 and 16 of the Act have been complied with,

the registration shall be completed as of the day on which, and of the priority in which, the application was delivered, and the documents of title, other than such as have under the Act or rules to be retained in the Registry, shall be delivered to the applicant."

Blackburne J concluded that there must be a cut-off point which, in accordance with Rule 42, he found to be the date of the application for registration and that that cut-off point applied for the purposes of Rule 40 as well as for Rule 42. At page 87 he said

"Where LRR 40 applies, the Registrar's obligation is to note on the register of title to the land, in respect of which the application for first registration is made, incumbrances to which the land may be subject as at but not subsequent to the date of the application. Protection of interests subsequent to that date is a matter for the person entitled to the interest: he can seek to protect himself by lodging a caution against dealings or in any of the other ways which may be available to him (depending on his interest) under the Act."

This conclusion accorded with the practice of the Land Registry but had the consequence that those purchasers, like Mr Strebel, whose contracts were concluded after the date of the application for registration made by PWA would not be protected by registration of the incumbrance constituted by the rights under their contracts. Before Blackburne J Farndale had submitted that Rule 40 did not apply to the application by PWA for first registration of what is known as a dispositionary lease, sc. one by which a new registrable term of years is created. That contention was abandoned before us.

The conclusion as to the cut-off point for the purpose of Rule 40 is disputed by the plaintiffs, not because it is wrong in itself but because it does not go far enough. They submit that the cut-off date is the date of registration so that as the Registrar is well aware of the contracts entered into after the application for registration they must be noted on the register in the same way as those entered into before the application. It was suggested that the conclusion adopted by the judge would deny to the Registrar a "snapshot" of the state of the title being registered because of the inevitable gap between the application and the actual registration. It was pointed out that there was nothing to restrict the objections elicited by the advertisements to those arising from acts and events occurring before the application for registration. It was also suggested, not unprompted by the bench, that unless the plaintiffs were right the action of registration would alter the pre-existing priorities which it was not to be presumed that the draftsman intended.

I do not accept these submissions. I will take the question of priorities first. The point arises from the fact that neither the Underlease nor the Debenture (nor for that matter all the subsequent dealings with the Underlease) was registered in the appropriate register in the Land Registry before the writ was issued. Accordingly all dealings took effect in equity and the rights of PWA, the purchasers and MHT ranked in accordance with the order of their creation. If the judge was right as to the cut-off point then until registration of the title to the Underlease all purchase contracts had priority to the Debenture but after registration only those concluded before the application for registration of the Underlease would continue to enjoy such priority. This is true so far as it goes. But as counsel for Farndale pointed out it does not go far enough. If the land were unregistered the grant of the Underlease to PWA and the Debenture granted by PWA to MHT would in each case have transferred a legal estate. Thus unless the purchase contracts were registered as class C(iv) Land Charges the Debenture would have obtained priority over all of them. None of them was then registered anywhere and the purchasers were precluded from doing so. Even if the object of the Land Registration system is to reproduce the equivalent priorities to those which would have prevailed in unregistered conveyancing, which is not always achieved anyway, it is still not necessary to construe Rule 40 in the way the plaintiffs contend.

The fact is that the only point of time referred to in the rules is the date of the application. This governs what documents the applicant must submit (Rule 20), the date when a title number is allotted (Rule 24) and by the express terms of Rule 42 the day as of which the title is to be registered. It is true that the provisions for advertisement inviting objections are silent as to any restriction on the period in which the objection must have arisen. I accept the submission of counsel for Farndale that the objection must be to the registration of the title as of the date of the application for registration; otherwise there will be no correspondence between the proposed registration and the objection. This conclusion is also supported by the mundane provision that the title number is allotted at the date of the application to register the title. Thereafter there is a title number against which to lodge a caution. It is consistent with that scheme that incumbrances previously arising should be disclosed and noted on the register when the title is subsequently registered but that those arising thereafter should be protected by the registration or lodgment of the appropriate instrument. It would cause unnecessary duplication and potential confusion if those arising later should also be noted on the title when registered. Accordingly in my view the judge was right as to the scope of Rule 40.

This leaves the alternative contention that s.70(2) Land Registration Act 1925 imposes a duty on the Registrar at the time of first registration to note on the register "any easement, right, privilege, or benefit created by an instrument and appearing on the title [which] adversely affects the land". S.70(1) prescribes what are overriding interests subject to which all registered dispositions take effect. The contractual rights of a purchaser not in actual occupation of the land are not overriding interests. I have considerable doubt whether the rights of a purchaser under a contract for the purchase of registered land are encompassed by the subsection at all; but I do not find it necessary to decide that point for I accept the argument for Farndale that it does not advance matters even if they are. This is because the provisions of the rules would apply on the first registration to which the sub-section refers. Thus, s.70(2) would call for notation on the register in accordance with Rules 40 and 42 which as I have already held import the cut-off date of the application for registration.

In my judgment Blackburne J was right in the conclusion to which he came that whereas the Registrar is duty bound to note on the title to the underlease when registered the rights of those purchasers whose contracts were signed before the application for registration he is not entitled to include a similar note in respect of those contracts signed after that date. The consequence is that the rights of Mr Chattey have priority over those of Farndale but the rights of Mr Strebel do not. Accordingly I answer Issue 3 in the negative.

In the result therefore Issue 4 is only of relevance to Mr Strebel. The argument before Blackburne J was described by him in the following terms

"It had as its starting point the submission that PWD took its assignment of the underlease on 16 October 1989 upon trust to give effect to the flat purchase contracts. The nature of the trust was one entitling the flat purchasers to enforce against PWD all of the vendor's obligations under the flat purchase contracts, ie to proceed with and complete the conversion of the Pointwest building and grant to the purchasers their respective subunderleases, alternatively, in the event of the flat purchase contracts going off otherwise than through the purchasers' default, to repay the deposits with interest. The next stage in the argument was that BBL had actual notice of that trust when, by the PWD debenture, PWD charged the underlease in favour of BBL to secure the monies due under the loan agreement. That knowledge was said to derive from clause 15(A)(12) of the loan agreement. The third stage in the argument was that, as a result of stages one and two, BBL thereupon became subject to the same constructive trust as that which bound PWD. The final stage was that, assuming that the conclusion in the third stage of the argument was correct, Farndale, on taking an assignment of the underlease on 6 January 1993 (which was expressed to be with the benefit of and, to the extent that BBL's interest was so subject, subject to the flat purchase contracts: see paragraph 15 of the background facts) likewise constituted itself a constructive trustee for the flat purchasers to give effect to the vendor's obligations under the flat purchase contracts. The result, so it was submitted, is that, now that the plaintiffs have lawfully terminated their flat purchase contracts, BBL and Farndale are separately obliged to repay to the plaintiffs their deposits with interest."

In the case of PWD the judge found that

"by taking an assignment of the underlease from LPT, entering into the loan agreement and charging the underlease as security for its obligations under the loan agreement, PWD was undertaking to carry out PWA's obligations under the purchase sale contracts. It was doing so because PWA was insolvent and indeed facing a winding-up petition on which, only nine days later, a winding-up order was made.

For what the point is, therefore, worth, I am of the view that PWD's conscience was affected in such a way as to give rise to an obligation to the flat purchasers to complete the development and fulfil the vendor's obligations under the flat purchase contracts."

But in the case of BBL the judge decided

"The only matter relied upon as subjecting BBL to a constructive trust in favour of the flat purchasers to give effect to their flat purchase contracts was BBL's knowledge, said to derive from clause 15(A)(12) of the loan agreement, that PWD held the underlease upon trust to give effect to the flat purchase contracts. I am of the view, however, that BBL's knowledge of PWD's trusteeship, if such it was, provides no basis for the suggestion that BBL's conscience was affected so as to subject it to an obligation to give effect to the flat purchase contracts. It was no part of the purpose of the loan agreement that BBL should undertake any obligations to the flat purchasers. Its purpose was the provision of finance by BBL and the other banks to enable PWD to acquire and build out the development and complete the flat purchase contracts."

The judge considered that that was enough to dispose of the constructive trust claim. But he noted an alternative and more limited way of putting the claim

"was that, as BBL only ever had an equitable charge over the underlease (because the charge, like the underlease over which it was granted, was not registered and therefore operated only in equity) the underlease was subject, in BBL's hands, to all of the equities affecting it created prior in time to the charge in favour of BBL. Those equities included the constructive trust binding on PWD to give effect to the rights against the underlease of the purchasers under the many flat purchase contracts (including those of the plaintiffs). The result, so [counsel for the plaintiffs] submitted, is that, when BBL exercised its power of sale by selling the underlease to Farndale, Farndale took the underlease subject to those prior equities. Now that the plaintiffs have lawfully terminated their flat purchase contracts the underlease now owned by Farndale is burdened by the plaintiffs' liens to secure the repayment to them of their deposits with interest. Since BBL has parted with its interest in the underlease to Farndale this alternative claim is maintained only against Farndale."

The judge disposed of the alternative argument on the grounds that

"In truth the claim is to no more than a minor interest in the underlease. Like any minor interest it will not prevail against Farndale's entitlement, if and when registered, as proprietor of the underlease except and to the extent that the plaintiffs and the other flat purchasers succeed in having their interests noted on the register of title to the underlease. In short, the alternative way of putting the claim adds nothing.

Counsel for Mr Strebel challenges this conclusion. He submits, and I quote from his written argument, that

"the judge overlooked the fact that Farndale was not entitled to use its entitlement to be registered in order to defeat the plaintiffs' priority. That was the decision in Lyus v Prowsa , itself a land registration case."

In Lyus v Prowsa (1982) 1 WLR 1044 the plaintiffs had contracted to buy from a developer a plot of registered land with the house to be built on it, the developer having already charged the estate as a whole to a bank to secure the development finance. The developer became insolvent and the bank sold the estate as mortgagee to the first defendant "subject to and with the benefit of" the plaintiff's contract. Three months later the first defendant resold the estate to the second defendant subject to the plaintiffs' contract so far if at all as it might be enforceable as against the first defendant. The transfer to the second defendant, which was duly registered, did not refer to the plaintiffs' contract. It was common ground that if the provision in the contract for the sale by the bank to the first defendant was adequate to impose a constructive trust on the first defendant then the effect of the provision in the contract for sale by the first defendant to the second defendant was to impose a similar trust on him. Dillon J, as he then was, concluded that both of them had that effect. At page 1053 he said

"Bearing in mind that there is no basis on which it could be suggested that the bank could be under any obligation to the plaintiffs to complete the house on Plot 29 for them, and bearing in mind the first defendant's solicitors' letter to Messrs Strutt and Parker, to which I have referred, I conclude that clause 11 was not inserted in the agreement of October 18, 1979, solely for the protection of the bank, like clause 7 of that agreement which sets out other matters subject to which the property was sold, and I conclude that it was a stipulation of the bargain between the bank and the first defendant that the first defendant would give effect in relation to Plot 29 to the contract which had been made between the vendor company and the plaintiffs.

If that is correct, it would follow in my judgment.....unless the Land Registration Act 1925 requires a different conclusion, that the first defendant, having accepted the land under the agreement of October 18 1979, and the consequent transfer, hold Plot 29 on a constructive trust in favour of the plaintiffs to give effect to the plaintiffs contract. That trust is also imposed on the second defendants by virtue of condition (b) of their agreement with the first defendant."

In my view the crucial distinction between that case and this is the finding that the trust was also imposed on the second defendants by the terms of their contract. There is no finding in this case that there is imposed on Farndale a constructive trust similar to that which the judge found to be imposed on PWD.

In dealing with the effect of the Land Registration Act 1925, at page 1054, Dillon J said

"It seems to me that the fraud on the part of the defendants in the present case lies not just on relying on the legal rights conferred by an Act of Parliament, but in the first defendant reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the first defendant acquired the land. That makes, as it seems to me, all the difference. It has long since been held for instance, in Rochefoucauld v. Boustead [1897] 1 Ch 196, that the provisions of the Statute of Frauds 1677 (29 Car. 2 c.3), now incorporated in certain sections of the Law of Property Act 1925, cannot be used as an instrument of fraud, and that it is fraud for a person to whom land is agreed to be conveyed as trustee for another to deny the trust and relying on the terms of the statute to claim the land for himself. Rochefoucauld v. Boustead was one of the authorities on which the judgment in Bannister v. Bannister [1948] 2 All E.R. 133 was founded.

It seems to me that the same considerations are applicable in relation to the Land Registration Act 1925. If for instance, the agreement of October 18, 1979, between the bank and the first defendant had expressly stated that the first defendant would hold Plot 29 upon trust to give effect for the benefit of the plaintiffs to the plaintiffs' agreement with the vendor company, it would be difficult to say that the express trust was over-reached and rendered nugatory by the Land Registration Act 1925. The Land Registration Act 1925 does not, therefore, effect the conclusion which I would otherwise had reached in reliance on Bannister v. Bannister and the judgment of Lord Denning M.R. in Binions v. Evans [1972] Ch 359 had Plot 29 been unregistered land."

Though Dillon J does not in that passage refer expressly to the necessity for a constructive trust to have been imposed on the second defendant he must have intended to apply the same principles to him for otherwise that defendant would not have been "a person to whom land is agreed to be conveyed as trustee for another" and it could not have been a fraud for the second defendant "to rely on the terms of the statute to claim the land for himself".

It is true, as counsel for Mr Strebel contended that the decision in Lyus v Prowsa was approved by the Court of Appeal in Ashburn Anstalt v Arnold (1989) Ch.1. But that approval was limited as the following passages from the judgment of the Court indicate. At page 24 Fox LJ said of the decision

"This again seems to us to be a case where a constructive trust could justifiably be imposed. The bank were selling as a mortgagees under a charge prior in date to the contract. They were therefore not bound by the contract and on any view could give a title which was free from it. There was, therefore, no point in making the conveyance subject to the contract unless the parties intended the purchaser to give effect to the contract. Further, on the sale by the bank a letter had been written to the bank's agents, Messrs Strutt & Parker, by the first defendant's solicitors, giving an assurance that their client would take reasonable steps to make sure the interests of contractual purchasers were dealt with quickly and to their satisfaction. How far any constructive trust so arising was on the facts of that case enforceable by the plaintiffs against owners for the time being on the land we do not need to consider."

Later, at page 25, he added that

"The court will not impose a constructive trust unless it is satisfied that the conscience of the estate owner is affected. The mere fact that that land is expressed to be conveyed "

subject to" a contract does not necessarily imply that the grantee is to be under an obligation, not otherwise existing, to give effect to the provisions of the contract. The fact that the conveyance is expressed to be subject to the contract may often, for the reasons indicated by Dillon J., be at least as consistent with an intention merely to protect the grantor against claims by the grantee as an intention to impose an obligation on the grantee. The words "subject to" will, of course, impose notice. But notice is not enough to impose on somebody an obligation to give effect to a contract into which he did not enter."

In my view these observations apply as much to the position of the second defendant in Lyus v Prowsa as to Farndale in this case. The fact that they had notice of the prior contracts or obligations was insufficient to impose an obligation on them and unless there was such an obligation it could not be a fraud on their part to rely on the provisions of the Land Registration Act 1925 as conferring on them an unincumbered title.

In my judgment Blackburne J was right for the reasons he gave in concluding that Farndale was not subject to any obligation by way of constructive trust to give effect to the Mr Strebel's contract. Accordingly I would answer the fourth issue in the negative.

Before Blackburne J there were two issues as to the property over which the lien existed. The first arose out of what was called the conceptual objection to which I referred earlier. The consequence of dismissing that objection was that the lien existed over the interest to which the vendor was entitled out of which the derivative interest was to be created. There was no appeal in that respect. The second issue was as to the geographical extent of the land in which the interest subsisted which was subject to the lien. Blackburne J concluded that the lien was confined to the area of land which was the subject matter of the contract. At page 51 of his judgment he said

"The reason why, in my judgment, the lien is confined to the vendor's interest in the area of land which is the subject matter of the contract and does not extend to any greater area is because the payment of the deposit is regarded as a part payment for an interest in that land and for no other with the result that, by force of that payment, the purchaser acquires an interest in the land in question. Where, therefore, the contract goes off, the interest does not revert to the vendor but is retained as security by the purchaser. The security therefore is co-extensive with the acquisition of an interest in the land by force of the payment. The interest so acquired is in the land which is the subject matter of the contract and not in any other. There is, therefore, no principled basis upon which, if the contract goes off otherwise than for the purchaser's default, the lien should be held to attach to any other land of the vendor."

The plaintiffs appealed from that finding contending that the lien extended to all the land comprised in the same interest of the vendor. During the course of the hearing of the appeal the plaintiffs abandoned that contention. Accordingly it is now common ground that the lien to which Mr Chattey is entitled is exercisable over the property comprised in the contract of sale to him for the interest therein conferred by the Underlease. We were informed that the development had advanced sufficiently far when work ceased in December 1990 to enable that property to be identified physically without any difficulty. Accordingly there should be no difficulty in making declarations giving effect to the rights of the parties in accordance with the judgments of this court. The question of how to give effect to a purchaser's lien in cases in which the relevant building or part does not exist does not arise.

I would allow the appeal of Mr Chattey, but not of Mr Strebel, and make a declaration to the effect that Mr Chattey is entitled to a lien over the property comprised in the contract made between him and PWA on 1st April 1987 for all the interest therein of Farndale created by the Underlease to secure repayment to him of the deposits paid by him pursuant to that contract.

Order: Appeal allowed. The defendants to pay 75% of costs of Court of Appeal and 50% of costs below. Leave to appeal was refused.