Mortgage: Proceeds of sale

Husband and wife granting bank second mortgage over property - bank failing to register charge effectively - property subsequently sold - purchase price used to discharge sums due to first mortgagee and various unsecured creditors - bank claiming proprietary interest in proceeds of sale of property - whether proceeds held on constructive trust for bank - judge finding for bank - appeal dismissedBarclays Bank plc v Buhr and others: Court of Appeal: Lord Chief Justice Woolf, Lord Justice Tuckey, Lord Justice Arden:25 July 2001By a legal charge dated 10 July 1989, the first and second defendants, a husband and wife, granted a second charge over Rectory Farm, Cold Aston, Chippenham, Avon, to the claimant bank, securing all moneys owed to it by the husband and wife.

The husband and wife had previously created a first mortgage in favour of UCB Home Loans Corporation Ltd (UCB), and thus the bank duly gave notice of its charge to UCB.

However, the bank failed to register its charge effectively because it gave an inaccurate address for the property.

In February 1998 the husband and wife fell into financial difficulties and entered into an individual voluntary arrangement (IVA) with their creditors.

It was agreed that the property should be sold.In 1998 the husband and wife instructed a firm of solicitors, the fourth defendant, to act for them in relation to the sale of property.

The property was sold in November 1998 and the balance of the purchase price was paid into the solicitor's client account.

The solicitor duly discharged the sums due to UCB as first mortgagee and used the remaining money to pay other unsecured debts of the husband and wife and certain expenses of the IVA.

The wife was adjudicated bankrupt on 12 January 1999.The bank issued proceedings against the husband and wife, the wife's trustee in bankruptcy and the solicitor, seeking a declaration that the bank had a proprietary interest in the proceeds of sale of the property.

It was submitted that the surplus proceeds of sale, less the sums due to UCB, were held on trust for the bank, and that the solicitor had not been entitled to use them to pay unsecured debts of the husband and wife or the IVA expenses.

The judge made an order declaring that the bank had a proprietary interest in the proceeds of sale of the property, which were held under a constructive trust.

The solicitor appealed, contending, among other things, that the bank did not automatically obtain a proprietary interest in the proceeds of sale by virtue of its unregistered charge over the property.Held: The appeal was dismissed.An unregistered land charge was void only against a purchaser.

Thus, the position as between the parties to the charge was unaffected by the non-registration of the charge by the bank, even though the property was sold and completion had taken place.

Furthermore, where a mortgagor made a disposition of the mortgaged property in a manner that destroyed the mortgagee's estate in the mortgaged property, a security interest in the property, which represented the mortgaged property, automatically came into existence.

The disposition by the husband and wife was not authorised, as their authority from the bank to sell the mortgaged property did not extend to selling the property in a manner that destroyed the bank's security.

Thus, the bank had a proprietary interest in the proceeds of sale, and it could be concluded that the judge had reached the right conclusion.Elizabeth Gloster QC and David Wolfson (instructed by TLT Solicitors, Bristol) for the claimant; Alastair Norris QC (instructed by Bond Pearce, of Exeter) for the fourth defendant.