City of London BS v Flegg [1988] AC 54

Facts

• Mr. and Mrs. Flegg were beneficiaries under a trust of land, holding equitable interests in a property.
• The legal owners of the property, their daughter and son-in-law, mortgaged the property to the City of London Building Society without the Fleggs' knowledge or consent.
• The City of London Building Society advanced funds on the security of the property.
• The proceeds from the mortgage were paid to at least two trustees, as required by statute.
• The dispute centred on whether the Fleggs’ equitable interests were extinguished by the mortgage transaction, leaving the building society with the property free of those interests.

Issues

1. Whether the mortgage, executed by the legal owners, overreached the Fleggs’ beneficial interests under the trust of land.
2. Whether the statutory requirements for overreaching under sections 2 and 27 of the Law of Property Act 1925 were satisfied.
3. What protection is afforded to beneficiaries when legal owners mortgage trust property without their consent.

Decision

• The House of Lords held that the mortgage did overreach the Fleggs’ beneficial interests.
• The payment of capital money to at least two trustees satisfied the requirements of sections 2 and 27 of the Law of Property Act 1925.
• The City of London Building Society acquired the property free from the Fleggs’ equitable interests, which were transferred to the proceeds of the mortgage.

Legal Principles

• Overreaching is permitted under the Law of Property Act 1925 if the transaction involves at least two trustees or a trust corporation and capital money is paid to them.
• Equitable interests under a trust of land are susceptible to overreaching where statutory formalities are met, prioritising the protection of lenders.
• The authority of legal owners as trustees allows them to mortgage property without the consent of beneficiaries, provided that overreaching requirements are fulfilled.
• Beneficiaries’ equitable interests do not bind purchasers or lenders who comply with statutory formalities and make payment to the appropriate trustees.

Conclusion

The decision in City of London BS v Flegg confirmed that equitable interests under a trust of land may be overreached by a mortgage when capital money is paid to two trustees, thereby transferring beneficiaries’ interests into the mortgage proceeds and protecting the lender’s security interest in the property.