In Scottish & Newcastle plc v Lancashire Mortgage Corporation Limited, both companies had registered legal charges over 109 Wellington Street, Grimsby (the Property) which was owned by Mr & Mrs Pexman. The legal charges secured an arrangement whereby part of LMC's advance to Mr & Mrs Pexman would be used to reduce their debt owed to S&N. The S&N legal charge would then stand as security for the remainder of the amount owed by the Pexmans, which was to be paid by subsequent instalments.

The intention of all parties was that LMC would hold the first legal charge, with S&N's charge ranking second in priority. However, due to delays in registration, in actual fact S&N's charge was registered first; with the LMC charge ranking second.

Mr & Mrs Pexman subsequently defaulted on their payments and LMC obtained and executed an Order for Possession. Unfortunately, following the sale of the Property, there were insufficient funds realised to repay the amounts owed to both LMC and S&N. Under the terms of the Land Registration Act 1925 (which was the relevant legislation in place at that time, but which is mirrored in the new Land Registration Act 2002), priority of payment of charges is governed strictly by the date on which they are registered. Because of this, and despite the intention that LMC should be ranked first, S&N would be paid first out of the sale proceeds, and LMC would have to suffer the shortfall loss.

LMC therefore sought a declaration from the Court that S&N was estopped, or prevented, from denying that its legal charge should actually rank behind LMC's.

On appeal, the Court of Appeal upheld the first instance decision, and determined that LMC's charge should have priority. The Court found that even though there may not have been any direct communication between LMC and S&N, both parties were aware of the wider commercial aspects of the refinancing being offered to Mr & Mrs Pexman; and S&N was aware that the partial lump sum repayment that it was to receive was being made by virtue of a mortgage advance being provided to the Pexmans from LMC. As a consequence of this, the Court found that LMC's legal charge security should take priority.

The Court found that S&N had effectively 'passively acquiesced' to LMC's expectation that it would receive a first legal charge; had allowed LMC to make the mortgage advance on that basis; but had subsequently asserted its priority to take the proceeds of sale achieved following the sale of the Property. As a consequence of this, the Court determined that S&N was estopped from asserting priority, and that LMC should be paid first out of the sale proceeds in order to reflect the parties' true intentions at the time that the deal had been entered into.

An interesting case, and one which illustrates an unusual situation where the Land Register did not reflect the true position of the property in question. It is a useful reminder that although it is rare that the Land Register is incorrect, it is always worth investigating further the facts of a particular case before accepting that the Land Register's position is correct.

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This published article may contain information of general interest about current legal issues, but does not give legal advice.