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Donovan v Prescott Place Freehold Ltd

The Court of Appeal has given judgment in Donovan v Prescott Place Freehold Ltd. As Nat Duckworth, who acted for the successful Appellant (instructed by Jon Clifford at Thursfields Solicitors) explains below, the Court of Appeal has resolved three novel issues under the Landlord and Tenant Act 1987, namely: 

(i)        Does an order under s.19(1) of the 1987 Act create an interest in land?

(ii)       Is it an abuse of process, in the Henderson v Henderson sense, for a party who holds an equitable interest created in the period after a 1987 Act “relevant disposal” to decide not to join in proceedings for an order under s.19(1) of the 1987 Act and to vindicate that interest in later proceedings instead?

(iii)      Is the jurisdiction under s.12B(5)(b) of the 1987 Act for the Court to eliminate an interest created after a s.19 order has been made the only proper forum for the resolution of that issue or can the Court grant injunctive relief designed to achieve the same end by a different legal route? 

The appeal also contains (rarely encountered) judicial consideration of the proviso to s.4 of the Law of Property Act 1925 (prohibition on ‘new’ equitable interests). An interesting issue about the proper application of the equitable ‘first in time’ priority rule was argued before the Court of Appeal, but left tantalisingly at large in their judgment.

The Facts of the Case

In 2014, the freehold of the block of flats at 34/36 Prescott Place, London SW4 was transferred by its then proprietor to Mr Batin in contravention of the ‘right of refusal’ conferred by the 1987 Act on the long leaseholders of the Property.

The transfer of the Property to Mr Batin contained conflicting statements about the consideration for the transfer: there was one statement that it was for nil consideration and another that it was in consideration of a release of a £125,000 debt. 

When the tenants became aware that the freehold had been transferred, they served notice on Mr Batin under s.12B of the 1987 Act. When Mr Batin failed to comply with that notice, they issued proceedings in the County Court for an enforcement order under s.19 of the 1987 Act. Mr Batin did not participate in those proceedings. However, on the day of the trial, Mr Donovan appeared by counsel and applied to be joined to the proceedings. He said that Mr Batin held the Property on trust for him and that he wished to argue that the 2014 transfer to Mr Batin was not a “relevant disposal” because the trustee exclusion in s.4(2)(g) of the 1987 Act applied. The County Court judge dismissed Mr Donovan’s application (on the basis that it was made too late in the day) and proceeded to make a s.19 order requiring Mr Batin to transfer the freehold to the tenants’ nominee.

The County Court judge left over the question of the purchase price to be determined in later proceedings before the First-tier Tribunal under s.13 of the 1987 Act which the tenant in due course issued against Mr Batin.

While the FTT proceedings were ongoing, the tenants launched a fresh set of proceedings in the High Court for injunctive relief, having by then noticed that preparations were being made for the sale of the two vacant flats in the Property on long leases. Mr Donovan was in due course joined to the High Court Proceedings and interim injunctions were granted against both Mr Batin and Mr Donovan preventing them from registering any existing leases or granting new leases ahead of the transfer of the freehold to the tenants’ nominee.

Mr Donovan did not take steps to intervene in the FTT Proceedings. At the eventual trial, the FTT determined that the consideration for the 2014 transfer had been £125,000 and that that was therefore the sum to be paid by the tenants for the freehold.

In the High Court proceedings, Mr Donovan adduced and relied upon a deed of trust, expressed to have been entered into in 2014, in support of his case that he was the beneficial owner of the Property. Mr Donovan also relied on long leases of the two flats, expressed to have been granted in 2014, which had not yet been registered. Mr Donovan brought a counterclaim for declarations that the freehold of the Property was held on trust for him; that he held equitable leases in the two flats and that the tenants’ nominee would take subject to those interests when the legal estate was transferred to it in satisfaction of the tenants’ rights under the s.12B notice.

For their part, the tenants did not accept that the deed of trust and the leases were executed on the dates that they respectively bore; they contended that the documents had been executed in 2019 and backdated to earlier dates as a ruse to overcome the effect of the s.19 order. 

The tenants argued that Mr Batin’s attempt to vindicate his beneficial interest in the freehold was an abuse of process, in the Henderson v Henderson sense, because Mr Donovan should have brought that claim in the County Court proceedings. The existence or otherwise of Mr Donovan’s beneficial interest in the freehold was relevant to the County Court Proceedings because, if the freehold was already held on trust for Mr Donovan in 2014, the transfer to Mr Batin was not a “relevant disposition” for the purposes of s.4 of the 1987 Act and no s.19 order could have been made. Mr Donovan’s claim in the High Court could and should have been brought in the County Court proceedings and it impermissibly sought to impugn the basis upon which the s.19 order had been made.

In relation to the leases, the tenants argued that, as a matter of the true construction of the 1987 Act, the making of a s.19 order suspended the dispositive powers of Mr Batin and meant that the leases purportedly granted after the s.19 order were simply void. In case they were wrong about that, the tenants argued that the s.19 order created interest in land (relying the Court of Appeal’s decision in Jones v Mahmut [2018] 1 WLR 6051); that that interest had priority over the equitable leases subsequently granted to Mr Donovan and that, accordingly, the equitable leases would be eliminated upon the registered transfer of the freehold to the tenants’ nominee.  For good measure, the tenants asked the Court to grant injunctions restraining Mr Donovan from protecting his equitable leases ahead of the freehold transfer by registering notices or going into ‘actual occupation’ of the flats.

The High Court Judgment

Richards J rejected Mr Donovan’s evidence that the deed of trust and the leases had been executed in 2014. He held that the deed of trust had been executed in 2019, shortly before the s.19 order was made, and that the equitable leases had been executed at some point after the s.19 order. The Judge held that both documents had been backdated as a deliberate ruse to mitigate the effect of the 1987 Act claim and that both Mr Donovan and Mr Batin had given untrue evidence to the Court. 

However, the Judge nonetheless held that the s.19 order had not had the effect of freezing Mr Batin’s dispositive powers and that both the equitable interest in the freehold and the equitable leases took effect as such on the dates that they were in fact respectively executed. The tenants nonetheless prevailed in the High Court proceedings because:

  1. Richards J held that it was an abuse of process for Mr Donovan to vindicate his beneficial interest in the freehold in the High Court proceedings; he should have done so in the County Court proceedings, for the reasons given by the tenants and to enable the Court to consider whether to exercise its jurisdiction under s.12B(5)(b) of the 1987 Act to eliminate his beneficial interest, and failing that, in the FTT proceedings.
  2. Richards J held that (i) the s.19 Order created an intertest in land; (ii) being ‘first in time’ for the purposes of the equitable rule preserved by s.28 of the Land Registration Act 2002, the equitable interest under the s.19 order had priority over Mr Donovan’s equitable leases and the registered transfer of the freehold would therefore eliminate them, even if they were ‘protected’ by notices or ‘actual occupation’ by the time that happened and (iii) in case he was wrong about (i) and (ii), injunctions would be granted to prevent Mr Donovan from protecting his equitable leases by either of those methods.

Mr Donovan appealed (with permission of Arnold LJ). The grounds of appeal did not include a challenge to the Judge’s adverse factual findings; but Mr Donovan challenged the finding of abuse of process in relation to his beneficial interest in the freehold (Ground 1) and all three limbs of the Judge’s conclusions in relation to the equitable leases (Grounds 2(i) – (iii).

Judgment of the Court of Appeal

Following a two-day hearing, the Court of Appeal (Asplin, Arnold and Snowden LJJ), allowed the appeal in relation to both the beneficial interest in the freehold and the equitable leases.

The Court of Appeal agreed with Mr Donovan on Grounds 1 and Grounds 2(i) and 2(iii). What permeated the Court of Appeal’s analysis across the various grounds of appeal was their view that the trial judge had been unduly influenced by his finding that Mr Donovan and Mr Batin had behaved badly in backdating the various instruments in an attempt to deceive the Court.  Whilst their conduct was thought by the Court of Appeal to be “disgraceful” and “not to be condoned”, the fact that they were found to have lied to the Court about the date of execution did not prevent Mr Donovan from relying on the legal consequences of the true position, as found by the Judge; the principles of both procedural and substantive law were nonetheless to applied, and not distorted, in the determination of Mr Donovan’s counterclaim.   

A summary of their conclusions on the individual grounds follows.

Ground 1: The Judge had gone wrong at the outset. A Henderson v Henderson objection is normally raised by way of an application to strike out the claim as an abuse of process made prior to trial. The tenants had not made such an application and had instead invited the Judge to resolve the substantive issues in the case at trial. The Henderson v Henderson objection should have been considered in that light and against the facts as found by the Judge.

The existence or otherwise of a beneficial interest created after a 1987 Act “relevant disposition” was irrelevant to the Court’s assessment of whether to make a s.19 order.  It would have become relevant if the tenants had brought a claim to eliminate that interest under s.12B(5)(b), but they had not done so, despite being on notice of Mr Donovan’s contentions, and “…it was not for Mr Donovan to offer himself up as a target for a potential section 12B(5) order which was not even sought”. It was likewise not abusive for Mr Donovan to have chosen not to join in the FTT proceedings: the onus was on the tenants to join him to those proceedings if they so wished.  Mr Donovan’s case in relation to his beneficial ownership of the freehold was not therefore a Henderson v Henderson abuse of process. 

Ground 2(i): The Judge had been right to conclude that the Court of Appeal’s decision in Jones v Mahmut [2017] EWCA Civ 2362 was not authority for the proposition that orders under s.19 of the 1987 Act create interests in land. However, the Judge was wrong to conclude that s.19 orders do create interests in land.  The 1987 Act does not avoid the prohibition on the creation of ‘new’ equitable interests imposed by s.4 of the Law of Property Act 1925 by express provision. Section 19 orders are in personam orders which enforce 1987 Act duties: they are a species of mandatory injunction enforceable by contempt proceedings. 

Section 19 orders were not equivalent to specifically enforceable contracts for the sale of land; they are orders which enforce non-consensual statutory rights and, unlike contracts which create mutual obligations, a s.19 order does not require the tenants to proceed with the transaction – they can withdraw at any time by serving notice under s.14 of the 1987 Act.  The mere fact that the Land Registry was prepared to register notices protecting section 19 orders was immaterial because registration of a notice does not establish that the interest in question is a valid one: see section 32(3) of the Land Registration Act 2002.  

Even if the Court of Appeal were wrong that s.19 orders generally do not create interests in land, this particular s.19 order was not an interest in land.  By the time it was made, Mr Batin was a mere trustee of the legal estate. Whereas an absolute owner of property is in a position to confer beneficial ownership on the purchaser pending conveyance of the legal title upon completion, Mr Batin had no equitable interest to convey.

Ground 2(ii): Given that the s.19 order was not an interest in land, the Court of Appeal did not need to determine the priorities issue.

Ground 2(iii): The Judge had been wrong to grant the injunctions.  The exercise of the judge’s discretion could not stand because it was premised on his conclusions (i) that the tenants had acquired an immediate equitable interest in the Property by virtue of the s.19 order, (ii) that equitable interest took priority over Mr Donovan’s equitable leases and (iii) that it followed that Mr Batin and Mr Donovan would be invading the rights of the tenants and their nominee if they took steps to ‘protect’ their equitable leases ahead of the freehold transfer.

The correct starting point for the Judge should have been his earlier conclusion that nothing in the 1987 Act precluded Mr Batin from granting interests over the Property after the s.19 order was made. The tenants had the ability to apply, under s.12B(5)(b), for Mr Batin’s leases to be eliminated or alternatively for a reduction in the price to be paid by them for the freehold, but they had failed make that application. It was wrong in principle for the Judge to grant injunctions which circumvented the scheme of the 1987 Act and the “fact that Mr Donovan backdated the 2014 Trust Deed and the Leases and gave false evidence about these matters, while disgraceful and not to be condoned, does not justify taking such a course”.

The priorities point left at large

From practitioners’ point of view, it is a pity that the priorities point was not resolved by the Court of Appeal. Mr Donovan had argued that the equitable ‘first in time’ rule should not be applied mechanistically; it was only if a later equitable interest was in conflict or otherwise inconsistent with an earlier equitable interest that the ‘first in time’ rule would operate to eliminate the later interest. Mr Donovan said that, once it was recognised that it was lawful for equitable leases to be granted after the making of a s.19 order, it would follow that his leases did not conflict with the s.19 order equitable interest (if it was one) and that they would not therefore be eliminated under the ‘first in time’ rule. Mr Donovan drew an analogy with a contract for sale of land which authorised the vendor to grant new leases in the period between contract and completion. The reason why equitable leases granted, and ‘protected’ by notices in the register, during that period would not be eliminated when the purchaser acquired the freehold was that there would, in those circumstances, be no conflict between the two equitable interests and Equity would not be called upon to intercede. Mr Donovan argued that his more flexible approach to the equitable ‘first in time’ rule was more consonant with the equitable principles which underpinned it and that if the rule were instead rigidly applied, in the manner for which the tenants contended, it would offend both principles of equity and the statutory scheme under s.12B(5)(b) of the 1987 Act.

We will never know whether the Court of Appeal would have accepted Mr Donovan’s interpretation of the equitable ‘first in time’ rule. The point may yet arise for consideration in another case. 

You can ready the judgment here.

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