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Subordination

WHAT IS IT?

Subordination is a principle which regulates priorities where a property is purchased with the benefit of a mortgage. It is similar to the principle of subrogation and the courts have often resorted to both in order to preserve the rights of mortgage lenders.

The way in which subordination works can be seen in the case of Abbey National Building Society v Cann [1991] 1 AC 56. Mr C purchased a leasehold flat for his mother to live in, with the benefit of a mortgage from Abbey National and with monies provided by his mother, from the sale of a previous property. It transpired that the mother had been let into occupation some 35 minutes before completion of the mortgage. Mr C subsequently defaulted in payment of the mortgage and Abbey National sought possession. The mother claimed that by reason of her contribution to the purchase price coupled with her actual occupation of the property prior to completion, she had an overriding interest which took priority to Abbey National's mortgage.

The trial judge rejected the mother's claim to have been in actual occupation prior to completion and made an order for possession. The Court of Appeal disagreed but nonetheless held that she had impliedly authorised her son to create a mortgage having priority to her interest. On appeal to the House of Lords, it was held that the correct date for determining the existence of an overriding interest was the date of registration, rather than the date of completion. However, where a purchaser relied on a bank or building society loan to complete his purchase, the transaction - that is the transfer of the property and the completion of the mortgage - were one indivisible transaction, and that there was no moment in time (scintilla temporis) during which the property vested in the purchase free of the mortgage. The court would therefore accede to the argument that the mother's interest should be subordinated to the lender's.

DOES IT APPLY IN ANY OTHER CIRCUMSTANCES?

There are a couple of other examples in the cases:

In Bristol & West Building Society v Henning [1985] 2 All ER 606, Mr & Mrs Henning (an unmarried couple) purchased a house with the benefit of a mortgage in favour of Bristol & West. The property was conveyed to Mr H alone and neither the conveyance nor the mortgage suggested that he was anything other than the sole beneficial owner. He defaulted on the mortgage and left, leaving Mrs H in sole occupation. When Bristol & West claimed possession, Mrs H claimed either a beneficial interest or an irrevocable licence, conferring on her some proprietary interest in the property in priority to Bristol & West. The trial judge upheld her claim to an irevocable licence and held that Bristol & West were not entitled to possession.

On appeal, Browne Wilkinson LJ held:

"There is a risk that the commonsense answer in this case may get lost in the many different technicalities which can arise. The basic fact is that the mortgage was granted to the society with the full knowledge and approval of Mrs H. There was a joint project between her and Mr H to buy the house with the assistance of such mortgage. Without it the house could never have been bought. Yet Mrs H is alleging that she has the right to stay in the house in priority to the rights of the society which provided the bulk of the purchase money for it. Although she has unsuccessfully tried to find some way of paying the instalments under the mortgage, the logical result of her argument (if right) is that she is entitled to stay in possession indefinitely without making any payment. That would be a strange result which I would be reluctant to reach".

He concluded that since the establishment of the parties' interests depended on their common intention, he could not impute to them an intention to mislead the Bristol & West by offering the unencumbered fee simple of the property as security when in fact there was to be an equitable interest which would take priority.

In Equity and Law Home Loans Limited v Prestidge [1992] 1 All ER 909, a couple purchased a house for £39,950. The woman contributed over £10,000 and the balance was raised on mortgage from Britannia Building Society. The conveyance and mortgage were both taken in the man's sole name. He subsequently re-mortgaged to Equity and Law Home Loans for £42,835 without the woman's knowledge or consent. Part of the advance was used to discharge the Britannia mortgage; the balance he kept. He left, arrears accrued and Equity and Law claimed possession. The woman claimed the entire beneficial interest in the property and claimed that her interest could not be incumbered by a remortgage of which she was not aware.

The Court of Appeal held that since the remortgage to Equity and Law was made against the background of the woman's consent to the Britannia mortgage for the purchase of the house, her consent to a new mortgage replacing the opriginal mortgage on no less favourable terms and having priority over her beneficial interest was to be imputed, and that imputed consent applied whether or not she knew of the creation of the new mortgage, provided it did not change her position for the worse. Lord Justice Mustill applied the reasoning in Bristol & West v Henning and again asked what intention one must impute to the parties:

"In my judgment, this question need only be posed for it to be answered in favour of the new mortgagees. Any other answer would be absurd, for it would mean that, if Mr had in good faith and without the knowledge of Mrs transferred the mortgage to another society in order say to obtain a more favourable rate of interest, Mrs would suddenly receive a windfall in the shape of the removal of the encumbrance which she had intended should be created in consequence of a transaction which could not do her any harm and of which she was entirely ignorant" .

PRACTICAL POINTS