City of London Building Society v Flegg [1988]

1. Facts

• The Fleggs, a couple, lived together with their daughter and son-in-law in a house that they all purchased together.

• The Fleggs contributed financially to the purchase, but the daughter and son-in-law were registered as the trustees of the legal estate (legal owners).

• Due to financial difficulties, the daughter and son-in-law remortgaged the house without informing the Fleggs.

• When they defaulted on the mortgage, the City of London Building Society sought possession of the property.

• The Fleggs, who had contributed to the purchase price and were in actual occupation (AO) of the house, argued that they had an overriding interest in the property that should protect them from eviction.

2. Outcome

• The House of Lords ruled that the Fleggs' beneficial interest in the property had been overreached.

• Overreaching occurred because the mortgage transaction was made with two trustees (the daughter and son-in-law), which satisfied the legal requirement for overreaching.

• As a result, the Fleggs' beneficial interest was transferred to the proceeds of sale rather than remaining attached to the property itself.

• Consequently, the City of London Building Society's claim to possession of the house took priority, and the Fleggs were required to leave the property.

3. Impact and Analysis

• Overreaching vs. Overriding Interest: This case established that overreaching takes precedence over an overriding interest. When overreaching occurs, the beneficial interest is effectively extinguished as it is transferred to the sale proceeds, regardless of any overriding interest.

• Lord Templeton's Judgment: Lord Templeton emphasised that overriding interests cannot interfere with overreaching because the beneficial interest is extinguished at the moment the deal is made.

• Two Trustee Rule: The case reinforced the "two trustee rule," where overreaching can occur only if the transaction is carried out by two trustees. If this rule is not satisfied, an overriding interest may prevail over the mortgagee's claim.

• Practical Implications: The decision highlights the importance of understanding how overreaching operates to protect the interests of lenders, even at the expense of those with beneficial interests who are in actual occupation. It underscores the vulnerability of beneficial owners when legal owners act without their knowledge.