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Can a charging order take priority over an earlier equitable interest?

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Posted by Susan Hopcraft on 24 April 2013

Susan Hopcraft Partner

In Hughmans Solicitors v Central Stream Services Ltd, the parties both argued they were entitled to property sale proceeds, but who took priority?

Hughmans acted for a Mr Davidson in a claim brought against him by Central Stream Services Ltd. Those proceedings were settled and an order was made setting out the terms of the compromise. Under the order Mr Davidson was to sell his property, the mortgage was to be discharged, other debts were to be paid off, and no less than £100,000 of the remaining proceeds were to be paid to Central Stream.

Following a dispute over £19,000 of unpaid fees, Hughmans then brought their own proceedings against Mr Davidson. They obtained a charging order over Mr Davidson’s property to cover those fees, which they registered against the property by way of a unilateral notice.

When the property was sold, the net proceeds after redemption of the mortgage were around £49,000; far less than the £100,000 promised to Central Stream. The priorities set out in the settlement order would lead to the whole of the net proceeds being payable to Central Stream. Hughmans applied for an order that the £19,000 secured by their charging order should be deducted from this sum. Central Stream claimed a prior secured right by way of the settlement order. The High Court held that the settlement order created a proprietary interest in the property and that it took priority over the claimant’s charging order.

At appeal Central Stream submitted that the property and its proceeds of sale constituted a fund from which, pursuant to a contract for valuable consideration, they were to be paid £100,000 in priority to all other claims upon it (save only the first mortgage of National Westminster Bank plc.). They claimed that their rights in relation to the £100,000 therefore had all the traditional characteristics of an equitable charge.

Hughmans submitted that the agreement did not contain language which was sufficient to show an intention to create an equitable charge over the property. They also submitted that, even if did create any proprietary interest, it was limited to the proceeds of sale and did not extend to the property itself.

The first issue considered by the Court of Appeal was whether a settlement order was capable of creating a proprietary interest. The judge determined that it did create a proprietary beneficial interest in the property in favour of Central Stream, by way of trust, rather than equitable charge. The judge held that there was an intention that Central Stream were to have the whole of Mr Davidson’s net equity in the property, subject only to the application of some part of the proceeds of sale in the payment of identified debts. The judge saw no difficulty in the concept of property being held for the benefit of a number of different persons and in different orders of priority.

The second issue was whether the settlement order took priority over a later charging order over the property. The basic rule as to priority between competing equitable interests in relation to registered land, as laid down in Section 28 of the Land Registration Act 2002, is that priority is determined by the order in which the equitable interests are created; the first in time has priority. It was also accepted by Hughmans that the charging order had not been ‘made for valuable consideration’ within the meaning of s 29(1) of the 2002 Act. 

Once it had been established that the settlement order created an equitable interest in favour of Central Stream, the solicitors had never enjoyed a right to maintain their unilateral notice in the face of a proposed sale of the property. They therefore failed to recover any of the sale proceeds, even after appeal.

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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