Newsletter: December 2014

At the PNBA’s Annual Lawyers’ Liability Seminar on 11 October 2014, Michael Pooles QC delivered a lecture addressing what he modestly described as a pot pourri of novel or recurrent issues relevant to professional liability claims. One of these issues in particular caused a rather sharp collective intake of breath from the lawyers present, since it concerned what Mr Pooles termed “the most significant potential elephant trap to have been devised for the unsuspecting advocate for a number of years.

The danger in question arose on 27 January 2014, when HMRC made a very slight – but potentially very significant – amendment to one of its Extra Statutory Concessions.

The concession in question is ESC D33 and it has been in place since the late 80s. One of its effects, prior to 27 January 2014, was that awards of damages and settlement sums were not subject to capital gains tax (CGT) where the recipient of the award was an individual or corporation tax where the recipient was a company. That has now changed.

To understand the effect of ESC D33 both before and after January 2014, it is necessary to look back at the case of Zim v Proctor [1985] STC 90. There, a sale of the claimant’s (or, in those halcyon days, the plaintiff’s) property had fallen through due to the negligence of its solicitors (the claimant had been unable to demonstrate good title to the property). The claimant and its solicitors had managed to agree a settlement. HMRC then sought payment of corporation tax on the whole settlement sum on the basis that it represented a chargeable gain. The claimant argued that, if it had to pay tax on the settlement sum at all, such tax should be assessed by reference to the underlying property (that is, the gain that would have been realised had the property actually been sold).
Warner J found in favour of HMRC and the entire settlement sum was subject to tax as a chargeable gain. He held that the relevant asset for tax purposes was the claimant’s right of action (against the solicitors) and not the property which should have been sold. As such, the ‘gain’ to be taxed was the difference between the market value of the right of action at the date of its acquisition and the sum for which it was ultimately realised (subject to any allowable expenses or deductions, etc).
Following Zim, HMRC put in place ESC D33. It had two main operative paragraphs. Paragraph 9 dealt with the case where there is an ‘underlying asset’, such as the property which should have been sold in Zim. In such cases, an award of damages or a settlement sum is assessed to tax by reference to the underlying asset. So, in Zim, the claimant’s ‘gain’ would be calculated by reference to the acquisition cost and (intended) sale price of the property and not by reference to the right of action itself. HMRC has not changed – and has not suggested that it is going to change – paragraph 9 of the concession.
However, paragraph 11 dealt with the case where there is no ‘underlying asset’ which can be used to calculate the amount of tax due on damages or a settlement sum. The classic example of this might be negligent tax advice, where a tax adviser’s client ends up paying too much tax as a result of the adviser’s negligence. Indeed, negligent tax advice has been given as an example of a ‘paragraph 11’ case by HMRC itself.
For almost thirty years, paragraph 11 of ESC D33 provided that awards of damages or settlement sums in cases which involved no underlying asset were simply exempt from CGT or the equivalent corporation tax.
It is difficult to disagree with Mr Poole’s comment that paragraphs 9 and 11 (pre-January 2014) appeared “both logical and just”. On 27 January 2014, however, and apparently without prior consultation or warning, HMRC removed the exemption in paragraph 11.
In doing so, HMRC replaced the blanket exemption in paragraph 11 with a ‘fixed cap’ of £500,000. Any awards of damages or settlement sums over that limit may now be subject to CGT or corporation tax. HMRC has a discretion in respect of such higher sums, but notes on its website that it “will not normally provide relief above that amount [i.e. £500,000].” Importantly, anyone who receives compensation of more than £500,000 should notify HMRC accordingly. If that party thinks their award should not be chargeable to capital gains tax, they may make a claim for relief. It remains to be seen how HMRC will apply its discretion in practice, particularly as the end of the tax year approaches.
In the meantime, HMRC has proposed changing paragraph 11 again. In a consultation paper published in July 2014, it proposed lifting the fixed cap to £1 million. Any award above this amount would automatically be considered a chargeable gain; HMRC would have no discretion to grant relief.
It is not difficult to imagine situations in which this proposed regime might result in injustice. Take an example where an individual has paid £2 million too much tax as a result of negligent tax advice. The unfortunate individual sues his adviser and recovers the £2 million. Then HMRC steps in and taxes (at the current CGT rate of 28%) the top £1 million slice of his £2 million award. The individual would remain out of pocket by as much as £280,000. Happily, however, the public purse has made a windfall of (overall) around £2,280,000.
Interestingly, the economic assessment which accompanied HMRC’s July consultation stated that the proposed further amendment to the concession was “expected to have a negligible impact on the Exchequer”; although it acknowledged that there “may be an impact on individuals and companies receiving compensation of more than £1 million.”
HMRC’s consultation ran for around six weeks and closed on 15 September 2014 (HMRC said it was running a shortened consultation period on the basis that it was “largely a technical consultation [about] a long standing concession with which professionals are familiar”).
Possibly as a result of this shortened period, HMRC received fewer than 20 responses. Although HMRC refused this author’s FOI request for copies of those responses, many of them are available on the websites of the various respondents themselves. They raise a number of concerns with HMRC’s proposals. The Law Society, for example, pointed out that, with respect to compensation, there is “no difference in the analysis between (properly incurred and claimed) compensation of £300,000 or £37 million. Compensation is compensation of actual loss, whatever the cash figure involved.
The Law Society was also concerned about the lack of ‘grandfathering’ provisions in the HMRC consultation. It warned that, absent such provisions, HMRC is “likely to be accused of retrospection”.
The Law Society’s two responses to the consultation are both available on its website, and are well worth reading.
Two issues remain to be discussed, albeit briefly. The first concerns the scale of the problems caused by the amendment to paragraph 11 of ESC D33; the second concerns the legal profession’s likely response to it.
As to the first of these issues, the scale of the problem obviously depends upon how many cases exist which are worth more than £500,000 (or, should HMRC’s proposals come into effect, £1 million) and do not involve an underlying asset to which the CGT or corporation tax can attach. The obvious example, as set out above, is negligent tax advice, but there may be other categories of cases as well. Practitioners should therefore be alive to the consequences of the new paragraph 11 when dealing with cases which do not (or may not) contain such an underlying asset.
It is worth noting that, in its response to HMRC’s consultation, the law firm Mishcon de Reya stated that it deals “with high value litigation matters on a daily basis and it is certainly the case that the rights of action in those matters cannot always be linked to underlying assets.”
The second issue concerns how practitioners should respond when dealing with a high value case not involving an underlying asset. If the claimant faces being taxed on their compensation, the obvious solution may be to claim the compensation plus the tax that will (or may) have to be paid on it. As such, claims may have to be grossed up to as much as 139% of the compensation sought so that, if 28% CGT is applied to the total sum, for example, the claimant is left with the full amount.
Defendants will presumably respond by arguing either that they should not be liable to compensate the claimant for this tax at all or that, at the very least, the claimant will never have to pay the full amount of tax – because it may, for example, be able to claim allowable expenses (possibly including its legal costs in the very proceedings by which the compensation is claimed).
It may be tempting for the claimant to include in their pleadings a ‘boilerplate’ clause seeking an indemnity from the defendant in the event that HMRC decides to tax the damages; however, might the payment of such an indemnity itself be subject to CGT or corporation tax?
It should go without saying that this is a murky area where tax and professional negligence collide, and accordingly specialist tax and/or civil litigation advice should probably be sought in cases which may fall foul of the revised ESC D33. It should also be noted that certain claims remain exempt from this form of tax (most obviously claims involving personal injuries, which are excluded by statute). For other claims, the ghost of Zim now stalks this land.

Martyn Naylor
4 Pump Court

Supreme Court
5 November 2014
[2014] UKSC 58

Subject: Trusts—Breach of trust—Re-mortgage of property—Solicitors holding funds on trust for completion—Solicitors in breach of trust by discharging part of existing mortgage debt and paying remainder over to borrowers—Lender later suffering loss—Whether obligation to restore trust fund—Whether loss to be compensated by equitable compensation—Measure of equitable compensation

Summary:  The beneficiary under a trust has the right to have that trust properly administered. What that will mean in any given case will depend upon the facts. In the present case, it would not have been realistic or equitable to look at a trust over the completion monies for a remortgage loan in isolation from the commercial transaction of which it formed part. If the respondent solicitor had performed its retainer properly, it would have paid over an additional sum of c.£300,000 to a prior charge-holder, and the appellant bank would have received a first legal charge rather than a second legal charge to secure its lending on the remortgage. In equity, the bank was entitled to be put into the same position as if that had been done. That required the solicitor to pay to the bank the sum that had been awarded by the trial judge, and not the totality of the appellant bank’s loss on the lending. The appeal was thus dismissed.


This was an appeal by the appellant bank (“AIB”). The claim arose out of the bank’s retainer of Mark Redler & Co (“Redler”) to act on its behalf in connection with a remortgage loan. Redler were also retained to act for the borrowers.

AIB provided a remortgage advance of £3.3M to the borrowers. It was a condition of that loan that a prior charge in favour of Barclays Bank plc (“Barclays”) was to be redeemed on or before completion of the loan, using part of the advance.

AIB paid the moneys over to Redler to be held on trust for the purposes of completing the transaction. Through Redler’s admitted negligence, only £1.2M of the borrowers’ total indebtedness to Barclays (of around £1.5M) was paid off, and accordingly the prior Barclays charge was not redeemed. The balance of the advance was paid to the borrowers.

AIB therefore could not register a first charge. It entered into discussions with Barclays and AIB’s charge was registered as a second charge. However, in due course the borrowers defaulted on the remortgage. Bankruptcy and a sale of the property ensued, and AIB suffered total losses of around £2.4M, being the total amount of the advance less credit for the proceeds of sale after costs.

The question of law was whether AIB was entitled to recover the whole of its c.£2.4M losses from Redler, or whether the amount for which Redler was liable was limited to the c.£300,000 representing the amount by which AIB’s security was less than it would have been if Redler had performed its retainer competently.

AIB brought its claim in breach of contract, negligence, breach of fiduciary duty and breach of trust. The measure of damages for breach of contract and negligence was agreed by both parties to be the c.£300,000 differential in the value of the security. However, AIB contended that in equity, it was entitled to equitable compensation for breach of trust for the whole of its losses.

This argument (and others by which AIB sought to recover its full loss) was dismissed by Judge Cooke at first instance, and by the Court of Appeal (Arden, Sullivan and Patten LJJ).  The Supreme Court then dismissed AIB’s appeal. Lord Toulson and Lord Reed each gave reasoned judgments. Lord Neuberger, Lord Wilson and Lady Hale agreed with both judgments. It was held that on the facts of this case, the value of the remedy for breach of trust was the same as the remedy for breach of contract and negligence.

Both Lords Toulson and Reed devoted substantial portions of their judgment to analysing the reasoning of Lord Browne-Wilkinson in Target Holdings Limited v Redferns [1996] AC 421. Lord Toulson stated that the resolution of AIB’s appeal:

“[49]…involves two essential questions. The more important question in the appeal is whether Lord Browne-Wilkinson’s statement in Target Holdings of the fundamental principles which guided him in that case should be affirmed, qualified or (as the bank would put it) reinterpreted. Depending on the answer to that question, the second is whether the Court of Appeal properly applied the correct principles to the facts of the case.”

Lord Toulson and Lord Reed also both acknowledged that there had been considerable academic and judicial debate about the reasoning in Target Holdings. For Lord Toulson, this was:

[47]…part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-relationship with common law principles and remedies, particularly in a commercial context….”

Lord Reed described his reasoning as considering the relationship between equitable compensation and common law damages “on a somewhat broader basis” than Lord Toulson. His Lordship began with certain propositions of first principle:

  1. The loss resulting from a breach of duty has to be measured according to legal rules, and different rules apply to the breach of different obligations [92].
  2. The rules appropriate to a breach of duty by a trustee similarly have to be determined in the light of the characteristics of the obligation in question [93].

Against the backdrop of these observations, his Lordship addressed the much-discussed dicta of Lord Browne-Wilkinson in Target Holdings distinguishing ‘commercial’ trusts from ‘traditional’ trusts. For Lord Reed, Lord Browne-Wilkinson was seeking:

“[102]… not to say that there is a categorical distinction between trusts in commercial and non-commercial relationships, or to assert that there are trusts to which the fundamental principles of equity do not apply….[but rather] to recognise that the duties and liabilities of trustees may depend, in some respects, on the terms of the trust in question and the relationship between the relevant parties …”

Lord Toulson similarly observed that although it was a fact that a commercial trust differs from a typical traditional trust in that it arises out of a contract rather than the transfer of property by way of gift, nonetheless:

[70]…Lord Browne-Wilkinson did not suggest that the principles of equity differ according to the nature of the trust, but rather that the scope and purpose of the trust may vary, and this may have a bearing on the appropriate relief in the event of a breach…. the solicitors should not be required to pay restitutive monetary compensation when there has in fact been no loss resulting from their breach. That is not because special rules apply to solicitors, but because proper performance of the trustee’s obligations to the beneficiary would have produced the same end result.”

Their Lordships were thus unanimous that Lord Browne-Wilkinson had not drawn a hard and fast distinction between commercial and traditional trusts. The position was rather that the proper remedy by way of equitable compensation for a breach of trust would be influenced in any given case by the origins of the trust, the nature of the trust obligation breached, and the wider relationship between the parties. This meant that the detailed rules relating to equitable compensation developed in respect of traditional trusts were not necessarily applicable to a bare trust arising in the context of a commercial contract, such as the present.

Another key theme in the appeal judgments was the underscoring of the fundamentally compensatory nature of the remedy of equitable compensation for breach of trust. At para [31] of his judgment, Lord Toulson identified the analysis which he considered lay at the heart of the outcome in Target Holdings. This comprised the propositions that:

  1. Where a trust was subsisting, the basic right of a beneficiary was to have the trust duly administered and to have the fund reconstituted as it should be;
  2. Whereas if at the time of the action the trust had come to an end, the normal order would be for the payment of compensation directly to the beneficiary; and
  3. The measure of compensation in the latter case would be the difference between what the beneficiary had in fact received and the amount which he would have received but for the breach of trust.

Lord Toulson referred to this analysis as Lord Browne-Wilkinson’s ‘fundamental analysis’ which “provided the foundation for all that followed” in Target Holdings.

Lord Toulson felt that these fundamental principles were correct and should be affirmed.  It appears that his Lordship viewed AIB’s appeal as an attack upon the core principle that the remedy of equitable compensation should do just that: compensate the beneficiary for his losses. At page 439 of Target Holdings, Lord Browne-Wilkinson had held that:

“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”

In AIB, Lord Toulson held that:

“[62]… it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties. [63]… I consider that it would be a backward step for this court to depart from Lord Browne-Wilkinson’s fundamental analysis in Target Holdings or to “re-interpret” the decision in the manner for which the bank contends…[64]… a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.

Lord Reed agreed that it was “a fallacy” in AIB’s claim that it sought to make Redler liable for the consequences of the inadequacy of the security accepted by AIB before Redler’s involvement, when Redler’s breach of trust had not affected that security except to the extent, initially, of the c.£300,000.

Their Lordships were thus unanimous that on the facts of this case, the compensatory nature of the remedy required the Court to have regard to what losses were causally connected to Redler’s breach.

As to Lord Toulson’s, second question, namely whether the Court of Appeal had properly applied the reasoning in Target Holdings to the facts of the present case, the Supreme Court upheld the decision below. AIB had argued that its case fell within Lord Browne-Wilkinson’s statement in Target Holdings, that:

until the underlying commercial transaction has been completed, the solicitor can be required to restore to the client account moneys wrongly paid away.”

It might have been thought that by this statement, Lord Browne-Wilkinson was preserving the role of the traditional remedies of restoring the trust account in the conveyancing context where completion under the mortgagee’s retainer has not taken place. However, Lord Toulson rejected AIB’s argument, holding that when Lord Browne-Wilkinson had spoken of ‘completion’ in that part of his judgment, he had been talking about completion of the commercial transaction. Although Redler did not ‘complete’ the transaction in compliance with the requirements of their retainer under the CML Handbook, as a commercial matter the loan transaction was executed or ‘completed’ when the loan moneys were released to the borrowers. The Court of Appeal had been right in the present case to understand and apply this aspect of the reasoning in Target Holdings as it did.

Finally Lord Toulson dealt with AIB’s argument (developed in the Supreme Court) based upon the obligation of a solicitor to reconstitute moneys misapplied from its client account under what was at the material time rule 7 of the 1998 Solicitors Accounts Rules. His Lordship held that although there was a breach of rule 7 by Redler which could have disciplinary consequences for the firm, this could not affect the proper approach to Redler’s liability to provide redress to AIB for a loss which AIB would have suffered in any event.


The Supreme Court’s decision affirms the fundamental principles and reasoning of Target Holdings and confirms that that decision did not require revision or reinterpretation. To critics of the earlier decision, this will be a disappointment.

On the other hand, there is perhaps an instinctive justice about an outcome that the compensation payable by a trustee in breach of trust should be limited to the loss actually caused by his breach. The judges who considered AIB’s case at all levels all came to the same conclusion in terms of outcome, albeit that their reasoning differed.

The Supreme Court’s decision further confirms that although the principles which apply to compensatory remedies for breach of contract/negligence and breach of trust are not the same, nonetheless the origins of the trust, the nature of the trust obligation breached, and the wider relationship between the parties will all inform the proper equitable remedy. If the purpose of a trust, and the obligations to which it gives rise, are formatively shaped by the context of a commercial contract, the Court is very likely to require the claimant to demonstrate a causal link between his losses and the breach. To that extent, the common law attitude to damages for loss will loom large in such a case.

Leading Counsel for AIB, Nicholas Davidson QC, reports that Lord Neuberger wryly observed during argument that “only one thing was certain. Whatever we decide, it will be criticised”. No doubt that was true: the decision will certainly spawn further academic and judicial debate. For practitioners, further case law will be necessary to explore the boundaries of the decision. When a given set of facts points away from the commercial context of AIB, and towards a more traditional trust situation, it will be interesting to see how AIB is interpreted and applied by the Courts.

Simon Hale
4 New Square

Supreme Court
22 October 2014
[2014] UKSC 52; [2014] 3 W.L.R. 1163

Handing down judgment on 22 October 2014, the Supreme Court determined the legal and proprietary interests of lenders, purchasers and borrowers surrounding sale-and-rent-back transactions (“SARBs”). The judgment also addresses the much debated question concerning the nature of the interest obtained by the purchaser in conveyancing transactions prior to completion and comments upon the law in relation to overriding interests and proprietary estoppel.

The transaction which made up the appeal to the Supreme Court, a sole remaining test case, was one of a vast number of SARB transactions taking place nationwide (although notably in the north east of England) prior to the regulation of SARB agreements.

A SARB agreement involved (as we now know, following the judgments of the Court of Appeal and the Supreme Court), a sale of the property by the owner (“the vendor-tenant”) followed by a lease-back from the purchaser (“the purchaser-borrower”). The sales, usually at an under value, typically arose from a promise by the purchaser-borrower that the vendor-tenant could reside in the property for life (or some other period) at a below market rate rent, were funded by mortgage lending, and often involved those in financial dire straits. The regulation of the SARB market, and the fall in the property market, has more or less brought an end to this as a means of investment.

The sole test case before the Supreme Court was that of Ms Rosemary Scott (“Ms Scott”). The facts of Ms Scott’s case were, in summary, that she had brought the property from North East Tyneside Borough Council in 1999 with a mortgage from C&G. She subsequently fell into financial difficulties and in 2005 placed the property on the market for £156,000. She was approached by Mr Foster (who was involved with North East Property Buyers (“NEPB”)) and was told that he, or a nominee of NEPB, would purchase the property for £135,000, in exchange for which: (a) she could stay in the property for a discounted rent of £250 pcm (in addition to repayments for residing in the property for various periods of time), and (b) she could live in the property forever and that her son would succeed her.

The nominee for NEPB (Aimee Wilkinson) was granted a Buy-to-let mortgage offer of £114,750 (plus fees) by Southern Pacific Mortgages Limited (“SPML”) on 15 June 2005.

The requisitions on title stated that arrangements would be made directly with the seller “as to both the handover of keys and the time that vacant possession would be given” and  the Contract of Sale, dated 12 August 2005, was expressed to be with full title guarantee and subject to the Standard Conditions of Sale (4th ed.). The special conditions attached at clause four were left by both firms of solicitors without being deleted, so that they read “The property is sold with vacant possession (or) The property is sold subject to the following leases or tenancies.” No leases or tenancies were listed.

Completion of the transfer from Ms Scott to the nominee, and the legal charge granted by Ms Scott to SPML, took place on 12 August 2005, and were registered on 16 September 2005. Ms Scott claimed to have been in actual occupation at the time of completion, but it was not until four days after completion, contrary to the terms of the nominee’s mortgage, that she was granted a fixed term two year tenancy at the reduced rate. At the end of the fixed term, the tenancy was said to become a monthly periodic tenancy terminable on not less than two months’ notice in writing.

The nominee failed to make payments under the mortgage and SPML obtained a possession order on 17 March 2009. Ms Scott, who claimed to have become aware of the order after the event, sought to be joined to those possession proceedings, which had taken place in a County Court northern England. Due to the vast number of SARB cases at that time, and the large number of apparently innocent lenders and vendor-tenants involved, it was agreed that 10 test cases would be advanced and those test cases were transferred to the High Court. The lenders involved included the three lenders represented on appeal; SPML, Mortgage Express and The Mortgage Business (collectively, “the Lenders”).

At first instance, Re North East Property Buyers Litigation [2010] EWHC 2991 (Ch), the matter proceeded by way of three preliminary issues in the High Court (drafted by Miss Sandells, acting on behalf of Mortgage Express at first instance and SPML and Mortgage Express in the Supreme Court). HHJ Behrens determined those preliminary issues in favour of the Lenders, concluding that: (1) even if the promises to the vendor-tenants gave rise to proprietary rights on completion, there was no moment in time in which such a right could bind SPML – Abbey National Building Society v Cann [1991] 1 A.C. 56;  (2) the vendors did not obtain an interest on exchange of contracts because the contract, conveyance and mortgage were one indivisible transaction, per Nationwide Anglia Building Society v Ahmed (1995) 70 P & CR 381; (3) prior to completion the vendor-tenant’s equitable rights were personal and not proprietary; (4) the transfers executed by the vendor-tenants on completion would have transferred any interest in the property pursuant to Law of Property Act 1925 (“LPA 1925”).

The matter was unsuccessfully appealed by the vendor-tenants to the Court of Appeal; Re North East Property Buyers Litigation [2012] 1 W.L.R. 1521. Etherton LJ, giving the lead judgment, held that: (1) a SARB consisted of a separate sale followed by a lease back on completion and did not comprise a reservation of an interest; (2) the contracts recorded that the sales were without reservation; (3) a mortgagee would be entitled to review the transaction in the same way; (4) no equitable interest arose in favour of the vendor-tenants prior to completion; (5) even if an equitable interest had arisen on exchange of contracts in consequence of the assurances made by the borrower-purchaser, Abbey applied.

Permission was then sought, and granted, to appeal to the Supreme Court. The Supreme Court decided two issues. As Lord Collins set out at paragraph 10, “One question is whether the purchasers were in a position at the date of exchange of contracts to confer equitable proprietary rights on the vendors, as opposed to personal rights only. The second question is whether, even if the equitable rights of the vendors were more than merely personal rights, the rationale of the decision of the House of Lords on the Land Registration Act 1925 (“the LPA 1925”) in Abbey National Building Society v Cann [1991] 1 A.C. 56 applies to this case.”

As to the first issue, Ms Scott argued that by virtue of the promise made to her by Mr Foster she had obtained an interest by way of either constructive trust or proprietary estoppel capable of binding SPML, or of overriding SPML’s registered charge by virtue of Schedule 3 of the Land Registration Act 2002 (“LRA 2002”). It was therefore necessary for Ms Scott to establish that she had either retained a proprietary interest at the time of sale, or that she had obtained a proprietary interest in the property prior to the exchange of contracts and therefore pre-completion.

The Supreme Court unanimously found in favour of the Lenders. SARB transactions were held to be sales followed by rent backs, so vendor-tenants could not claim priority on the basis of a reserved interest under the contract of sale. Whilst not fact specific, as set out above, in Ms Scott’s case SPML was expressly informed that there would be vacant possession at the time of sale and that the requisitions on title had not listed any tenancies or leases in place as at the date of completion.

Further, the Supreme Court also held that in order for an unregistered interest to override a registered disposition pursuant to Schedule 3 of the 2002 Act, that interest must itself be proprietary in nature. Accordingly, it was incumbent upon the vendor-tenant to establish that their propriety interest had arisen upon, or prior to, exchange of contracts. The only source of that proprietary interest (the Court having found there was no reserved interest) was the purchaser-borrower (in Ms Scott’s case NEPB’s nominee), who could not herself grant a proprietary interest prior to her acquisition of the legal interest. The alleged proprietary estoppel could only be “fed” upon the nominee’s acquisition of the legal interest; the purchaser-borrower is not entitled to grant a greater interest in the property than she herself holds.

Further, following the dicta of the House of Lords in Abbey, the borrower-purchaser only ever obtained an equity in redemption subject to the Lenders’ respective charges; there was no scintilla temporis between the completion of the purchase and the completion of the mortgage in which the borrower-purchaser held an unencumbered interest in the property from which to grant an unfettered interest in the property to the vendor-tenant. Ergo, any right granted by the borrower-purchaser to the vendor-tenant was subject to the Lenders’ charges, including any right which crystallised once the estoppel had been “fed”; again, the borrower-purchaser is not entitled to grant a greater interest in the property than she holds. Accordingly, whilst the vendor-tenants may have personal claims against the borrower-purchasers arising from the broken promises, they did not have rights in priority to those of the Lenders.

The second decided issued concerned the divisibility of the transaction comprising the sale of the property and the mortgage. Lord Collins framed the question in paragraph 83 as, “whether the contract, conveyance and legal charge were one indivisible transaction” and Baroness Hale at paragraph 95 as “whether the contract should be seen as an indivisible transaction with the conveyance and mortgage”.

The House of Lords in Abbey had concluded that they were. This analysis had been adopted by the Court of Appeal in Ahmed, per Aldous LJ at 389 and, as Lord Collins highlighted at paragraph 97 of his speech in NEPB, it appeared to have been the conclusions of both Lords Walker and Hughes in the Supreme Court in R v Waya [2013] 1 A.C. 294, a case cited by the Lenders in argument.

However, Baroness Hale (with whom Lords Wilson and Reed agreed) disagreed both with the aforementioned line of cases and with Lords Collins and Sumption. She concluded that the contract of sale could not be seen as indivisible from the conveyance and the mortgage. Her position, summarised in paragraph 115, was; “But that may not be true if the mortgage takes place sometime after the conveyance: there may be a period during which the purchaser owns the land without encumbrances. Not all conveyances and mortgages are indivisible: it depends on the facts, which is why Cooke [1952] Ch. 95 may not have been wrongly decided.

Lady Hale continued at paragraphs 116ff, stating that when one looks at the information available to each of the parties and to the distinct agreements to which they are parties (i.e. the contract of sale on the one hand and the mortgage on the other) it could not be said to be a true “tripartite” transaction. Further, when Lord Walker and Lord Hughes expressly referred to the same in R v Waya [2013] 1 A.C. 294 they were neither deciding the point in this context, nor did they intend for the transaction to be understood as tripartite.


This author considers that the positions of Lord Collins on the one hand and Lady Hale on the other are not necessarily incompatible and that the issues raised by Lady Hale, and Lord Reed subsequently, are not necessarily irreconcilable with the conclusion reached by both Lord Collins and the House of Lords in Abbey. It turns upon the method of taxonomy adopted. However, the debate about divisibility, or indivisibility, of conveyance and mortgage is unlikely to have an impact on the outcome of SARB cases going forwards and is therefore best kept for another day. As Lord Collins acknowledged at paragraph 80 of his speech, the issue was irrelevant to the outcome of the appeal once the first issue had been determined in favour of the Lenders.

NEPB has dealt conclusively with the law relating to SARB cases of this nature. The findings of the Supreme Court are not fact specific in this respect. However, the decision in NEPB does not only deal conclusively with SARB transactions, it has clarified the law in relation to the longstanding, and much debated, question over the nature of the right obtained by the purchaser upon exchange of contracts prior to completion. It has also determined the priority of interests in conveyancing transactions, upholding the important House of Lords decision in Abbey (which pre-dated the introduction of the 2002 Act), and has given useful commentary to the law of Land Registration, overriding interests and proprietary estoppel. It is an important decision in a number of respects.  
Accordingly, in almost all cases the Lender’s charges will be safe; the vendor-tenants acquired no more than personal rights against the borrower-purchasers and will not have acquired a right in priority to those of the Lenders. Indemnity insurers for solicitors acting on behalf of the Lenders in SARB transactions will no doubt breathe a sigh of relief; as the Lenders’ security is not in jeopardy from the vendor-purchaser’s overriding interest the Lenders will have acquired the security that they bargained for.
Whether we will now see claims being brought by the vendor-tenants against their conveyancing solicitors is a different matter. Taking into consideration the vast number of SARB transactions, this wave of litigation could be substantial. However, Ms Scott’s conveyancing solicitors were chosen for her by Mr Foster and this appears to have been the case in a number of SARB transactions. It is therefore unclear whether any of those solicitors still exist, can be found, or have insurance.

Nicholas Broomfield
4 New Square

Court of Appeal
30 October 2014
[2014] EWCA Civ 1410

Subject: Professional Negligence—Financial Advisers—Limitation—Losses to the value of a bond during the ‘credit crunch’—Section 14A of the Limitation Act 1980—Constructive Knowledge under section 14A (10) — “a person’s knowledge includes knowledge which he might reasonably be expected to acquire” —Regard to claimant’s naiveté in deciding what knowledge she might reasonably be expected to acquire

Summary:  An investor whose bond had suffered significant losses during the ‘credit crunch’ could not rely upon the provisions of section14A of the Limitation Act 1980 in order to bring a claim against her adviser in time.


On 20 September 2005, the claimant invested £65,000 into a Legal and General Investment Bond (“the Bond”). This was upon the advice of the defendant, a ‘network’ of financial advisers. After making withdrawals from the Bond in 2008, 2011 and 2012, the claimant surrendered the Bond in February 2012. At that time, its value had dropped to £53,152.

Having seen an advert for ‘no win no fee’ legal representation, the claimant consulted solicitors in April 2012. After taking advice, her claim was issued in November 2012. The claimant alleged that the Bond had been unsuitable for her and that the defendant’s investment advice had been negligent.

Her case as to limitation was that it was not until February 2012 that she had the knowledge required for bringing an action for damages, within the provisions of section14 of the Limitation Act 1980 (“the Act”), and that her claim was accordingly brought in time. In particular, she asserted that it was not until February 2012 that she knew either that she had suffered a loss, or that she might have received inappropriate advice.

The defendant countered that the claimant had the knowledge required by July 2009. It relied in part upon the fact that the claimant had had received four annual statements in June 2006, 2007, 2008 and July 2009, the latter two of which showed a catastrophic fall in the value of the Bond, caused by the credit crunch. It also relied on the claimant’s oral evidence (below).

The Bond had no fixed term. The judge found that the understanding between the claimant and the defendant was that the money would remain in the Bond for at least five years. The critical moment was the claimant’s state of mind in July 2009, after receipt of an annual statement showing the Bond had a fund value of only £43,653. This was against a backdrop of previous growth in 2006 and 2007, with the Bond peaking at £78,970.

The claimant gave evidence that when she received the July 2009 statement she was, in her own words, “horrified at the amount of money that was going out of that account“. The loss was “massive“. It was “haemorrhaging money“. Moreover, the claimant contacted another member of the defendant and was told that it might have been better if the investment had been more diversified. Upon advice, she instructed the defendant to transfer her investment to a different fund. Importantly however, the claimant also gave evidence that she was adamant that she had believed throughout that she would receive the whole of the £65,000 of her investment back upon redeeming the Bond.

As to this somewhat confused picture, the Judge found that in July 2009, the claimant:

“… knew that the investment as initially recommended by the defendant had a defect, in that the fund should not all have been put into commercial property. She had some sense that [the defendant] was to blame, rather than purely market conditions, but she did not believe that she could do anything about it and that whatever else happened she would still get her £65,000 back at the end of the five years. There is some inconsistency in her thinking but I do find that she still genuinely believed that by the end of the five years she would receive at least £65,000.”

The Court of Appeal (Tomlinson LJ, with whom Lewison and Sullivan LJJ agreed) held that the claimant’s “irrational belief that she would recover £65,000 after five years” was not sufficient to demonstrate that she had not, in July 2009, actually appreciated that she had suffered damage.  She had realised by that point that she had a flawed product; and at the very least knew that it was an intrinsic feature of the Bond that she might at the end of five years recover nothing more than £65,000, whereas had she put her money on deposit she could have expected interest on top. Anchor

However, Tomlinson LJ in fact decided the appeal based upon the claimant’s constructive rather than actual state of knowledge. The key decision was what knowledge it was reasonable to expect that the claimant might acquire under section 14A (10) of the Act when she learned of the fall in the Bond. Applying Gravgaard v Aldridge & Brownlee [2005] PNLR 19, the test was to consider the surrounding circumstances so as to decide what a person in the position of the claimant might reasonably have been expected to do, but without regard to special or peculiar characteristics of the particular claimant concerned.

On the evidence, this claimant was particularly naïve. Tomlinson LJ was prepared to assume (though apparently with some doubt) that her naiveté was a relevant surrounding circumstance rather than an irrelevant characteristic peculiar only to her. But even making that allowance, his Lordship found that a reasonable investor would have taken steps from July 2009 onwards such as to investigate the possibility of a claim. The claimant could have asked more searching questions of the adviser whom she contacted when switching her investment, and she could have gone back to the literature that was presented to her when she first placed the Bond. As a result, she was fixed with constructive knowledge and her claim was time barred by July 2012. The defendant’s appeal was therefore allowed and the claim dismissed.


The £65,000 which the claimant decided to invest represented 75% of her and her husband’s life savings. It might therefore be thought that this was a case where the Court would strive to find a route to a remedy. This might be thought all the more likely where the claimant’s evidence showed such evident naiveté.

However, the decision underlines that the claimant’s burden in seeking to invoke section 14A is a high one. Characteristics peculiar to the individual claimant will be disregarded in the constructive knowledge analysis. In reality, the rather wordy formulation that a person’s knowledge includes knowledge which he might reasonably have been expected to acquire is in practice a prescriptive enquiry: what does the Court think the claimant should have done? If when advising a claimant, they have not acted as would a reasonable (and prudent) person, they will have a mountain to climb. Anchor

Simon Hale
4 New Square

[2014] EWHC 2553 (QB)

Possible Leapfrog Appeal to the Supreme Court


Personal injury and clinical negligence practitioners will know that the courts at first instance are bound by the much criticised decision of the House of Lords’ in Cookson v Knowles [1979] AC 556, which holds that multipliers in Fatal Accident Act cases are assessed at date of death.

We understand that the High Court has given permission to the claimants in Knauer v Ministry of Justice [2014] EWHC 2553 (QB) to pursue a leapfrog appeal to the Supreme Court. Their Lordships have yet to indicate whether they will permit the appeal to proceed.

Cara Guthrie
Outer Temple Chambers