– Protection of trusts of land from a mortgagee who takes the land as security for a loan.
The following example illustrates a case scenario where the interests of beneficiaries behind a trust of land are overreached through the payment of the loan amount to two trustees who hold the land in trust for them. It shows how an equitable interest in land may be protected even though it is not registrable neither in registered land nor in unregistered land. This protection means that their interest takes effect in the money that is paid to at least two or more legal trustees provided they all consent to the purchase or to the mortgage of the land.
A and B are holding land Q on trust on behalf of C and D.
A and B together consent to a loan by X bank where the bank takes a mortgage on land Q . They default on the loan and X bank wants to sell the land to realize its money. What are the rights of C and D behind the trust of land as beneficiaries of the land?
Since the loan money has been legally received by two trustees the rights of C and D will be overreached by X bank meaning the bank can enforce it rights against both C and D and exercise its paramount rights as mortgagee so it can possess , or apply for an order for sale or appoint a receiver etc., Nonetheless C and D even though they lose their right to live inside the house they can find solace in the fact that at least the money received by A and B is held in trust for them, since the loan money is supposedly held in trust for their own interest.
OVERREACHING IS MAY BE LESS SAFE THAN IT SEEMS.
Note that the principle of overreaching illustrated in the hypothetical case applies in the same manner and has the same effects in both registered and unregistered land. However C and D’s rights will take effect in the proceeds of the loan money it’s just that they can be lawfully evicted. The system of overreaching comes with the risk that A and B may abscond with the loan money leaving C and D lawfully evicted due to overreaching, with only a right to sue A and B for breach of trust and for damages. By then many practical considerations may thwart their hopes for recovering the money.
ATTENTION ! MUST ALL THE TRSUTEES CONSENT OR ONLY AT LEAST A MINIMUM OF TWO IS NEEDED IN ORDER FOR OVERRERACHING TO APPLY.
This snippet explains how overreaching occurs and how s 27 of the LPA 1925 is commonly misinterpreted, resulting into errors over whether overreaching has actually occurred. S 27 of the LPA 1925 restricts the powers of a trustee to overreach by setting a statutory minimum of two trustees in order for overreaching to take effect. The following example may illustrate the confusion that may be caused in someone’s mind resulting from a wrong interpretation of s 27 of the LPA 1925.
For practical considerations s 27 of the LPA 1925 is cited as follows:
“[F32(1)A purchaser of a legal estate from trustees of land shall not be concerned with the trusts affecting the land, the net income of the land or the proceeds of sale of the land whether or not those trusts are declared by the same instrument as that by which the trust of land is created.]
[F33(2)Notwithstanding anything to the contrary in the instrument (if any) creating a [F34trust] of land or in [F34any trust affecting the net proceeds of sale of the land if it is sold], the proceeds of sale or other capital money shall not be paid to or applied by the direction of fewer than two persons as [F34trustees], except where the trustee is a trust corporation, but this subsection does not affect the right of a sole personal representative as such to give valid receipts for, or direct the application of, proceeds of sale or other capital money, nor, except where capital money arises on the transaction, render it necessary to have more than one trustee”.
In the light of what has been said above, let’s consider that there are three trustees in a trust of land. Would that mean that according to section 27 that if the purchase money/mortgage loan money is paid to the two consenting trustees by the purchaser /lender but the third has not consented to sale or mortgage that there is overreaching?
The answer is no, for overreaching to occur except for there to be a minimum of two trustees there must be a conveyance of the legal estate, as required by s 27. Likewise, for overreaching to occur all three trustees must consent to the purchase or mortgage of the land and not only a minimum of two. The reason that all three must consent is that in order for there to be a legal mortgage or conveyance of the legal estate, all joint tenants must agree, otherwise legal title is not conveyed and without the conveyance of the legal estate there can be no overreaching. Accordingly ,the mortgagee or purchaser will not be a purchaser of the legal estate in land as provided by s 27 of the LPA 1925a and overreaching is impossible.
S 27 (1) of the LPA 1925 States:
[F32(1)A purchaser of a legal estate from trustees of land shall not be concerned with the trusts affecting the land, the net income of the land or the proceeds of sale of the land whether or not those trusts are declared by the same instrument as that by which the trust of land is created.]
In order for a legal estate to be obtained the consent of all trustees no matter what their number in total ( up to a statutory maximum of four) must be given. The reason for that is that they are considered to be joint legal trustees and therefore their actions can only have legal effect and therefore convey a legal estate if they only act as a unity.
