14.4. Overreaching

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definition given by Charles Harpum in ‘Overreaching, Trustees’ Powers and the Reform of the 1925 Legislation’, namely, that overreaching is merely a process by which pre-existing interests are subordinated to later interests created by dispositions made under a trust. In other words, on this view, contrary to what Cherry says, overreaching is just a means of extinguishing pre-existing interests on a disposition to a purchaser.

If the second is adopted in preference to the first, it has a profound effect on the scope of the doctrine, as we see below. In order to appreciate the significance of the difference, however, it is necessary first to outline how the overreaching machinery provided by the Law of Property Act 1925 operates.

14.4.2. Operation of overreaching

Overreaching is not confined to interests under a trust of land, but this is where it most often occurs. Provision for trustees of land to overreach equitable interests generally is made by section 2(1) of the Law of Property Act 1925 (as amended by paragraph 4 of Schedule 3 to the Trusts of Land and Appointment of Trustees Act 1996):

(1) A conveyance to a purchaser of a legal estate in land shall overreach any equitable interest . . . affecting that estate, whether or not he has notice thereof . . . (ii) if the conveyance is made by trustees of land and the equitable interest . . . is at the date of the conveyance capable of being overreached by such trustees . . . and the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance are complied with.

A conveyance includes the grant of a mortgage or a lease as well as the transfer of a fee simple (section 205(1)(ii) of the 1925 Act). The requirements of section 27 respecting the payment of capital money which are referred to here are that, notwithstanding anything to the contrary in any instrument creating the trust, ‘the proceeds of sale or other capital money’ arising out of the conveyance must not be paid to fewer than two persons as trustees of the trust, or to a trust corporation as trustee (section 27(2)).

Section 2(1) refers to equitable interests in general, but section 2(2) and (3) then effectively cut the category of equitable interests that can be overreached down to beneficial interests under trusts, by excluding (among other things) commercial equitable interests such as restrictive covenants, easements, estate contracts and options to purchase (section 2(3)). The significance of this is that overreaching was intended to apply only to interests in land which could properly be represented in money terms, in the sense that an interest in the proceeds of a sale of the land would be an acceptable substitute for an interest in the land itself. This could never be true of commercial interests such as easements or covenants: if an easement or covenant is overreached it is effectively destroyed. At the time of the 1925 legislation, however, it was true of interests under what are now called trusts of land, because they were primarily used as investment devices. If the principal function of the trust fund is to act as an investment for the beneficiaries, it is entirely appropriate

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In City of London Building Society v. Flegg [1988] AC 54 (extracted at www.cambridge.org/propertylaw/), the House of Lords was invited to reverse this position and hold that trustees could not overreach the interests of beneficiaries in occupation without their consent. The Flegg case provides a good illustration of the fragility of the protection that overreaching provides for beneficiaries. The nontrustee beneficiaries were Mr and Mrs Flegg, who lived in a house, ‘Bleak House’, with their daughter and son-in law, Mrs and Mr Maxwell-Brown, who held the legal title on trust for the four of them. The overreaching transaction was a mortgage over Bleak House which the Maxwell-Browns granted to the City of London Building Society to secure repayment of a sum of money the building society had lent to the Maxwell-Browns. The effect of the overreaching mechanism was to require the Maxwell-Browns to hold the loan on trust for themselves and the Fleggs. This of itself did not prejudice the financial position of the Fleggs: the effect of the grant of the mortgage was to deplete the value of the Maxwell-Browns’ fee simple (still held on trust for themselves and the Fleggs) by an amount precisely equal to the amount of the loan, so the Fleggs’ beneficial interest in the loan money compensated them exactly for what they had lost. What caused the Fleggs’ loss was the Maxwell-Browns’ breaches of trust: the Maxwell-Browns defaulted on repayment of the loan, so entitling the building society to sell the house free from all the beneficial interests, and dissipated the loan money instead of keeping it safe for the Fleggs. The building society was therefore entitled to evict the Fleggs from their home, leaving them with just a personal claim against the Maxwell-Browns (apparently now insolvent and in prison).

The Fleggs’ argument was, essentially, that the Maxwell-Browns should not have been able to put their home at risk in this way by mortgaging the fee simple without their consent. Put more precisely, it was argued on their behalf that beneficiaries in occupation of trust land were protected against overreaching without their consent by section 14 of the Law of Property Act 1925. Section 14 provides:

This Part of this Act shall not prejudicially affect the interest of any person in possession or in actual occupation of land to which he may be entitled in right of such possession or occupation.

On the face of it, this is an attractive argument. The overreaching machinery provided by the Law of Property Act 1925 appears in sections 2 and 27 of the Act, both in ‘this Part’ of the Act (i.e. Part I). The interests of beneficiaries in occupation of land are prejudicially affected by an overreaching disposition made without their consent if it will deprive them of the benefit of occupation of the land (although see Lord Oliver’s response to this point). The last part of the section is admittedly not apt to cover beneficiaries in occupation of the trust land: they do not have an interest in the land ‘in right of’ (i.e. by virtue of) their occupation. However, none of those who do have an interest in land ‘in right of ’ their possession or occupation could conceivably be covered by section 14 (adverse