[COURT OF APPEAL]

BAILEY v. BARNES.

[1890 B. 3574.]

Vendor and Purchaser - Constructive Notice - Purchaser of Legal Estate - Conveyancing Act, 1881 (44 & 45 Vict. c. 41), s. 21, sub-s. 2 - Conveyancing Act, 1882 (45 & 46 Vict. c. 39), s. 3, sub-s. 1.

J., the owner of four freehold houses, mortgaged them in fee for £1500 each. The mortgagees transferred their mortgage to B. in consideration of the principal and interest then due, amounting to £1579 1s. 5d. on each house. Two days afterwards B. sold the houses to H. M. for exactly the same sum as he paid for the transfer to himself, and conveyed them to H. M. in exercise of the power of sale in the mortgages, freed from the equity of redemption. H. M. soon afterwards mortgaged the four houses for £6000, and on her death her successor in title, E. M., sold the equity of redemption to L. for £2500, subject to the prior mortgage for £6000. Certain creditors of J., the original owner, who had recovered judgment in an action against him, and obtained equitable execution on his equity of redemption, brought an action against B. and E. M., impeaching the validity of the sale to H. M., and obtained judgment setting it aside as a fraudulent execution of the power of sale, and declaring the Plaintiffs entitled to a right of redemption. L. was not a party to the action, but on receiving notice of it he paid off the mortgage for £6000, and took a conveyance of the legal estate from the mortgagees. At the time when L. purchased the equity of redemption from E. M., he had no actual notice of any impropriety in the sale by B. to H. M., nor of any facts affecting the sale not disclosed by the deeds, except that he had seen a valuation which appeared to shew that the purchase by H. M. was at an undervalue, nor did he make any inquiries concerning the circumstances of the sale: -

Held (affirming the decision of Stirling, J.), that L. was not affected by constructive notice of the impropriety of the sale, and that he was protected against the prior equitable interest of the Plaintiffs by his acquisition of the legal estate.

BY four deeds, dated respectively the 12th of May, 1888, four houses, being Nos. 11, 12, 13, and 14, Salisbury Pavement, Putney, were conveyed to Charles Johnson in fee.

By three deeds, dated respectively the 14th of May, 1888, Johnson conveyed the houses, Nos. 12, 13, and 14, to L. S. Bristowe and C. Robbins in fee, by way of mortgage for securing on each house £1500 and interest, and by a deed dated the 14th of June, 1888, Johnson conveyed No. 11 to C. H. Foss,

J. R. Sowray, and C. Robbins in fee, by way of mortgage for securing a like sum of £1500 and interest.

On the 28th of January, 1889, the Plaintiffs, F. Bailey, D. Bailey, and W. S. Marner, recovered judgment against Johnson in an action for a debt and costs, amounting together to £1314 15s. 3d., and on the 16th of March following, they obtained an order for a receiver, by way of equitable execution on his equity of redemption in the four houses.

The Plaintiffs did not register their order for a receiver under the Land Charges Registration and Searches Act, 1888, until the 17th of February, 1890, but they gave notice on the 20th of March, 1889, to the mortgagees and to the occupying tenants of the house. Shortly afterwards the mortgagees entered into possession of the premises by taking the rents and profits.

On the 21st of December, 1889, the mortgagees transferred their mortgages to James Barnes, the consideration in the case of each house being £1579 1s. 5d., namely, £1500 for principal and £79 1s. 5d. for interest. On the 23rd of December, 1889, Barnes conveyed the houses to Hannah Midgley for the exact sum which he had himself paid to the mortgagees, viz. £1579 1s. 5d. for each house. Barnes purported to convey under the powers of sale contained in the original mortgages.

On the face of the documents there was nothing, except the fact that Hannah Midgley paid Barnes the same sum that he paid the mortgagees, to shew that anything was wrong or irregular in this transfer and sale, but Barnes was in fact a mere nominee of Hannah Midgley, and there was no real exercise of the power of sale.

On the 4th of March, 1890, Hannah Midgley mortgaged the houses for £6000, and the mortgagees had the legal estate conveyed to them in the usual way.

On the 6th of March, 1890, Hannah Midgley made a second mortgage to Wigley for £500.

Hannah Midgley died on the 13th of May, 1890, having by her will given all her real and personal estate to Edwin Midgley, whom she appointed her sole executor.

On the 29th of July, 1890, Mr. A. P. Lilley agreed to buy the property from Edwin Midgley for £2500, subject to the prior

mortgage for £6000. On the 13th of August a conveyance was executed by E. Midgley to Lilley, and he paid the £2500 purchase-money.

In July, 1890, Lilley had been shewn a valuation made by a firm of auctioneers in January, 1890, for the purposes of the mortgage by Hannah Midgley, and according to this valuation the value of the property was somewhat speculative, but was estimated at £8700. An abstract was delivered to Lilley's solicitors, Messrs. Lee & Pemberton, disclosing the deeds of the 12th of May, 1888, the 14th of May, 1888, the 14th of June, 1888, the 21st of December, 1889, the 23rd of December, 1889, and the 4th of March, 1890. The title was investigated by the solicitors on his behalf, and they made several requisitions, but none were made in respect of the transaction carried into effect by the deeds of December, 1889. They also made the usual searches in the Land Registry, but found nothing registered against E. Midgleyfrom the time when he acquired the property.

As early as March, 1890, the Plaintiffs suspected that the sale to Hannah Midgley was not a bon‰ fide sale. Her estate was being administered by the Court, and an order was obtained by the Plaintiffs on the 11th of August, 1890, for leave to take proceedings to impeach the sale. On the 15th of August, 1890, a writ was accordingly issued against Barnes, Johnson, and E. Midgley to set aside the sale by Barnes to Hannah Midgley, and to redeem the property on the footing that E. Midgley was only entitled to be treated as a mortgagee. Lilley, of whom the Plaintiffs knew nothing, was not a party to these proceedings. In June, 1891, however, Lilley heard that the sale by Barnes to Midgley was questioned. On the 17th of March, 1892, Mr. Justice Stirling declared that the sale was invalid, and the Plaintiffs were entitled to redeem the property, and on the 5th of November, 1892, the decision was affirmed on appeal.

On the 7th of February, 1893, a receiver of the four houses was appointed in the action. In March, 1893, Lilley moved to discharge this order; and before the motion was heard, in order to secure his title, he paid off the mortgage for £6000, and on the 11th of April, 1893, took a conveyance of the legal estate from the mortgagees.

When the motion was brought on it was arranged that it should be treated as an application by Lilley to appear and be examined pro interesse suo, and it was subsequently agreed that the witnesses should be cross-examined before the Court, and that the learned judge should determine all questions as to the rights of Lilley and the Plaintiffs, in like manner as if an action had been brought for the purpose.

Lilley was accordingly examined and cross-examined. The result of the evidence was that he had no knowledge of any circumstances affecting Hannah Midgley's title beyond what appeared on the face of the deeds set out in the abstract, and the valuation of January, 1890.

The motion was heard before Mr. Justice Stirling on the 19th and 20th of April, 1893.

Warrington, for Lilley: -

Mr. Lilley is entitled to hold the property free from the Plaintiffs' equitable charge. He was a bon‰ fide purchaser without any notice either actual or constructive of any defect in the title, or of any impropriety or irregularity in the exercise of the power of sale at the time when he made his purchase. He has acquired the legal estate from the mortgagees, and is entitled to rely on the protection afforded by sect. 21, sub-sect. 2 of the Conveyancing Act, 1881, and sect. 3, sub-sect. 1 of the Conveyancing Act, 1882: Rice v. Rice (1).

The knowledge that the sale was made at an undervalue (which is the utmost degree of knowledge that can be imputed to Lilley) is not enough to render it an improper exercise of the power of sale so as to give him constructive notice of the invalidity of the sale, although as between mortgagor and mortgagee, the mortgagor or second mortgagee might be entitled to relief.

Fischer, Q.C., and Archibald Brown, for the Plaintiffs: -

There was quite enough to affect Lilley with constructive notice of an improper or irregular exercise by Barnes of the power of sale, and the Plaintiffs are entitled to priority by virtue of their earlier equitable charge: Phillips v. Phillips (2); Ind,

(1) 2 Drew. 73.

(2) 4 D. F. & J. 208, 213.

Coope & Co. v. Emmerson (1); Jackson v. Rowe (2); Farrar v. Farrars, Limited (3); Maxfield v. Burton (4); Parkinson v. Hanbury (5); Selwyn v. Garfit (6). At all events, Lilley ought to have acquired notice of the mala fides of the sale. He was put upon inquiry, and his not having made inquiry was an act of culpable negligence. He only got in the legal estate quite recently - since the commencement of this action - and he is not entitled to the benefit of the provisions contained in the sections of the Conveyancing Acts of 1881 or 1882 which have been referred to: Bellamy v. Sabine (7); Van Gelder v. Sowerby Bridge United District Flour Society (8); Campbell v. Holyland (9); Rules of Supreme Court, 1883, Order XVI., rule 11.

Midgley was served with notice of motion, but did not appear.

Warrington, in reply: -

A legal estate acquired pendente lite is sufficient. The decision in Robinson v. Davison (10) shews, that if a third mortgagee buys in the first mortgage pendente lite the second mortgagee is excluded. That decision has never been dissented from, and it was cited with approbation in In re Russell Road Purchase-Moneys (11). Moreover, Order XXIV., rule 1, provides that any ground of defence arising after action brought may be raised in defence or in reply. If there was an improper or irregular exercise of the power of sale Mr. Lilley's title is not affected by it unless he had personal knowledge of it: Selwyn v. Garfit. It would be unreasonable to require every purchaser to inquire into the adequacy of the price paid for the property by the vendor. This was an embryo property of a speculative character, and the nominal rents had not been actually paid by the tenants. The purchaser was entitled to assume that the sale was made after due notice given to the mortgagor requiring payment of the mortgage money.

(1) 12 App. Cas. 300, 306.

(2) 2 S. & S. 472.

(3) 40 Ch. D. 395, 410.

(4) Law Rep. 17 Eq. 15.

(5) 1 Dr. & Sm. 143.

(6) 38 Ch. D. 273.

(7) 1 De G. & J. 566.

(8) 44 Ch. D. 374.

(9) 7 Ch. D. 166.

(10) 1 Bro. C. C. 63.

(11) Law Rep. 12 Eq. 78, 85.

1893. May 16. STIRLING, J.: -

It has been agreed that I should determine all questions as to the rights of the Applicant and the Plaintiffs in like manner as if an action had been brought. The order now to be made will consequently contain a submission by both parties to be bound in like manner as if the order were made in an action brought by the Plaintiffs against the Applicant. The history of the action is shortly as follows [His Lordship then stated the facts of the case, and continued: - ]

Mr. Lilley has quite recently, namely, on the 11th of April, 1893, taken steps for obtaining a transfer to himself of the mortgage of the 4th of March, 1890, and has got in the legal estate. Under these circumstances Mr. Lilley relies on the provisions of sect. 21, sub-sect. 2, of the Conveyancing Act, 1881, which are as follows: "Where a conveyance is made in professed exercise of the power of sale conferred by this Act, the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power." I think that Mr. Lilley is entitled to the benefit of these provisions unless it can be made out that he had notice that the powers of sale contained in the mortgages of 1888, were improperly or irregularly exercised by Barnes. If he had such notice, then, in my opinion, the decisions on similar provisions actually introduced into mortgage deeds (as, for example, Parkinson v. Hanbury (1) and Selwyn v. Garfit (2) ought to be applied. I think that to uphold the title of a purchaser who had notice of impropriety or irregularity in the exercise of the power of sale would be to convert the provisions of the statute into an instrument of fraud.

Now, Mr. Lilley had no actual knowledge of any impropriety or irregularity. Neither, in my opinion, did he wilfully shut his eyes and abstain from making inquiries which might have led to a knowledge of impropriety or irregularity. Sect. 3 of the

(1) 1 Dr. & Sm. 143.

(2) 38 Ch. D. 273.

Conveyancing Act of 1882 provides as follows: "A purchaser shall not be prejudicially affected by notice of any instrument, fact, or thing unless - (i.) it is within his own knowledge, or would have come to his knowledge if such inquiries and inspections had been made as ought reasonably to have been made by him"; and it is contended that he ought, having regard to the facts disclosed by the abstract, and to the valuation which was produced to him, to have made further inquiries.

I take it that to render the second branch of this section applicable, the circumstances must be such as to bring the case within what is laid down by Lord Cranworth in Ware v. Lord Egmont (1): "I must not part with this case without expressing my entire concurrence in what has on many occasions of late years fallen from Judges of great eminence on the subject of constructive notice, namely, that it is highly inexpedient for Courts of Equity to extend this doctrine - to attempt to apply it to cases to which it has not hitherto been held applicable. Where a person has actual notice of any matter of fact, there can be no danger of doing injustice if he is held to be bound by all the consequences of that which he knows to exist. But where he has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the Court to say, not only that he might have acquired, but also, that he ought to have acquired, the notice with which it is sought to affect him - that he would have acquired it but for his gross negligence in the conduct of the business in question. The question, when it is sought to affect a purchaser with constructive notice, is not whether he had the means of obtaining, and might by prudent caution have obtained, the knowledge in question, but whether the not obtaining it was an act of gross or culpable negligence. It is obvious that no definite rule as to what will amount to gross or culpable negligence, so as to meet every case, can possibly be laid down."

The state of the title to which I have to apply the law is shortly this: Sale of the houses to Johnson in May, 1888, followed by mortgage of each house for £1500, the advance in one case being sanctioned by the Court, the inference being that the value must have been about £2200. In December,

(1) 4 D. M. & G. 460, 473.

1889, there is a transfer of the mortgages followed immediately by a sale for the amount of the mortgage debt, namely, £6300, about, and the purchaser knew of a valuation, dated in January, 1890, shewing that the property was worth £8700.

It was quite possible that the transferee of the mortgage might have been in a position to exercise the power of sale at the time of the transfer. The events mentioned in sect. 20 of the Conveyancing Act, 1881, might have occurred prior to the transfer, and, but for the amount of the price, I cannot think that the sale could reasonably be supposed to be affected by any impropriety. As regards the price, a mortgagee "is bound to sell fairly, and to take reasonable steps to obtain a proper price; but he may proceed to a forced sale for the purpose of paying the mortgage debt": see Farrar v. Farrars, Limited (1).

The question, therefore, appears to me to reduce itself to this, whether the not obtaining further information as to the circumstances under which the sale took place amounted to culpable negligence; and, in my opinion, it did not. I think that Mr. Lilley or his advisers might reasonably have abstained from inquiring into that subject; and, therefore, that Mr. Lilley is entitled to rely on the apparent title created by the conveyances of the 23rd of December, 1889, and to hold the property to which he has now acquired a legal title, free from redemption by the Plaintiffs. There will be a declaration accordingly; but it is not a case for costs on either side.

W. W. K.

From this decision the Plaintiffs appealed. The appeal came on to be heard on the 1st of August, 1893.

Fischer, Q.C., and Archibald Brown, for the Appellants: -

Lilley claims to be a purchaser for value without notice. Our reply is two-fold, first, that he bought nothing but an equity of redemption, and, therefore, notice or no notice, he took subject to all prior equities; secondly, he neither acquired the legal estate nor paid the £6000 until after he had notice of our charge. He could not better his position after he had given his notice of motion, and so the litigation with him had commenced.

(1) 40 Ch. D. 398.

[LINDLEY, L.J.: - Does the doctrine of lis pendens apply to a mere motion to discharge a receiver?]

The submissions in the order put the proceedings on the same footing as an action. The Court disregards what is done pendente lite: Bellamy v. Sabine (1).

[ Cozens-Hardy, Q.C., referred to Robinson v. Davison (2).]

Every purchaser for value of an equitable interest, if he seeks protection by getting in the legal estate, must shew that he paid his money and took the legal estate without notice: Peacock v. Burt (3); Pearson v. Benson (4); Toulmin v. Steere (5).

[LINDLEY, L.J.: - We only wish to hear the counsel for the Respondents upon the question of notice.]

Cozens-Hardy, Q.C., and Warrington, for the Respondent Lilley: -

The contract was an ordinary contract, and the power of sale had arisen; there was no reason why the purchaser should look beyond this. The doctrine of constructive notice ought not to be carried too far. A purchaser is not bound to be suspicious, but only to take the ordinary precautions which men of business use: Ware v. Lord Egmont (6); Montefiore v. Brown (7). Under these circumstances we rely upon the Conveyancing Act, 1881, s. 21, sub-s. 2, and the Conveyancing Act, 1882, s. 3, sub-s. 1.

Ashton Cross, for the Defendant Midgley.

Fischer, in reply.

1893. Oct. 30. The judgment of the Court (Lindley, Lopes, and A. L. Smith, L.JJ.), was delivered by

LINDLEY, L.J. (after stating the facts as set forth above, proceeded as follows): -

The grounds of Mr. Justice Stirling's decision were (1.) that when Lilley agreed to buy the property in July, 1890, and when

(1) 1 De G. & J. 566.

(2) 1 Bro. C. C. 63.

(3) 4 L. J.. (Ch.) (N.S.) 33.

(4) 28 Beav. 598.

(5) 3 Mer. 210.

(6) 4 D. M. & G. 460.

(7) 7 H. L. C. 241.

he paid the £2500 to his vendor, he, Lilley, acted perfectly bon‰ fide and without any actual notice of the invalidity of the sale by Barnes to H. Midgley; (2.) that Lilley had no constructive notice of such invalidity at those times; (3.) that although he had notice of such invalidity in June, 1891, he was entitled to protect himself by acquiring the legal estate, which he ultimately did; and (4.) that under these circumstances he was protected by sect. 21, sub-sect. 2, of the Conveyancing Act, 1881, and sect. 3 of the Conveyancing Act, 1882.

Bona fides on the part of Mr. Lilley and the absence of actual notice by him of anything wrong were found as facts by the learned Judge before whom Mr. Lilley was examined, and we accept his conclusions on these points.

The appeal then really turns on whether in July and August, 1890, Mr. Lilley is to be treated as having had notice of the invalidity of Midgley's title, and on the effect of acquiring the legal estate in April, 1893. This is one of those cases in which there is danger of referring knowledge of facts now known to a time anterior to their discovery - danger of falling into the error attributed to those who are wise after the event. The Plaintiffs' case against Lilley rests on the notice, if any, which he had in August, 1890, when he bought the property and paid the £2500. No doubt if he had been a suspicious or unwilling purchaser, he would very likely have made inquiries which would have induced him not to complete his purchase. But he was not suspicious in fact, and he did not make such inquiries as a suspicious man would perhaps have made. It would, however, be going too far to affect him with constructive notice of the invalidity of Barnes' sale. The doctrine of constructive notice is based on good sense, and is designed to prevent frauds on owners of property; but the doctrine must not be carried to such an extent as to defeat honest purchasers; and although this limitation has sometimes been lost sight of, still the limitation is as important and is as well known as the doctrine itself. This will be seen both from well-known decisions and from the language of the Conveyancing Act, 1882, s. 3, which is now the authority to be regarded. In Ware v. Lord Egmont (1), Lord Cranworth stated the law on this subject

(1) 4 D. M. & G. 460.

in language which has always been accepted as correct. [His Lordship read the passage from p. 473 of the report, which was read by Mr. Justice Stirling in his judgment(1).]

"Gross or culpable negligence" in this passage does not import any breach of a legal duty, for a purchaser of property is under no legal obligation to investigate his vendor's title. But in dealing with real property, as in other matters of business, regard is had to the usual course of business; and a purchaser who wilfully departs from it in order to avoid acquiring a knowledge of his vendor's title is not allowed to derive any advantage from his wilful ignorance of defects which would have come to his knowledge if he had transacted his business in the ordinary way. In the celebrated judgment of Vice-Chancellor Wigram in Jones v. Smith (2), the cases of constructive notice are reduced to two classes: the first comprises cases in which a purchaser has actual notice of some defect, inquiry into which would disclose others; and the second comprises cases in which a purchaser has purposely abstained from making inquiries for fear he should discover something wrong. The Conveyancing Act, 1882, really does no more than state the law as it was before, but its negative form shews that a restriction rather than an extension of the doctrine of notice was intended by the Legislature. The 3rd section runs thus (sub-sect. 1): "A purchaser shall not be prejudicially affected by notice of any instrument, fact, or thing unless - (i.) it is within his own knowledge, or would have come to his knowledge if such inquiries and inspections had been made as ought reasonably to have been made by him." Can we say that Mr. Lilley or his solicitors "ought reasonably" to have made inquiries into the validity of the sale by Barnes? "Ought" here does not import a duty or obligation; for a purchaser need make no inquiry. The expression "ought reasonably" must mean ought as a matter of prudence, having regard to what is usually done by men of business under similar circumstances. Light is thrown on the meaning of "ought reasonably" by the Conveyancing Act, 1881, s. 21, sub-s. 2, which relieves purchasers from mortgagees purporting to sell under powers of sale from the necessity of inquiring into the propriety or irregularity of the exercise of the

(1) Ante, p. 31.

(2) 1 Hare, 43.

power. It is easy to see now that Mr. Lilley's solicitors might have been more suspicious and more cautious; but we are not prepared to say that they ought to have been so when he bought in August, 1890, and unless we can go that length we cannot hold that Mr. Lilley then had notice of anything wrong.

For these reasons we have come to the conclusion that, in August, 1890, when Mr. Lilley bought the property subject to the mortgage for £6000, he had no notice, actual or constructive, of any defect in his vendor's title.

The case, then, stands thus: The Plaintiffs had a judgment affecting Johnson's equity of redemption. Lilley had acquired by purchase for value an equitable interest in the same property from a person whose title apparently displaced Johnson's, and also, consequently, the Plaintiffs' judgment. Lilley had no notice of any defect in his own title, no notice that the Plaintiffs' judgment affected him. Lilley afterwards discovers that the Plaintiffs' judgment is not displaced, and in order to protect himself he pays off the £6000 mortgage and gets in the legal estate. The question is whether he can now hold the property free from the Plaintiffs' judgment.

We are of opinion that he can. The maxim Qui prior est tempore potior est jure is in the Plaintiffs' favour, and it seems strange that they should, without any default of their own, lose a security which they once possessed. But the above maxim is, in our law, subject to an important qualification, that, where equities are equal, the legal title prevails. Equality, here, does not mean or refer to priority in point of time, as is shewn by the cases on tacking. Equality means the non-existence of any circumstance which affects the conduct of one of the rival claimants, and makes it less meritorious than that of the other. Equitable owners who are upon an equality in this respect may struggle for the legal estate, and he who obtains it, having both law and equity on his side, is in a better situation than he who has equity only. The reasoning is technical and not satisfactory; but, as long ago as 1728, the law was judicially declared to be well settled and only alterable by Act of Parliament: see Brace v. Duchess of Marlborough (1).

(1) 2 P. Wms. 491.

It was contended that this doctrine was confined to tacking mortgages. But this is not so. The doctrine applies in favour of all equitable owners or incumbrancers for value without notice of prior equitable interests, who get in the legal estate from persons who commit no breach of trust in parting with it to them: see Saunders v. Dehew (1), and Pilcher v. Rawlins (2). It is true that the doctrine does not apply to an equitable owner or incumbrancer who gets in the legal estate from a trustee who commits a breach of trust in conveying it to him - at all events, if such breach of trust is known to the person who gets in the estate, and, perhaps, even if he does not know of it: see Carter v. Carter (3); Mumford v. Stohwasser (4). But the present case does not fall within this exception to or qualification of the general principle; for Lilley obtained the legal estate from a mortgagee whom he paid off, and who committed no breach of trust in conveying the legal estate to him.

The fact that the estate was got in pendente lite is immaterial: see Robinson v. Davison (5), and Bates v. Johnson (6).

The appeal must be dismissed with costs.

Solicitors: Jackson, Smart, Geake, & Woodd; Lee & Pembertons; Chappell, Griffith, & Brookbridge; G. Chalcraft.

(1) 2 Vern. 271.

(2) Law Rep. 7 Ch. 259.

(3) 3 K. & J. 617.

(4) Law Rep. 18 Eq. 556.

(5) 1 Bro. C. C. 63.

(6) Joh. 304.

M. W.