An unsatisfactory side effect of disclaimer

A trustee in bankruptcy lost all rights to the proceeds of sale of a freehold property after he disclaimed title to it.

Background

Mr Sleight was the trustee in bankruptcy of an insolvent estate. The deceased’s assets included several freehold properties that were charged to banks where the value of the property was less than the amounts due under the charges. Given the negative equity, the trustee in bankruptcy disclaimed title to these properties as they constituted “onerous property”.

The effect of the disclaimer was that the freehold title to the properties ceased to exist and all rights and interest in the properties vested in the Crown, a process known as escheat. However, despite the disclaimer, the banks retained their rights to sell the properties under their legal charges. Two of the disclaimed properties were sold and there was a small surplus from the sales after the costs of sale and sums due to the banks had been paid. Who was entitled to this surplus?

Mr Sleight applied to court for an order vesting the properties in him as “a person who claims an interest in the disclaimed property”.

Result

The court refused Mr Sleight’s application. As he had disclaimed all interest in the properties, he was no longer “a person who claims an interest in the disclaimed property”. There was a further complication that, as the properties in question had been sold to a third party, title to the properties could not be vested in Mr Sleight. The only question was whether he had any entitlement to the proceeds of sale.

Analysing the procedures that apply where property has vested in the Crown, the judge concluded that, in this case, the Crown was entitled to the surplus and that Mr Sleight had no standing to claim it. The only basis on which Mr Sleight might have had a claim would have been if the banks had applied to court for an order vesting title to the properties in them before sale, thus recreating the freehold title. However, this had not happened in this case. The banks had relied on separate powers within the legal charges to sell the properties to a third party.

Commentary

The result is not unsurprising. Disclaimer brings to an end all rights and interests in the disclaimed property whether past, present or future. However, the result is also unsatisfactory. As the judge commented: “The unsatisfactory position therefore is that had a vesting order been sought and obtained by the mortgagee in this case the likelihood is that the surplus could have been ordered to be paid to the applicant for the benefit of creditors. However, notwithstanding the Crown does not wish to assert a claim to the money and notwithstanding the mortgagee does not either, I cannot order that the surplus is paid to the applicant. The likely result seems to be that the money will languish with and be held by the court funds office for an indefinite period.”

The process of escheat is an ancient one but not well suited to the modern age. The Crown is usually at pains not to have anything to do with property that has passed to it in this way, to ensure that it does not become liable for it in any way. Perhaps it is time for some better procedures to be enacted to deal with circumstances where freehold property is disclaimed.

Sleight v The Crown Estate Commissioners [2018] EWHC 3489 (Ch)