Dhillon v Orchard & Anor

Factual and Procedural Background

Appellees (an elderly couple) were long-term registered owners of a residential property ("The Property") subject to existing secured indebtedness. In late 2010 they entered a sale-and-rent-back transaction by which they transferred The Property to Company A for a discounted price and remained as tenants under an assured shorthold tenancy. Company A was controlled initially by a married couple; subsequently the Appellant became sole shareholder and later purchased The Property from Company A in 2013. Company A was dissolved in 2016; the Appellant became bankrupt shortly afterwards and a bankruptcy restriction affecting The Property was removed in 2022. The Appellant sought possession in 2022 for rent arrears and commenced proceedings. The Appellees defended and counterclaimed, alleging (i) fraudulent misrepresentation by Company A and (ii) that the sale-and-rent-back transaction was unenforceable under the Financial Services and Markets Act 2000 ("FSMA") read with the Regulated Activities Order ("RAO"), entitling them to recover The Property.

At first instance Judge Duddridge dismissed the fraud allegation and held that the Appellant had not herself carried on the regulated activity "by way of business", so FSMA did not render the transaction unenforceable as against her; he ordered possession and rent. The Appellees appealed. That appeal was heard by Judge Miles, who rejected the "by way of business" ground but permitted the Appellees to advance a new argument based on section 26 FSMA: that their section 26 rights constituted a mere equity binding on a successor in title and thus constituted an overriding interest protected by actual occupation. Judge Miles allowed that ground and remitted consequential issues to a further hearing. The Appellant appealed to the court giving the present opinion.

Legal Issues Presented

1. Whether the right to recover money or property under section 26(2) FSMA is capable of binding successors in title to the original transferee (so as to permit an original owner in actual occupation to assert a mere equity as an overriding interest against a later registered proprietor).
2. Whether the Appellees should have been permitted to advance, on appeal to Judge Miles, a point that had not been run before Judge Duddridge (i.e. whether an appellate court should allow a new point of law to be taken on appeal where it was not raised below).

Arguments of the Parties

Appellees' Arguments

• Their rights under section 26 FSMA render the original sale voidable and operate as a "mere equity" capable of binding successors in title; consequently those rights were protected as an overriding interest by their actual occupation of The Property.
• They should be permitted to raise that argument on appeal because the essential factual elements were in issue on the pleadings and the matter did not require further evidence.
• Policy considerations (protection of persons’ homes) support the conclusion that section 26 remedies should be available against successors in title.

Appellant's Arguments

• FSMA sections 26–28 should be read as providing restitutionary and compensatory remedies against the contractual counterparty; the statutory text and structure do not indicate that those remedies extend to successors in title.
• Section 28(8) indicates Parliament intended recovery only of the value of property if it has passed to a third party; statutory silence on successors in title and the absence of provisions dealing with tracing, bona fide purchase or successor knowledge indicate the remedies are not directed at successors.
• If Parliament had intended remedies against successors in title it would have addressed the many complex consequences; established authorities (InnovatorOne; Angelgate) support reading the remedies as directed to the contractual counterparty. The allowance of a novel point on appeal was also argued to be procedurally inappropriate given uncertainty about costs and potential prejudice.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began from the statutory text and structure of FSMA sections 26–28 and the RAO provisions defining regulated sale-and-rent-back activities. Section 26 renders an agreement unenforceable against the "other party" and entitles that party to recover "any money or other property paid or transferred by him under the agreement" and compensation. Section 28(8) provides that where property transferred under the agreement has passed to a third party, references to that property are to be read as references to its value at the time of transfer.

The court analysed whether Parliament intended sections 26(2)(a) and 27(2)(a) to impose proprietary liabilities on successors in title. It concluded that the statutory scheme does not expressly make remedies available against successors and that section 28(8) points to a recovery of value (not of the property itself) where property has passed to a third party. The court identified several consequences that Parliament did not address (tracing, bona fide purchaser defences, how compensation is to be calculated against successors, and the treatment of diverse asset types) and considered that statutory silence is significant.

The court considered earlier decisions. It found Hamblen J's reasoning in InnovatorOne and Judge Hodge's subsequent endorsement in Angelgate persuasive that the statutory remedies are principally directed at the contractual counterparty. It rejected Judge Miles' contrary conclusion that section 26 rights operate as mere equities binding successors in title; Judge Miles' analysis was regarded as inconsistent with the statutory language and as introducing complexities the statute does not resolve.

On the procedural point, the court reviewed the established appellate principles (Singh v Dass; Notting Hill etc.). Although Judge Miles permissibly allowed the Appellees to advance a new point, the court considered he erred in his assessment of prejudice and costs protection: the assumption that "equity in The Property" would cover adverse costs was unwarranted and the Appellees might not have the means to satisfy costs unless they recovered The Property. For these reasons the court considered the judge's grant to run the new point on appeal to be flawed, though that procedural error was ancillary to the principal statutory conclusion.

Holding and Implications

APPEAL ALLOWED

Holding: The court allowed the Appellant's appeal. It concluded that the rights to recover money or property provided by sections 26(2)(a) and 27(2)(a) FSMA do not extend to successors in title of the original transferee; those statutory remedies are directed to the contractual counterparty and (where property has passed to a third party) to recovery of value under section 28(8). The court also found that the lower judge's decision to allow the Appellees to advance a new point on appeal was flawed for reasons of prejudice and inadequate protection as to costs.

Implications: The direct effect is that the Appellees cannot establish, on the basis of section 26 FSMA alone, that their right of recovery binds the Appellant as a successor in title and so cannot rely on that basis to assert an overriding interest against the Appellant's registered title. No broader proprietary regime imposing automatic liability on successors in title under sections 26–28 FSMA was recognised by the court; the decision endorses the view that remedies under those sections are primarily against the contractual counterparty and that Parliament did not enact provisions making successors routinely vulnerable to such claims.