Property Litigation Column: When Is A Sham Not A Sham?

• Published date: 30 May 2022
• Subject Matter: Real Estate and Construction, Conveyancing, Real Estate
• Law Firm: Gatehouse Chambers
• Author: Ms Brie Stevens-Hoare QC and Amanda Eilledge

Brie Stevens-Hoare QC and Amanda Eilledge consider the impact of co-owner forgery following the decision in Victus Estates and others v Munroe and others [2021] EWHC 2411 (Ch).

Introduction

In Victus Estates and others v Munroe and others [2021] EWHC 2411 (Ch) the Court considered the position where one joint owner (S1) forges the signature of the other (S2) on the transfer of their property to B1, where B1 is aware of the forgery. The Court concluded that such a transfer is not a sham and is still effective to transfer S1's equitable interest in the property to B1, under section 63 of the Law of Property Act 1925 (LPA 1925). In this case B1 (one of the fraudsters), purported to charge the property to a mortgage lender. The Court concluded this was effective to charge the interest to which B1 was entitled, namely its half share in the property.

In this article, we examine whether it can be right that any beneficial interest in real property passes in these circumstances. Regrettably, permission to appeal having been refused, the senior courts will not be considering the apparently inconsistent authorities for now.

The relevant authorities on sham

In Snook v London and West Riding Investments Ltd [1967] 2 QB 786 Diplock LJ, at paragraph 802D, explained the meaning of a sham in this way:

"...it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties' legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities...that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating." (Emphasis added.)

It is plain from this dictum, that a sham transaction can be intended by the parties to create some legal rights, but nonetheless be a sham because there is a difference between what they appear to create and what they actually do create.

In Hitch v Stone [2001] EWCA Civ 63, Arden LJ identified a number of points as having emerged from the authorities which have variously considered and applied the Snook test including the following:

• In the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.
• The test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.
• There must be a common intention of the parties.

A sham document is void for all purposes (see paragraph 17 of 1st Property Finance Ltd v Martin & Haigh (a firm) [2006] 5 WLUK 17).

In Penn v Bristol and West Building Society [1995] 2 FLR 93 it was held that a fraudulent TR1 in (practically) the same circumstances as in Victus Estates...