Proceeds of sale and the 12-year rule

We are often asked whether a local authority can retain the net sale proceeds following an enforced sale, if the property owner fails to claim the funds within 12 years of the sale. The answer is no, the local authority will not be entitled to retain the net sale proceeds after 12 years or at any other time.

There is some commentary which suggests a local authority is entitled to retain the net proceeds of sale, where they have held the money for over 12 years. This view appears to be based on the provisions of section 20(1)(b) of the Limitation Act 1980 (“LTA 1980”), which state that:

“No action shall be brought to recover proceeds of the sale of land after the expiration of twelve years from the date on which the right to receive the money accrued”.

The idea being that the local authority could rely on section 20(1)(b) of the LTA 1980 as a defence to any claim brought by the property owner (or anyone else entitled to receive the net proceeds) more than 12 years after the sale completes. While section 20(1)(b) might apply to prevent a second charge holder from recovering the net sale proceeds from the first charge holder after 12 years, it does not apply to a claim by the property owner to recover the net sale proceeds. 

In an enforced sale, the local authority exercises a power of sale under section 101(1)(i) of the Law of Property Act 1925 (“LPA 1925”). The local authority holds the proceeds of sale under a statutory trust pursuant to section 105 of the LPA 1925, which obliges the authority to pay the net sale proceeds to the person who is entitled to receive the mortgaged property (i.e. the owner).

There is no point in time at which the local authority becomes entitled to receive the net sale proceeds (after deduction of the debt and costs etc) or any interest which accrues on it. That money always belongs to the property owner. Any attempt by the local authority to use the net sale proceeds (including the interest) for their own purposes would be a breach of the statutory trust which arises under s.105 of the LPA 1925. 

While there is a limitation period for claims relating to a breach of trust, it does not apply to someone who has lawfully assumed the position as trustee (known as a “class 1 trustee”), such as the local authority exercising a power of sale under the LPA 1925. The local authority is instead caught by section 21(1)(b) of the LA 1980, which provides as follows: 

“No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

1. 1. in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
   2. to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee or previously received by the trustee and converted to his use.”

There will be no limitation defence against a property owner who seeks to recover the net proceeds of sale from the local authority at any time, while the net proceeds remain in the possession of the local authority. Nor will there be a limitation defence where the local authority has used the net sale proceeds for its own purposes or paid them to a third party, even if this occurs more than 12 years after the sale. The local authority can never benefit from the net sale proceeds or any interest which accrues on those funds, as the interest form part of the trust money.

A local authority has two choices if the owner does not claim the net sale proceeds. It can either, hold the money indefinitely and keep an account of any interest or pay the money into the Court Funds Office. Section 63(1) of the Trustees Act 1925 provides that trustees who have money in their control belonging to a trust may pay those monies into the Court Funds Office. 

Paying funds into the Court Funds Office is a relatively straightforward process which involves filing the appropriate Court Funds Office form and a witness statement with the High Court or District Registry. For more information on payments into Court please contact Alex Dunne or Lyndon Campbell. 

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