Falco Finance v Gough [1999] Ch 28 This case, *Falco Finance v Gough*, decided in the English Court of Appeal, is a significant one in understanding the principles of equitable liens and their priority in the context of unregistered land. The core issue revolved around whether Falco Finance had a valid equitable lien against Gough’s property and, if so, whether it took priority over Gough’s own later mortgage. Gough, in 1991, contracted to purchase land from a vendor. Falco Finance provided funds to Gough specifically for this purchase. Crucially, the land was unregistered. The intention, explicitly documented, was that Falco Finance would have security over the property. However, the legal charge intended to be granted never materialized. Despite this failure, Falco Finance claimed an equitable lien. Later, Gough granted a legal mortgage to a building society. When Gough defaulted on both obligations, Falco Finance sought a declaration that its equitable lien took priority over the building society’s mortgage. The key question before the court was whether Falco Finance had an equitable lien, and if so, whether it was enforceable against Gough’s subsequent mortgagee. An equitable lien arises where a contract shows a clear intention to create a charge over property, even if the formal legal charge is not completed. The court emphasized the importance of intention. It had to be evident that the parties intended the property to stand as security for the debt. The Court of Appeal held that Falco Finance did indeed have an equitable lien. They reasoned that the explicit purpose of the advance was to enable Gough to purchase the property, and that there was a clear understanding between the parties that Falco Finance would have security over it. The fact that the legal charge was never executed did not negate the pre-existing intention to create security. The court considered the evidence of the agreement and concluded that a sufficient intention to create an equitable charge existed. Having established the existence of an equitable lien, the court then addressed the issue of priority. Since the land was unregistered, the principle of “first in time prevails” generally applies to equitable interests. This means that the equitable lien of Falco Finance, created in 1991, would, on the face of it, have priority over the subsequent legal mortgage granted to the building society. However, this principle is subject to the doctrine of notice. If the building society had taken its legal mortgage without notice of the earlier equitable lien (i.e., they were a bona fide purchaser for value without notice), their interest would take priority. In this case, the building society argued that they did not have notice of Falco Finance’s interest. The court determined that the building society did not have actual notice of the equitable lien. The crucial point was whether they had constructive notice – whether they would have discovered the lien had they made reasonable inquiries. The court found that the building society *did* have constructive notice. Reasonable inquiries, in this circumstance, would have involved investigating the source of the funds Gough used to purchase the property. Had they done so, they would have discovered Falco Finance’s involvement and the intended security. Therefore, the Court of Appeal concluded that Falco Finance’s equitable lien took priority over the building society’s legal mortgage. The case reinforces the importance of the doctrine of notice in unregistered land law and highlights the responsibility of mortgagees to conduct reasonable inquiries before advancing funds. It demonstrates that a clear intention to create a security interest, even without a formal legal charge, can be effective as an equitable lien and can have priority over subsequent interests if the later interest holder had notice, either actual or constructive, of the earlier equitable interest.

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