Category Archives: Banking

Lender not bound by seller’s right to cancel unconscionable bargain

Section 116 of the Land Registration Act 2002 provides:

“It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following—

(a) an equity by estoppel, and:
(b) a mere equity,

has effect from the time the equity arises as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority).”

So an equity, which would include a right to set aside an unconscionable bargain, is an interest capable of binding successors in title.

An interest which falls within any of the paragraphs of Schedule 3 of the Land Registration Act 2002 is not postponed to a registrable disposition under Section 29(1). These interests include:

“An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for—

(a) …

(b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so“.

The type of residential sale and leaseback which follows is now heavily regulated by financial conduct legislation. It is prohibited unless strict requirements are met.

In Mortgage Express v Lambert [2016] Ms Lambert had been in desperate financial straits. She contacted Annonna Ltd, which was owned and run by Messrs Sinclair and Clement. They visited her at her flat and told her that the flat was only worth £30,000. They offered to buy her lease of it for that. They also said that she would be able to continue living there indefinitely, rent free during the first year and then for £250 per month. The agreement to sell and the promise that Ms Lambert could stay were part of a single bargain.

In the course of the sale, she completed an “Overriding Interests Questionnaire” which her solicitors had sent her. It said she had to disclose all overriding interests of which she was aware, and then gave examples including “rights of persons in occupation”. The form said “If any of the above ARE applicable please enter details below”. She returned the questionnaire but did not disclose any rights. Her solicitors told her that flats like hers were selling at £115,000 to £120,000. Ms Lambert confirmed to them in writing that she had decided to sell at £30,000 of her own free will and had not been pressured into selling at that price. She later confirmed that she was happy to sell at an undervalue because her chief concern was to pay off her loan. She seems to have told the solicitors something about an arrangement for a tenancy but the solicitors do not appear to have made any inquiry about the nature of the leaseback.

Sinclair and Clement made an online application to Mortgage Express for a secured loan of £102,000. In the application form they said that they were applying for a buy-to-let remortgage and that the value of the flat was £120,000.

Sinclair and Clement changed solicitors causing a delay in obtaining a revised offer of a mortgage from Mortgage Express so they completed the purchase with the aid of a £30,000 bridging loan. Ms Lambert sold with full title guarantee. Clause 6 of the sale contract provided that vacant possession would be given on completion. Another special condition said:

“Any Occupier(s) who sign(s) this Contract gives his/her consent to the sale and agrees that vacant possession will be given on the Completion Date free from any estate rights or interest he/she may have in the Property (if any).”

Her solicitors’ replies to requisitions on title said that vacant possession was to be given on completion.

Mortgage Express later sent a new £102,000 mortgage offer based on a £120,000 valuation which Sinclair and Clement accepted. Their solicitors told Mortgage Express that the purchase price was £30,000 and that they were therefore taking out indemnity insurance against the possibility of the sale being set aside as an undervalue transaction if Ms Lambert became bankrupt.

Sinclair and Clement’s solicitors certified that Mortgage Express would obtain a good and marketable title free from any charges or onerous encumbrances, and that the purchase would be with vacant possession. The mortgage to Mortgage Express was completed and the bridging loan was paid off out of it’s proceeds

On 21 January 2008 Messrs Sinclair and Clement were registered at HM Land Registry as proprietors of the lease, and the mortgage to Mortgage Express was registered.

With Mortgage Express’s permission, Sinclair and Clement transferred the lease into Sinclair’s sole name but he failed to keep up his repayments so Mortgage Express appointed receivers. Ms Lambert also fell into arrears with her rent, and the receivers began possession proceedings against her.

The Court of Appeal said that the sale was an unconscionable bargain and that Ms Lambert’s right to have the sale to Sinclair and Clements set aside, for that reason, was capable of being an overriding interest and so it was a right that was proprietary in character.

The mortgage to Mortgage Express was made by Sinclair and Clement. Since they were joint registered proprietors, by sections 34 and 35 of the Law of Property Act 1925 they held the legal estate, and entered into the mortgage, as trustees of land so the capital monies from the mortgage were paid to them. As trustees Section 6(1) of the Trusts of Land and Appointment of Trustees Act 1996 gave them all the powers of an absolute owner.

Section 26 of the Land Registration Act 2002 provides:

“(1) Subject to subsection (2), a person’s right to exercise owner’s powers in relation to a registered estate or charge is to be taken to be free from any limitation affecting the validity of a disposition.

(2) Subsection (1) does not apply to a limitation—

(a) reflected by an entry in the register, or

(b) imposed by, or under, this Act.

(3) This section has effect only for the purpose of preventing the title of a disponee being questioned (and so does not affect the lawfulness of a disposition).”

There was no limitation in the register at the time of the mortgage; nor was there a limitation on the validity of the disposition imposed by the Act itself.

Section 26(3) made it clear that Section 26 aimed only to prevent the disponee’s title from being called into question. Section 26 would defeat any right which was an overriding interest to the extent that that right was a right to impugn the title acquired by the disponee.

If there were an overriding interest that interest would not affect the validity of the disposition consisting of the grant of the mortgage. The mortgage would have taken effect subject to it.

The effect of the mortgage being entered into by two (or more) trustees was governed by section 2 of the Law of Property Act 1925 which provides, inter alia, that:

“(1) A conveyance [which would include a mortgage] to a purchaser of a legal estate in land [which would include a mortgagee] shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if—

(ii) the conveyance is made by trustees of land and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees under the provisions of sub-section (2) of this section or independently of that sub-section, and the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance are complied with…”

The bold words state that notice or otherwise of an interest is irrelevant to the question of overreaching.

What would amount to an overriding interest claim in the case of a sale by one trustee is shifted from the land to the sale or mortgage proceeds if the sale or mortgage was made by two trustees and the capital monies raised by the mortgage were paid to both of them. All this being the case here the only remaining question was whether Ms Lambert’s interest was “capable of being overreached”.

In Birmingham Midshires Mortgage Services Ltd v Sabherwal [2000] Robert Walker LJ said:

“The essential distinction is, as the authors of Megarry and Wade note, between commercial and family interests. An equitable easement or an equitable right of entry cannot sensibly shift from the land affected by it to the proceeds of sale. An equitable interest as a tenant in common can do so, even if accompanied by the promise of a home for life, since the proceeds of sale can be used to acquire another home.”

In the same way, Ms Lambert’s claim against Sinclair and Clement could shift to the proceeds of the mortgage which she could use to buy herself another home. It was different in character from an equitable easement which was one of the rights which made no sense unless it was attached to the land (see observations of Robert Walker LJ above).

So if Ms Lambert did have an interest that was an overriding interest, it was overreached by the grant of the mortgage by two trustees to Mortgage Express and her claim was transferred away from the property to the proceeds of that mortgage to buy herself a new home.

Had it been necessary to decide whether Ms Lambert’s right to have the bargain set aside fell within Schedule 3 paragraph 2 of the Land Registration Act 2002, the court would have said inquiry had been made of Ms Lambert before the disposition (that is to say the grant of the mortgage to Mortgage Express) and that she did not disclose the right that she now asserted. She could not reasonably have been expected to have labelled the right she now claimed as arising from an “unconscionable bargain” but it would have been reasonable for her to have at least disclosed that she was not in fact giving vacant possession and that when transferred to the purchasers the lease would be encumbered by the tenancy that she had agreed to take.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

SDLT claimed from wrong party in case of Shari’a financing

In Project Blue Ltd v Revenue and Customs [2016] the issue for the Court of Appeal was whether Project Blue Limited (“PBL”) was liable for stamp duty land tax (“SDLT”) for its acquisition of the former Chelsea Barracks (“the Site”).

PBL was controlled by the sovereign wealth fund of the State of Qatar.

It agreed to buy the Site from the Ministry of Defence (“MoD”) for £959m.

It funded the purchase and development of the Site in a way which was compatible with Shari’a law.

A loan at interest secured by a legal charge on the Site would not have been Shari’a-compliant.

It therefore contracted to sell the site to Masraf al Rayan (“MAR”), a Qatari bank, for about £1.25bn being the £959m required to complete the purchase from the MoD plus substantial extra money to cover SDLT and future development costs.

The contract with MAR was completed contemporaneously with the completion of PBL’s contract with the MoD. On the same day MAR granted PBL a lease of the Site for 999 years and various put and call options were entered into which would entitle PBL in due course to re-acquire the freehold of the Site from MAR. Later PBL granted an underlease to Project Blue Development Limited (“PBDL”), a company in the same group.

The rent under the lease was calculated in such a way that the bank would receive a return on it’s investment.

It was “critical to appreciate that the bank [would] be the real owner of the asset for the term of the lease, and the customer [would] not.”

HMRC contended that PBL was the taxable party but that the chargeable consideration on which SDLT was payable would be the £1.25bn paid by MAR to PBL rather than the £959m paid by PBL to the MoD. This would result in a SDLT liability of £50m.

PBL said that the party liable for the tax was MAR but that HMRC was now out of time for making any determination or assessment in order to recover it.

The court said completion of the contracts between the MoD and PBL and between PBL and MAR engaged the provisions of ss.44 and 45 of the Finance Act 2003 which dealt with contracts for land transactions under which the contract was to be completed by a conveyance or transfer (s.44) and cases where the completion of the contract for a land transaction was effected by a “sub-sale or other transaction (relating to the whole or part of the subject matter of the original contract) as a result of which a person other than the original purchaser [became] entitled to call for a conveyance to him”: s.45(1)(b).

The effect of s.44 was that the contract was not treated as a land transaction unless completion did not in fact take place but the contract was nevertheless substantially performed.

This would normally include the payment of most of the purchase price. But when, as here, completion occurred in accordance with the contract then “the contract and the transaction effected on completion [were] treated as parts of a single land transaction. Here the effective date of the transaction was the date of completion”: s.44(3).

Therefore the contract between the MoD and PBL was not a land transaction nor was the contract between PBL and MAR nor was the lease agreement between MAR and PBL. The put and call options were land transactions under s.46 but they were granted for no consideration so no charge to SDLT arose.

So the only potential land transactions were the transfer of the Site between the MoD and PBL, the transfer from PBL to MAR and the lease from MAR to PBL.

s.45(1) applied in relation to the two contracts for the sale of the Site so the provisions of s.44 which treated the contract and conveyance as a single land transaction taking effect on completion were modified so as to prevent a charge to tax on both legs of the sub-sale or composite completion of the two contracts.

Here, the existence of the sale on to MAR meant that under s.45(3) the substantial performance or completion of the sale to PBL was disregarded leaving the completion or substantial performance of the deemed secondary contract to MAR as the only possible acquisition of a chargeable interest.

The next transaction to be considered was the acquisition of the Site by MAR.

S.71A accommodated Shari’a-compliant financing arrangements according to the Ijara model which depends upon the financial institution becoming the owner of the relevant property. Where, as here, the financial institution acquired the property from a third party owner the financial institution would be liable for SDLT on the purchase price whether or not that was undertaken at it’s customer’s request.

Cases falling within s.45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor in terms of their tax consequences. MAR was therefore liable for SDLT on completion of the secondary contract under s.45(3) and was not entitled to claim relief elsewhere under s.71A.

So HMRC had pursued the wrong party for the tax.

Usually the customer will have some money of it’s own to put towards the purchase. So if SDLT was only charged on the amount provided by the bank there would be an undercharge.

In such cases the type of arrangement is called Musharaka financing. Here there is a form of partnership by which the partners jointly acquire an asset. The asset will be held by them as beneficial tenants in common in the proportions in which they contributed to the purchase price.

But under that kind of arrangement both the bank and the customer will be liable for the SDLT. However there is no risk of an undercharge as both will have contributed to the purchase from the third party vendor.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

This case concerned the SDLT provisions of Finance Act 2003 which has undergone a series of amendments since 2003. This appeal was concerned with the legislation in force in January 2008.

Mortgage clause did not sweep up all borrower’s present and future assets

In the Land Registry Adjudicator case of Bonsu v Flex Mortgages Ltd [2016] the borrower had charged the Property, and any rights they may have relating to it, to the lender with full title guarantee by way of legal mortgage. In the same Clause 3 the borrower agreed “that this mortgage is extended to cover any legal or equitable estate which [they] or any one of [them] own[ed] now or acquire[d] at any time in the future.”

However in the mortgage “Property” was not given any extended definition, to include other or after-acquired land – it’s only meaning was the Ground Floor Flat.

The Adjudicator said Clause 3 of the 2006 Charge created a mortgage over the Ground Floor Flat (both as regards the legal estate and any equitable interest). It did not purport to or actually create a fixed or any other form of charge, legal or equitable, over any other property, whether owned contemporaneously with the 2006 Charge or subsequently acquired by the borrower.

The words ” extended to cover” were inappropriate to create an immediate charge over unidentified property. Moreover such a charge was not a usual or standard term of a normal mortgage. If the lender wished to create such a charge, the words of charge would have to be express and entirely clear.

In fact the additional words had been intended to operate as an “all estate” provision. The ” legal or equitable estate” referred to had to relate to the mortgaged ground floor flat defined as “the Property”.

The clause aimed to subject to the 2006 Charge any lesser or different interest owned by the borrower in that Property. So if, at the date of execution, the borrower had a defective legal estate, but a valid equitable interest in the Property, that interest would automatically become subject to the charge.

Also, if the borrower has a defective legal title at the date of the charge, but subsequently got a valid legal estate, that too would be subjected to the charge.

Any other interpretation was implausible because:

1. The clause did not identify the property in which the borrower had a present or future legal or equitable estate. The only property referred to in clause 3 was the Property as defined.

2. It would otherwise create or purport to create a mortgage not only over all after-acquired property, but over every single asset owned by the borrower at the date of the 2006 Charge. So that interpretation was quite against commercial common sense.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Mortgages: later facility letters not caught by restrictions on tacking

Section 48 of the Land Registration Act 2002 provides that charges over registered land rank in the order of their registration. That is subject to the restrictions on tacking contained in sections 49 and 50.

“Tacking” describes the method by which a creditor, with a mortgage securing an original advance, can use that mortgage to secure a further “advance” and so obtain priority for the further advance over sums secured by any second or later mortgage.

As this may prejudice second and later mortgagees, tacking is only allowed in limited cases.

For these purposes an advance is money paid to someone on terms that they will repay it, in other words a loan.

The issue in Urban Ventures Ltd v Thomas & ors [2016] was whether any further advances had been made by the holder of first mortgages on various properties.

Only if further advances had been made, would the restrictions on tacking apply.

The Court of Appeal said the borrowers had entered into a series of further facility letters but essentially all that had happened was that the lender required the borrower to sign up to date versions of their standard terms, and added unpaid interest and fees in respect of the original advances to the account.

No new advances were made.

The facility letter dated 26 March 2009 may have replaced, rather than varied, the previous facility letter as amended, but its purpose was to set out the terms, largely the same as previously applying, to the existing advance.

That facility letter and the subsequent facility letters were restatements, with relatively minor variations, of the original facility letter, rather than the complete extinction of the original facility letter and its replacement with a new contract.

It followed that this was not a case in which tacking arose, and the lender retained its priority as first mortgagee in respect of the advance originally made by it in October 2006.

The unpaid interest was added to the account and capitalised in successive facility letters. In the absence of an express arrangement between the parties to that effect, unpaid interest could hardly be treated as a new or further advance so as to be caught by the restrictions on tracking.

Insofar as fees were payable under the terms of the original facility letter the same would apply to them. However further fees payable on each renewal of the facility, were not payable under the terms of the original facility letter. This was academic because of the substantial shortfall on the sale of the properties. Had it mattered to the outcome of this appeal, it would have been necessary to consider carefully whether, and in what ways, section 49 of the Land Registration Act 2002, and section 94 of the Law of Property Act 1925, applied to the creation of new liabilities which fall within the charging provisions of the first mortgage or charge.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Solicitor should have disclosed price discrepancy to lender

In the Court of Appeal case of Mortgage Express Ltd v Bowerman & Partners [1996] Millett LJ said;

“…..A solicitor who acts for [buyer and lender in] a transaction owes a duty of confidentiality to each client, but the existence of this duty does not affect his duty to act in the best interests of the other client. All information supplied by a client to his solicitor is confidential and may be disclosed only with the consent, express or implied, of his client. There is, therefore, an obvious potentiality for conflict between the solicitor’s duty of confidentiality to the buyer and his duty to act in the best interests of the mortgage lender.”

No such conflict was found by the court to exist:

“It is the duty of a solicitor acting for a purchaser to investigate the vendor’s title on his behalf and to deduce it to the [lender’s] solicitor. He has the implied authority of his client to communicate all documents of title to the [lender’s] solicitor. In the present case, the information in question appeared on the face of the vendor’s title, which consisted of his agreement, subject to contract, to purchase the flat for £150,000. Had the [lender] instructed other solicitors, [the borrower’s solicitor] would have had to provide them with a copy of that agreement. It would then have been for those solicitors to consider whether they ought to inform their client of the price which [the borrower] was paying for the flat. In the present case [the borrower’s solicitor] was instructed to act both for the buyer and the [lender] and it was his duty to investigate the vendor’s title on behalf of each of his clients. He must, therefore, be taken to have been in possession of the documents of title, including [the vendor’s] purchase agreement, not only as solicitor for [the borrower] but also, with [the borrower’s] implied authority, as solicitor for the [lender]. He then came under a duty to the [lender] to consider whether he ought to disclose the information which that documentation contained to them.”

In the Court of Appeal case of Goldsmith Williams Solicitors v E.Surv Ltd [2015] the court said that the question whether the Solicitors were under the Bowerman duty in the present case depended on whether that duty was excluded by, or was inconsistent with, the terms of the solicitors’ engagement, as contained in the Council of Mortgage Lender’s (CML’s) Handbook.

On the contrary Clause 5.1.2 of Part 1 of the CML Handbook could only be explained on the basis that if:

1. a matter “comes to the attention of the solicitor dealing with the transaction which [the solicitor] should reasonably expect [the Lender] to consider important in deciding whether or not to lend to the borrower” and

2. that matter is not confidential to the borrower

then the solicitor should report it to the lender.

One of the matters then included under Rule 6(3)(c) of the Law Society’s Practice Rules 1990 as being a solicitor’s obligation to the lender was “making appropriate searches relating to the property in public registers … and reporting any results … which the solicitor considers may adversely affect the lender”.

A search of the Land Registry in this case was a search for the purposes of that sub paragraph and had resulted in the information that the property had been purchased recently at a lower price which strongly suggested that the current valuation was excessive. The search in this case had obviously been relevant to the value of the proposed security and the information should have been reported to the lender.

However the solicitors’ appeal was successful. Even if they had provided the information they should have on the purchase price and date of purchase of the property, it had not been proved on the balance of probabilities that the lender would have reacted to the information. This was because on their mortgage application the borrower had provided price history information which was not materially different.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Mortgage: Solicitor had failed to give surety necessary advice

In Royal Bank of Scotland v Etridge (No.2) [2001] (“Etridge”) the House of Lords considered the obligations and rights of lenders and sureties where the surety is to provide security for the borrowing of another person where that person might be in a position to exert undue influence over the surety.

The common situation is that of a wife mortgaging her interest in the matrimonial home to secure bank borrowing by her husband.

There the House of Lords was concerned to identify the minimum requirements necessary to protect the surety from granting a charge over property without fully understanding the nature and effect of the proposed transaction, and to ensure that the surety took the decision whether to provide security freely and of their own will.

Where a solicitor is advising someone mortgaging property or giving a guarantee to secure another’s debts, the requirements set by Etridge and their responsibilities are:

1. before acting, to consider whether there is any conflict of duty or interest and what is in the best interests of the surety;

2. to confirm the identity of the surety and explain to the surety the reason for the solicitor’s involvement, which is to counter any later allegation of undue influence or failure to understand the transaction and its implications;

3. to confirm that surety agrees to the solicitor so representing and advising the surety;

4. to explain and advise at a face-to-face meeting, without the borrower being present, and in appropriately non-technical language.

Other principles

1. The bank instructs the solicitor but the solicitor should be chosen by the surety. Cost and the fact a solicitor/client relationship pre-exists are important factors so the same solicitor may act for the borrower, the surety and the bank. BUT, the legal and professional duties that the solicitor assumes when accepting instructions to advise the surety, are owed to the surety alone and the solicitor must be satisfied that he can give the surety the necessary advice fully, carefully and conscientiously. If the provision of that service may be inhibited, the solicitor must cease acting for the surety and so inform the bank; and,

2. the core minimum advice to be given and involvement of the solicitor is:

(a) to explain the nature of the documents and the practical consequences for the surety if (s)he signs them (mainly loss of the property made available as security and/or, where a guarantee is being provided, being bankrupted);

(b) to explain the seriousness of the risk involved entailing:

(i) an explanation of the purpose, amount and principal terms of the new facility,

(ii) an explanation that the bank may increase the facility or change its terms or grant a new facility without referring back to the surety,

(iii) an explanation of the surety’s liability under any guarantee,

(iv) discussion of the surety’s means, the value of any property being mortgaged, and whether (s)he or the borrower have other assets with which to make repayment if the transaction fails). So routinely, the bank must provide the solicitor with financial information about the borrower so that the financial risks to be assumed by the surety may be properly explained to the surety. The relevant information will vary but as a minimum should be the borrower’s current indebtedness, the limit of any current facility, and the limit and terms of any proposed facility;

(c) to explain that the surety has a choice and that the choice is the surety’s alone. This will be informed by the borrower’s and the surety’s present financial circumstances, including their present indebtedness and financial facilities available to them discussed at 2(b)(iv) above;

(d) to ascertain whether the surety wishes to negotiate with the bank (eg to re-prioritise the order in which the bank may call upon securities and/or to fix the upper limit of the surety’s exposure at a lower level) and, if so, whether (s)he wishes to do so directly with the bank or with the bank through the solicitor; and

(e) to verify whether the surety wishes to proceed and, if so, to get the surety’s authority to write to the bank to confirm the explanation the solicitor gave the surety.

Before advising the surety, the solicitor should get any information needed from the bank (if missing from the bank’s instructions).

If the above requirements, are complied with, the bank can accept, rely upon and, if need be, enforce the surety’s security and/or guarantee.

Where the solicitor has been properly retained, the bank can assume that the solicitor has done the job properly.

If the solicitor’s advice is poor that is a matter between the surety and the solicitor.

However, if the bank ought to have realised from facts known to it that the surety has not received the appropriate advice, Etridge says any bank, proceding with the security, would do so at its own risk.

A lender might lose the benefit of security obtained in good faith, if the lender ought to have known that the surety’s concurrence to it had been got by a third party’s misconduct (more often than not the borrower’s).

A bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts as (1) the transaction may well not be to the wife’s financial advantage and (2) such transactions carry a substantial risk of the husband has committing a legal or equitable wrong in getting the wife to stand surety, which may entitle the wife to set aside the transaction.

More generally, a bank is put on inquiry where (1) the transaction is not on its face to the surety’s financial advantage and (2) the relationship between the borrower and the surety causes a substantial risk that the borrower could and did exert undue influence in getting the surety to provide a guarantee or security.

The surety must therefore inform the bank of the chosen solicitor’s identity. There has to be a balance between independence on the one hand and practicality and avoidance of unnecessary financial outlay on the other.

In the High Court case of HSBC Bank Plc v Brown [2015] the court looked behind the solicitor’s certificate and found that he had failed to take any of the steps and to give the core minimum advice specified in Etridge. So the bank’s claim for possession was dismissed and the mortgage was declared unenforceable.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Third parties who induce breaches of personal rights may not rely on non registration

To make a purchaser of a registered land title subject to personal liability in respect of adverse contractual rights concerning land, not disclosed on the register, may seem contrary to the entire scheme of land registration.

Section 29(1) Land Registration Act 2002 is the section that regulates priorities but it does not concern itself with purely personal rights. It postpones any interest affecting land to any later land dealing, if the priority of that interest was not protected at the Land Registry at the time of registration of that later land dealing so long as that later land dealing has been done for value.

The key to this conclusion is that the phrase an interest affecting land covers proprietary rights – but would not extend to purely contractual rights as section 132(3)(b) of the Land Registration Act 2002 defines “any interest affecting the estate” as “an adverse right affecting the title to the estate…”

In the High Court case of Lictor Anstalt v Mir Steel UK Ltd & Another [2014] a hot steel strip mill (“HSM”) was in a factory which the claimant (Lictor) had procured for Alphasteel (now in administration).

The removal of a HSM would have been complex, very expensive and time consuming and would have required some remedial repair works to the site.

The court ruled that the HSM formed part of the site and so, part of the land itself. Given it’s very nature, the HSM was intended as a permanent or semi permanent structure. The purpose of securing the HSM to the site had been to enjoy the site as a functioning steel mill.

An HSM of this kind would have been expected to have an operable life of up to fifty years and would only be removed in exceptional circumstances.

It therefore rejected Lictor’s primary claim that the HSM was a collection of chattels which Lictor had retained title to despite Alphasteel’s ownership of the site.

Although the HSM had become part of the land an agreement between the Lictor and Alphasteel (“the April Agreement”) had sought to:

– regulate Alphasteel’s use of the HSM creating contractual and equitable rights and obligations in relation to the it;
– to classify the HSM as a chattel;
– to preserve a contractual right for Lictor to prevent dealings with the HSM by Alphasteel as if it were the owner; and
– to preserve a contractual right for Lictor to enter onto the site in order to sever the HSM from the land and remove the HSM.

When the Administrators of Alphasteel later sold the site including the HSM on to Mir, Mir actually knew through the Administrators that by executing the associated hive down agreement and the land transfer the April Agreement would be breached.

This exposed Mir to liability to Lictor for the tort (legal wrong) of inducing breach of contract.

Will this lead to a need for additional enquiries in every case? No because the tort is based upon actual knowledge by the purchaser of the contractual rights being broken.

However it does mean that a buyer with knowledge that it’s purchase proposals will contravene someone else’s contractual rights cannot simply close their eyes and rely on the fact that those rights are not protected by a notice or a restriction on the land register.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Mortgagee could enforce mortgage just to pressurise

If a lender is enforcing a mortgage it should do so to recover it’s debt. Usually this will be by selling or letting the property.

It cannot do so for a collateral purpose.

Most mortgages entitle a lender to recover, also, the costs it incurs in enforcing the mortgage.

In The Co-Operative Bank Plc v Phillips (2014) the bank had a legal charge which stood second to Barclays Bank’s first mortgages over the properties.

The Co-Operative Bank Plc (“Coop”) had no realistic chance, or therefore intention, of recovering the borrower’s indebtedness by selling or leasing the properties.

It withdrew the enforcement proceedings.

Mr Phillips claimed the bank had merely brought the proceedings to frighten family members into paying. Indeed his daughter had raised £50,000 to pay to the bank. He said this was an invalid collateral purpose entitling him to recoup his costs from the bank on the much more generous “indemnity basis”.

The High Court took a broader view. Whilst there was no prospect, or intention, of the bank recouping itself by a sale or letting of the properties, it was quite entitled to take proceedings to bring pressure on the family to pay money to the bank. The bank was merely seeking to get its money back, which was the whole purpose of mortgages. So Mr Phillips’ claim to indemnity costs failed.

Nevertheless, as there was no realistic prospect of a sale or letting, the legal costs the bank had caused to be incurred by enforcing the charge were not “properly incurred” as the legal charge’s cost recoupment clause had stipulated. This may seem strange to some, given the court’s earlier ruling that the proceedings were a legitimate tactic to enforce the legal charge’s purpose of getting the money back.

As such the bank was neither entitled to recoup it’s own legal outlay through the legal charge, nor was it entitled to recoup, through the legal charge, the legal costs the court had awarded Mr Phillips against the bank when the bank withdrew its proceedings against him.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Estoppel did not save legal mortgage but it was still equitable

In the High Court case of Bank of Scotland Plc v Waugh & Ors [2014] a legal mortgage had been signed by trustees in favour of the bank but the signatures had not been witnessed.

The bank tried to argue that the trustees were estopped from denying that it had been properly executed.

It pointed to a letter the bank had received from a Mr Gray who was solicitor for the trustees, solicitor acting for the bank and one of the trustees.

This said:

“We have had the mortgage deed executed by the trustees and are now enclosing a certified copy of it.”

The bank said this was a clear representation that the legal mortgage had been validly executed.

The bank contended that the triple capacity in which Mr Gray was acting founded the estoppel and that it had relied on the representation by lending the funds on or about 8th August 2003. The bank said the case was on all fours with Shah v Shah [2001] where an estoppel claim was successful.

However the court said this case was indistinguishable from the unfavourable High Court case of Briggs v Gleeds (2014) which I blogged here a short while ago (See Category “Pension Schemes”). That case had given six powerful reasons for not allowing an estoppel where it is clear on the face of the “deed” that it had not been executed in accordance with the Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 (“the 1989 Act”).

So the trustees were not estopped from relying on the fact that the legal mortgage was not validly executed as a deed.

However a document, which is otherwise valid, but which fails to take effect as a legal mortgage due to some defect of form may (subject to section 2 of the 1989 Act) still be a good equitable mortgage.

This is based on the court’s power to specifically perform a contract to create a legal interest in land.

Section 2 of the 1989 Act provides:

“(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contract are exchanged, in each.

(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.”

In this case the mortgage was signed by both the trustees and on behalf of the bank. It expressly incorporated the bank’s Standard Terms.

These principles operated to grant the bank’s mortgage some salvation. It was not executed as a deed and thus did not take effect as a legal mortgage. However it was signed by the parties and did contain all the terms that had been agreed. So it took effect as an equitable mortgage.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

On Facts no misrepresentation – or reliance by investor

For a misrepresentation claim to succeed the claimant must show both that a material misrepresentation was made and that he relied on it.

The case that follows illustrates that a sophisticated professional who invests may face higher hurdles here.

In Roberts v Egan [2014] the issues were whether any representation was made and, if so, the extent of the representation. The claimant was an experienced solicitor who had made two investments, each of £204,000, in a scheme involving acquisition and development work on various new shopping centres. The claimant had lost the whole of his investment and now sued the respondent to get it back.

The claimant based much of his claim upon the statements in the three-page report, he alleged to have been attached to an email, and a one-page summary attached to the same email.

The three-page report said “the debt for undertaking the developments would be organised by [the developer, Henry Davidson Developments Limited] via their own bank, RBS in Nottingham, and we will just continue to own the sites but have no responsibility for the development funding throughout the building period”; and the one-page summary of the investment proposal, also prepared by the respondent, contained a further statement that “… the developers will arrange their own bank finance with the LLP making balancing profit payments on completion”.

It was the claimant’s case that these were representations which the making of his investment had relied on BUT that in fact the investment vehicle (“A5”) had ultimately borne the risk of the costs of the development as it provided security in the form of a third party mortgage over the properties in favour of the developer’s bank (NatWest) to cover the possibility that the developer might default on the borrowings that the developer had incurred to fund its development costs.

The claimant said, as a prospective investor, the respondent owed him a duty of care to ensure that the representations made were correct and that he had, in reliance upon those representations, made by the respondent through an intermediary, invested the sum of £408,000 in A5.

The High Court ruled that:

The statement and report were simply outline proposals which had been superseded by more detailed draft funding documentation emailed onto the claimant. It was necessary to take all of the pre-contract communications, concerning the investment scheme, made by or on behalf of the respondent to the claimant and view them objectively, in a common sense and realistic fashion, so as to understand what, if any, representation was being made about development funding and the ownership of the sites by A5.

In fact there was no express reference in either the three-page report or the one-page summary to the issue of security. Neither document purported to tell prospective investors about the security position.

The furthest that they went was the statement in the three-page report that A5 would “just continue to own the sites but have no responsibility for the development funding throughout the building period”.

The claimant said there was an implicit misrepresentation there that there would be no third party security over the sites themselves and that there would be no security for development funding over the site.

However the court held that the claimant had not even seen that three page report and that it had not been emailed onto him by the intermediary at the material times.

In any event any qualified solicitor and experienced and astute commercial investor such as the claimant, objectively reading those documents would have appreciated that these were no more than outline proposals, and that matters of detail would have to be addressed in the detailed funding documentation and long-form security documentation that would have to be drawn up and settled before the investment scheme could go ahead. The court found that these had been emailed to the claimant in draft and held that, on the claimant reading them, they would have operated to cancel any misrepresentation or, false impression there may have been earlier.

The High Court held that there was no material reliance by the time the claimant came to make his two investments, upon the statements in the report or the one-page summary.

So the court rejected the claims in misrepresentation on the grounds that there was no material misrepresentation and, if there were, there was no material reliance on them by the claimant.

As an aside the court said that had there been any misrepresentations the court would have ruled them to have been made by the respondent’s limited company rather than by himself acting in person.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.