Tag Archives: Banks

Mortgages prevented lease surrenders which were basis of guarantor release

The Co-Operative Bank Plc v Hayes Freehold Ltd & Ors [2016] was a preliminary hearing in respect of a striking out/summary dismissal application. Here a head lease was granted out of a freehold which was now mortgaged to The Coop Bank. The mortgage prohibited the mortgagor accepting a surrender of a lease without the Coop Bank’s consent.

An underlease had been granted out of the head lease. The underlease was also mortgaged to The Coop Bank so it could not be surrendered without the Bank having released it from that mortgage.

There was a composite deal in which both the head lease and the underlease were purportedly surrendered without the consent of The Coop Bank.

Clause 6 of the surrender of the underlease purportedly released the undertenant and it’s guarantor from further compliance with the underlease.

The High Court ruled that both surrenders were ineffective as the Bank’s consent had not been obtained.

The court also said that the fundamental assumption behind Clause 6 was that the surrender package would be effective. That assumption being disappointed the underlease guarantor remained bound by the guarantee in the underlease.

The Coop Bank therefore had an arguable case in support of it’s interests that must go to full hearing.

The 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.

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.

Salaried partner not liable to property clients

Section 14 of the Partnership Act 1890 provides for a person to be liable as a partner where:

First, the person in question has been held out as a partner in a firm; and,

Secondly, two further sub-elements have been complied with:

A the claimant must have “given credit” to the firm; and,

B such “credit” must have been “given” in reliance upon (“upon the faith of”) the representation that the defendant was a partner.

In Nationwide Building Society v Lewis [1998] the Court of Appeal said ‘given credit’ was not to be construed restrictively and could apply to ‘any transaction of the firm’.

There is no presumption of reliance in favour of a claimant. The claimant must prove, in every case, that in entering into the contract for legal services with the relevant firm, they had, in some way, relied upon the fact that the headed paper, or other representation, held the employee out as a partner of the firm.

As the High Court said in Sangster v Biddulph [2005] the claimant must satisfy the court that, on the balance of probabilities, the holding out or representation had a material influence on the claimant’s decision to proceed with the proposed transaction through those solicitors.

The holding out or reliance does not need to have had a decisive effect but it must have been a contributing causative factor in the claimant’s decision to use the firm.

In Walsh & Ors v Needleman Treon (A Firm) & Ors [2014] the claimants claimed against Mr N and Mr T, the equity partners of the firm, under an agreement whereby the firm was to act for the claimants in short term bridging finance transactions protected by legal charges over properties.

Thc claimants sought to establish liability, also, against a Mr Prior who resisted this on the basis that, as a “salaried partner”, he was an employee of the firm, albeit also the head of the firm’s property department and held out a “partner” on the firm’s letterhead.

The High Court said the claim did not begin to make out a case of material reliance by the claimants on any holding out of Mr Prior as a partner.

There had been nothing to suggest that any of the claimants would, or might, have done anything differently had Mr Prior not been held out as a partner.

Even when one of the claimants began to become concerned about the prospects of repayment, the most that could be said was that that claimant had felt reassured because of Mr Prior’s specialist skills and seniority- nothing necessarily to do with his status, or otherwise, as a partner.

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.

Did Bank assurances postpone liability under guarantee?

In Bank Leumi (UK) Plc v Akrill [2014] the respondent (“the bank”) sought summary judgment against the appellant (“Mr Akrill”) on two personal guarantee claims totalling £3,840,493.83 including interest and costs to be assessed, if not agreed.

Mr Akrill was a property developer through a group of companies known as the Manor Group. He was the sole beneficial owner of each of the group companies.

The bank agreed to fund the Manor Group buying and developing Clarence Flour Mill (“Manor Mill”) in Hull. Mr Akrill was told that a personal guarantee would be necessary but Mr Akrill alleged that the bank’s regional manager told him that he was in “no danger” because the loan would be no more than 60% of the value of the property and that the bank would seek to recover any monies owing in the first instance from the borrower and by enforcing its security over assets within the Manor Group, and would only look to enforce the personal guarantee against Mr Akrill in the event of a shortfall.

Mr Akrill contended that this assurance was important to him, and that without it he would not have been prepared to offer a guarantee for the full amount of the loan. He accepted that, with hindsight, he should have ensured that the bank documents reflected that assurance. The regional manager denied making the representations which Mr Akrill attributed to him and having such a conversation.

Mr Akrill later signed a further guarantee of an overdraft facility and, again, said he did so in reliance on another assurance from the regional manager by phone while he was travelling home with his wife. Mr Akrill said he was told the bank would not call it in and that that persuaded him to sign the guarantee.

The bank placed particular reliance on Clause 18 of the personal guarantees and the cases on similar provisions:

“The Guarantor [Mr Akrill] hereby acknowledges that it has not relied on any warranties or representations made by or on behalf of the Bank in entering into this Guarantee………….”

Finally, the signature pages of the guarantees warned Mr Akrill as follows:

“By giving the Guarantee you might become liable instead of or as well as the Debtor.

You should seek independent legal advice before entering into the Guarantee.”

Each of the guarantees was on the face of them executed by Mr Akrill as a deed in the presence of his solicitor. In signing each of them, the solicitor confirmed, in the bank’s standard template wording, that it had been executed by Mr Akrill in his presence and after he had explained its contents to Mr Akrill.

Despite this wording, Mr Akrill said that in each case he signed the personal guarantee at his home and then sent it to the solicitor. He also maintained that the solicitor did not advise him on the contents of either document. There was no evidence before the court from the solicitor confirming or denying this testimony.

The relevant Manor Group facility was not repaid on 30 November 2011 and remained unpaid.

Mr Akrill relied on the representations he alleged the regional manager made to him as creating collateral warranties which prevented the bank from calling upon the guarantees before seeking redress from Manor Group companies and realising its security over their assets.

Mr Akrill said that since the bank had done neither, it could not sue him under the guarantees.

The bank replied that this defence was bound to fail given the terms of the guarantees including, in particular, clause 18, and the principles the decided cases required to be applied in considering such terms.

Refusing the bank summary judgment the Court of Appeal said the sharp conflict between the evidence or Mr Akrill and the regional manager could not be resolved without cross examination. The circumstances of the guarantees’ execution and witnessing also needed looking into further. Additionally the evidence of Mr Akrill’s wife that she overheard the conversation between Mr Akrill and the regional manager, needed to be taken into account. Mr Akrill’s case, though unlikely to succeed, was not wholly implausible.

So the first instance judge was wrong to conclude that Mr Akrill had no real prospect of establishing that the regional manager made him the representations he claimed he relied on. The Court gave Mr Akrill conditional leave to defend and directed that the application be remitted to the High Court for consideration of the appropriate conditions to impose.

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

Fruitless unsecured member claim in LLP administration insufficient to put administrators through examination

In Berntsen & Anor v Tait & Anor [2014] the administrators of Coniston Hotel (Kent) LLP (the “LLP”) sought an order that the Applicants’ proceedings be struck out and that the Applicants’ claim be dismissed.

The Applicants were the LLP’s members. The LLP’s hotel, the Coniston Hotel, at Sittingbourne needed further funds to enable it to complete works and to open for business. The LLP’s Bank, National Westminster Bank PLC, was not prepared to lend more without personal guarantees from one or both Members. The Members would not give them.

The Members put the LLP in Administration with the Respondents appointed as Administrators.

The Administrators sold the Hotel to West Register Limited, an associated company of the Bank.

The Claimants alleged that the Hotel was worth in excess of £7 million and had been sold for £4.25 million, which was an undervalue. They could not criticise anything specific in the marketing and sale process itself but said that the marketing process was a “sham” leading to a sale to a predetermined purchaser, which for non specific reasons, was part of a conspiracy to defraud by members of the Bank, the Valuer and the Administrators. Those who suffered from the alleged conspiracy were the LLP and, indirectly, therefore, the Members.

Rejecting the undervalue and conspiracy claims as “unviable”, and ordering the proceedings to be struck out, the court said the costs would have been significant and Members had evidenced an inability to pay the Respondents’ costs.

The final allegation, under paragraph 75 of Schedule B1 to the Insolvency Act 1986, was that the Administrators had handled the Administration badly. But their pleading had not identified any of that mishandling. However in order for the Members in this case to bring the claim, whether in the capacity of Members or as creditors, they had to show they had a “sufficient interest” in the remedy which was being sought. Here that remedy was that the Administrators pay compensation to the LLP, which might mean the Administrators remitting some or all of their fees (£130,000). However those fees could only be distributed, first to the secured creditors i.e. the Bank. As the Bank was owed over £1 million any such recovery by the LLP would be for the exclusive benefit of that secured creditor. Nothing would be paid to unsecured creditors. or the Members. So the Members did not have the necessary pecuniary interest in the remedy they were seeking. to qualify to make that claim. Their human interest in seeing the Administrators subjected to a trial did not give them standing to bring an examination claim. So the court dismissed that claim also.

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