We’ve Completed! Or have we? The Essential Element of Completion in a Refinance Transaction – Jonathan Newman.
When Aldermore completed a mortgage advance in January 2013 to Mrs Rana, there was nothing particularly remarkable about the transaction.
This was a loan facility to be secured over 3 properties registered in the name of the borrower’s sister and already charged to the Clydesdale Bank. The properties were to be transferred into the borrower’s name, the existing debt to Clydesdale be repaid, and Aldermore to take first legal charges over the security properties. Mrs Rana the borrower and transferee was raising additional capital from the transaction.
Lender’s solicitors released funds to the borrower’s solicitors against undertakings for completion.
Although solicitors did pay over the balance directly to the borrower, regrettably they misappropriated the sums which were required to pay off the Clydesdale. Clydesdale were not repaid, and understandably refused to discharge their security.
Aldermore sought and recovered £1.796 million compensation from the Law Society Compensation Fund which covered the majority but not all of their losses. In fact Aldermore were still looking at an actual losses of £368,000 and they sought to recover these from the mortgage borrower.
At first instance, in the High Court, their claim against the borrower was dismissed, although the Court agreed that the borrower should repay £78,193.64 being the sum received by her from the transaction. But the Court maintained that the borrower could not be contractually liable for any of the losses as the mortgage transaction had never been completed. Aldermore appealed. The Court of Appeal agreed.
• The essential element of a remortgage transaction included the redemption of prior mortgages.
• Unlike with a purchase transaction, the event of completion is the transfer of title to the property, in a refinance transaction the essential element is the creation of a new, first legal charge.
• As completion had not taken place the borrower had no contractual liability to Aldermore.
An update on Etridge
Mrs Brown was the legal owner of a welsh farm. Though registered as the owner to the legal title, the farm was in fact occupied by her son. Mrs Brown had not lived there since 1987. She regarded the property as her sons. So when her son requested her to enter into a mortgage of the property to secure facilities he had obtained from HSBC, she agreed. Following default by the son, HSBC issued possession proceedings, placing reliance on a certificate of independent legal advice obtained, confirming, that Mrs Brown had received independent legal advice. The certificate was provided by the solicitor who also acted for the son in connection with the borrowing.
The doctrine of undue influence allows a Court to intervene where a relationship of trust, confidence, reliance, dependence or vulnerability exists. Specifically in relation to lending cases, it is common for a party to charge their asset for the benefit of a family member. Etridge stands as the leading case and main guidance for banks who are said to have been put on enquiry as to risk of undue influence in every case where the relationship between the guarantor/mortgagor of the property and the debtor is a non-commercial one.
Mrs Brown argued that the mortgage was unenforceable by reason of fact that HSBC had failed to meet the minimum requirements set out in Etridge. She maintained that she had received no direct contact from the Bank, nor the solicitor, before signing up to the charge. She also maintained that she had received no legal advice notwithstanding the certificate produced.
HSBC argued that having received the certificate from a solicitor which confirmed that independent legal advice had been given they were entitled to rely on it. Any failings in the advice given, they said, was a matter for Mrs Brown to take up with her solicitors, but having complied with Etridge, they said, the charge was enforceable; Mrs Brown’s claims lay elsewhere.
HSBC’s documentation and records were sadly lacking. They may well have taken the steps required by Etridge but they were unable to show this.
The charge was determined as being unenforceable by reason of the Bank’s failing to meet or show that it had met Etridge guidelines. HSBC was unable to obtain possession. In a helpful judgment, further clarification on Etridge was given, which included the following recommendations which all banks and lenders would be well advised to follow.
1. The lender should engage with the mortgagor directly to obtain details of the solicitor of her choice,
2. The lender should notify the chargor directly that it will require written confirmation from a solicitor that the nature, content and effect of the documents and transaction have been fully explained to her,
3. The lender shall explain directly to the mortgagor that their reason for so doing is to preclude the mortgagor from disputing the legally binding effect of the charge.
4. The lender should record and document all of the above.
5. As regards the solicitor providing certificate, that solicitor should consider all conflicts of duty and confirm, inter alia, that they have explained the reason for the advice, the nature and seriousness of the documents, and alternatives which arise. The meeting between solicitor and client should take place face to face.
Advice to Lenders
1. Consider internal documentation, and the recording of your contact with mortgagor in these circumstances. Engagement should take place as early as possible in the process, certainly in advance of execution, and of course any such engagement should be independent of the borrower.
2. Ensure that certificates of advice are up to date, comprehensive, and fit for purpose.
The Restriction I am referring to is a Form K Restriction normally worded as follows:
“Restriction: No disposition of the registered estate is to be registered without a certificate signed by the applicant for registration or his conveyancer that written notice of the disposition was given to XYZ Limited being the person with the benefit of an interim charging order on the beneficial interest of Joe Bloggs made by the Newport County Court on 13th January 2015 (Court ref 7XY1234)”.
The wording of the Restriction seems to suggest that by serving notice, a seller will satisfy the terms of the Restriction and a purchaser will be registered as the new owner.
However, there is more to it than that. XYZ Limited obtained an Interim Charging Order against Mr Bloggs.
Therefore, even though it does not have a legal interest in the land, it does have an equitable or beneficial interest, i.e. an interest in the proceeds of sale. The company must therefore be repaid when the property is sold by the owners. This is on the assumption that XYZ Limited obtained a Final Charging Order of course.
It is correct that the purchaser will be able to register the title in his or her name free of the Restriction simply by providing a copy of the notice served on XYZ Limited. However, the seller still needs to deal with the underlying debt.
The seller and his solicitors will hold the sale funds as Trustees and the seller will be responsible for repaying the Charging Order in full.
Simply serving notice and thinking that the solicitor’s job is done will likely lead to further action against the seller and, in turn, a potential negligence claim against the solicitor.
Any lender with a first mortgage can add advances onto its debt, in priority to other registered interests, where;
• There is an agreement in place between chargees, or
• He has no notice of subsequent interest (and his charge so permits), or
• There is a contractual obligation in the mortgage to make further advances.
This is known as the doctrine of “tacking”.
But what happens when a lender has renewed the loan facility without seeking the agreement of a subsequent charge holder. It is quite common in renewals for interest to be rolled up, capitalised, and for renewal fees to be applied to the account.
Is the priority of the renewed facility, and the charges within, vulnerable to subsequent charge holders?
Well, the Court of Appeal has this month provided some useful guidance to clarify the position.
In the matter of Urban Ventures -v-Thomas, the Court gave careful consideration to the meaning of “further advances” in the context of anti-tacking provisions and in particular, circumstances where the original loan facility has been renewed.
The Court held that a renewal will not amount to a new replacement advance, (i.e. losing priority) even where accrued but unpaid interest and fees have been added and included in the new principal sum under the new facility, in cases where;
1. No money had passed to the borrower on renewal.
2. There was no understanding between lender and borrower that the principal had been repaid and another loan re-lent.
3. The capitalised interest represented interest not yet paid, which interest fell to be secured by the first legal charge.
Clearly it is preferable to have all registered chargees enter into a Deed of Priority or Inter-Creditor Agreement to prevent disputes between registered charge holders over amounts and priority. In so doing, enforcement is more easily regulated. But it does remain open to dispute that fees charged on subsequent renewals (which do not arise under the terms of the original facility letter), might be considered outside the context of these provisions, (therefore unable to be tacked onto the original mortgage debt in priority to second or subsequent security).
So where an original facility agreement does allow for renewals of facility, take care to set out the level of renewal fees, and other terms for renewal, to avoid potential dispute by subsequent charge holders over priority.
In a recent speech by Sir James Munby, at the Family Law Bar Association, he announced that there are revolutionary reforms underway, one being that people will be being able to divorce online from next year. The reform is aiming to work towards achieving a paperless court over the next four years.
With the increasing numbers of litigants in person, moving to a digital word, could be said to be the way of the future, and the court system has to move with the times. The process from start to finish will be conducted online and the future is to achieve a digital court, with proceedings being issued online and even some proceedings, including the final hearing be conducted online from the comfort of your own home. However, the more complex and heavy cases will continue to be conducted in a court room.
In an ever increasing digital world, moving into a new phase of radical reform to a digital court will of course have its pros and cons. No doubt there will be many sceptics who are weary of the changes, but given that we live in a digital world, which has changed the way in which companies and individuals alike do business, surely such a change in the court process is inevitable.
Victoria Constanti – firstname.lastname@example.org
A scenario which I have come across when acting for lenders in connection with property sales involves the following entries at the Land Registry:
1. Equitable charge to ABC Limited.
2. Legal charge to our lender client.
The question is, which one has priority and will be entitled to receive the funds due first if the property is sold? I have discovered that many conveyancers do not know the answer to this and in all honesty, the position is not as simple as it may seem. It is however a very important point, especially if there is insufficient equity to repay both and for example, our client has taken possession to sell the property.
In the above scenario, the answer is that further information is required. It depends on the date each charge was created. Notice that I said “created”, not “registered”. Unlike registered legal charges, an equitable charge is not afforded any priority against competing financial charges on the basis of when it was registered against the title alone.
Had the above entries been reversed, the legal charge would always have priority regardless of when it was created.
The date of creation is the important date when considering an equitable charge. If the equitable charge was created on 8th February 2015 but the legal charge was created on 7th February 2015, the legal charge would have priority despite the fact that the former was registered first. The main statutory provisions for this are Sections 28 and 32 Land Registration Act 2002 (“LRA”).
If the equitable charge was created and registered before the legal charge, it would have priority as registering it against the title preserves any priority it may have.
When dealing with competing legal charges, the position is much simpler in accordance with section 48 LRA in that the first registered charge has priority.
LENDINVEST COMPLETES FASTEST MORTGAGE DEAL IN THREE DAYS
– Believed to be bridging market’s fastest ever completion
– Advantage of speed taken, while keeping underwriting standards high
London, 2 February 2016 – LendInvest, the leading online lender for short term property finance, has completed its fastest ever bridging finance deal.
Within three working days, the lender was able to move from initial enquiry to full drawdown of a £590,000 facility based on a 60% LTV.
LendInvest was launched to reinvent the mortgage, bringing technology to this largely offline market for the first time. The business’ experienced team believes this is the UK bridging market’s fastest-ever completion where the lender and borrower were unknown to one another before application.
The borrower was introduced by Target Capital and LendInvest worked closely with Brightstone Law, a frequent legal adviser to LendInvest on transactions.
Having been unable to negotiate an extension to an expiring development loan with her existing high street lender, the borrower urgently sought bridging finance to cover the completion of her house conversion project. Post-completion, the borrower intends to move to a longer-term buy-to-let mortgage. The property in question began as an old-fashioned three-bedroom, end of terrace house with surrounding land in East London. It has been extended and renovated to become a modern, seven-bedroom home for a renting family.
Matt Tooth, Head of Distribution at LendInvest, said: “Credit must go to our broker, legal and valuation colleagues whose help was integral to completing this deal within the tightest of all time constraints. The case was very well presented by the borrower and her broker, which enabled our team to promptly and confidently approve the proposal within hours. Equally, we instructed a valuation that was turned around and shared with all parties electronically within hours.
“We are delighted to lead the way on speeding up safely the mortgage application process. However, too many delays and mistakes still taint the industry’s reputation. With this deal setting a benchmark, we hope that before too long, speed becomes the norm in an industry that embraces the power of technology to streamline the underwriting process.”
Magnus Duke Dadzie, the business development manager that led on the deal for LendInvest, added: “One complication in this deal arose when the borrower discovered that her passport – a key document required by our underwriting team – had expired. Our technology-based, decision-making process isn’t a linear, box-ticking exercise; while we waited for the applicant to renew her passport and supply it to us, we were able to progress with other aspects of underwriting and searches so that time was not lost and deadlines were met.”
— Ends —
Carmen Murray, PR Manager at LendInvest – mailto:email@example.com/ 020 3846 6820
LendInvest is the leading online marketplace for short term property lending and investing. The company was spun out of Montello Bridging Finance, the established bridging finance provider, in summer 2013.
LendInvest aims to bring the speed, efficiency and transparency of marketplace lending to the mortgage market for the first time. In the last two years, LendInvest has originated over £500 million of loans to landlords and developers for terms lasting one month to three years, making it one of the most active short-to-medium term mortgage lenders in the UK.
LendInvest is authorised and regulated by the Financial Conduct Authority and in July 2015, it became the first peer-to-peer platform to be rated by a regulated European credit rating agency.
All loans are secured by a registered first charge against property in the UK and the company has consistently provided returns to investors between 6-9% per annum.
LSC is a commercial lender who provided short term finance in 2013 to a mortgage borrower. The sum advanced was £169,000, the borrower was a Gail Boddice. The advance was to be secured by a legal charge over a residential buy-to-let property in Chester and the loan facility was to be guaranteed by her husband. Abenson’s acted for the borrower. The property had been in joint names historically but was to be transferred into Mrs Boddice’s sole name. There was an ID fraud “most probably” accordingly to the Court perpetrated by the husband. LSC pursued the “borrowers” solicitors when its application for registration of charge at Land Registry had been rejected, and the fraudster had absconded with the mortgage monies. The claim was on three grounds;
1. Breach of undertaking by Abensons.
2. Breach of a duty of care to the lender (to take reasonable care to establish that the charge had been validly executed).
3. Breach of warranty of authority (solicitors warranting that they acted on behalf of the real borrowers when they palpably had not).
The case of LSC Finance Ltd v Abensons Law Ltd did not go well for the borrower’s solicitor. In fact Mr Abenson, solicitor for the purported borrower was described by the Judge as “by far the worse solicitor witness I have ever seen giving evidence in the witness box”. His answers were “extremely” vague. His evidence was inconsistent on the facts surrounding the execution of the charge, and the transfer of the property into single name, and his testimony on the circumstances surrounding the execution of the charge and how it came into his possession, was wholly unsatisfactory. Mr Abenson gave three differing and separate accounts in relation to this crucial issue.
From a lenders point of view the case is most notable for the precise terms of the undertaking which the lender’s solicitors insisted upon, and which Abensons gave (notwithstanding their deficiencies in other areas). Post completion, time passed, and Abensons failed to obtain registration of the transfer, and the charge in favour of LSC. Land Registry refused to register the transfer and mortgage documentation suspecting, quite rightly, the existence of mortgage fraud.
HHJ Hodges judgement does not make for pleasant reading for Abensons, or the reputation of high street solicitors. It was clear that with the benefit of hindsight from an independent view point, that Abensons failed to take their binding obligation to the lender seriously, or give appropriate significance to the requirements which were made of them in relation to the execution formalities.
On the duty of care issue, the Judge came down clearly on the side of the lender, indicating that any solicitor who fails to verify the signatures on documents presented to him when executed elsewhere, and not by a lawyer, would be in breach of his duty of care. Relying on a telephone conversation with the borrower to confirm her execution, was unacceptable and failed to meet the standard required.
The letter of undertaking which Abensons gave, is quoted in the judgement and is of interest to all mortgage lenders. It read;
“ 1. We confirm the execution of:
(a) the first legal charge by the Borrower in favour of LSC over the Property (“”the Charge””).
(b) the Personal Guarantee by the Guarantor.
3. Within 7 working days of completion, we will complete the registration of the Charge against the Borrower as a first legal charge on the Property. We will send to the Land Registry the Charge and requisite registration fee with form(s) AP1, RX1 and all relevant documents (including certified copies of the Charges [sic] to register the Charge at the Land Registry. ”
The Court recognised that the precise terms of the undertaking were all important and this was the crux of the case. The acceptance of an instruction letter from solicitors that they were required to hold an original “validly – executed security” prior to completion, and to provide an undertaking for the same, formed the basis of their instructions, was highly significant. In “Ronseal” terms “validly executed security” is precisely that. It is a legal charge which is validly executed and capable of registration. Failure to so provide, even if solicitors are not at fault, will still leave solicitors in breach of an undertaking prescribed in such terms.
And once the undertaking had been construed in that way, literally, it followed that the same solicitors were in breach of the warranty of representation to the lender, i.e. that they acted for the true borrowers.
The claims for breach of undertaking and breach of warranty of authority had therefore been made out.
Lessons to Learn
1. Solicitor to solicitor undertakings are of huge importance, and provide a vital safeguard against loss to lenders through identity fraud.
2. When the Court deems that a solicitor should pay special attention to verification of signatures on documentation when executed not in his presence, and not before a professional, a prudent lender should be doing exactly the same.
3. Where a legal charge is taking place contemporaneously (as in this case) the transfer of title from single to joint names (for no apparent good reason) additional caution should be attached, and if the borrowers solicitors are unable to provide a reasonable explanation for the arrangement, enhanced due diligence should be applied.
It is well known that persons who are in actual occupation of a property at the date of lending can defeat the lender’s right to exercise its power of sale. That is why a prudent lender will make extensive enquiries as to occupation prior to lending, and where occupation is disclosed and discovered, will take appropriate steps to investigate the nature of the occupancy, and the interest, and thereafter take precaution to have any interest waived or postponed in their favour.
But where occupation is unknown or is concealed, significant issues arise, including certain situations where an occupant with beneficial interest may assert a superior proprietary interest.
For these reasons lenders will welcome the Court of Appeals’ decision in Credit & Mercantile v Kaymuu Ltd and others which was published last month.
In this case, the court has confirmed that there are certain circumstances where a lender will not be bound by the interest of an occupier who was in occupation prior to the date of mortgage, but whose interest was unknown to the lender, even though it was potentially apparent.
Two friends, and business partners agreed to buy a substantial residential property in 2010. The property was funded by one of the partners, K, but the purchase was carried out in the name of a company wholly owned and controlled by M. M, via his company, dealt with all acquisitions aspects. K was to live in the property (which he did) from the date of the purchase in May 2010. Both friends and partners knew and understood that the beneficial interest in the property was to be K’s. Shortly after the purchase, and with the title to the property to be registered in the name of M’s company, M took it upon himself to raise finance on the property by way of mortgage. A surveyor for Credit & Mercantile inspected the property but failed to notice K’s occupation. K was present at the surveyors inspection, but asked no questions of the surveyor, and made no comment. Nor did K take any steps to enquire from the surveyor what the purpose of the surveyors visit was, nor in fact did he seek to protect his interest. The mortgage ran into default. Credit & Mercantile sought to exercise their power of sale and, asserted that they were entitled to the repayment of their debt from the sale proceeds in priority to any interest arising out of Mr K’s occupancy and/or beneficial ownership. The sum was not insignificant. The amount claimed by Credit & Mercantile was £694,072.75. K made claim to this sum and any surplus arising.
Most cases in this area focus on the nature of the occupation, but in this case, the nature of the occupation was not in issue. The Court accepted that K was in occupation prior to the date of charge. In most instances a pre-existing occupier binds the mortgagee.
On strict agency principles, where one party gives actual or ostensible authority to another to carry out activities in the name of the Principal (as in this case, K provided M with legal title which in the eyes of any third party, included the power to sell or mortgage) the Principal is bound by the agents activities.
The Court of Appeal held that K had given M the means of representing himself as the beneficial owner. As a beneficial owner, to the outside world, M had full authority to deal with the property in any way he saw fit including mortgaging the property. K had taken no part in the purchase whatsoever, and failed to bring his interest to the notice of the lender when he had a chance to do so when the inspecting surveyor attended nor did he make enquiry of M when he had the opportunity to do so, or contact the lender directly.
Accordingly, the Court of Appeal held that the lender on these facts and circumstances would not be bound by K’s beneficial interest notwithstanding the fact that his occupation took place prior to the date of mortgage.
Points of Interest
There are two main points of interest in this case which lenders should take note of.
• The occupants claim is lost because he had given a third party, his agent, clear authority to act in the matter of a beneficial owner. He had done this willingly and openly.
• The lender succeeded even though the surveyor had failed to identify any occupation and even though the court concluded that a reasonably prudent surveyor would have discovered that the property was occupied and would most likely have been involved in an encounter with the occupier.
Lenders who await the result of recovery action before pursuing errant valuers risk losing the right to claim
In a September decision in the Central London County Court a lender’s claim against its valuers was lost for being out of time.
Section 2 of the Limitation Act provides for a limitation period of 6 years for tortious claims. In negligence cases the time runs from the date the damage is suffered. In simple terms where a loan has been granted, that damage may be suffered on the date of the loan, if for example, the borrower’s covenant has no value, but in other cases, from the date of default by the borrower. The loss suffered on negligent valuation will be the difference between the value placed upon the property by the errant valuer, and its true market value. A cap is generally applied, and that cap will be the amount by which the property has been overvalued, so that, any losses arising as a result from the fall in the property market would not be recoverable.
In Canada Square Operations Ltd –v- Kinleigh Folkard & Hayward Ltd (KFH), the borrower applied for a mortgage advance which equated to 90% of loan to value. The lender took two valuations. Firstly from Connells who valued the property at £475,000 on the 23rd December 2005 and then from KFH in January 2006. They valued the property at £500,000. The lender noted the discrepancy between the two valuation figures and went back to Connells informing them of the higher valuation received and asking Connells to reconfirm, which they duly did. No evidence was taken from the lender as regards reliance, and notably the issue of reliance was not decided. Nevertheless, the loan was completed and the borrower maintained payments albeit sporadically until January 2008. In August 2008 the borrower surrendered the property to the lender. Although placed in auction, the property did not sell, but was subsequently sold in May 2009, the sale price being £305,000. On the 23rd October 2013 the lender chose to issue its claim for damages against KFH.
The lender’s claim was vigorously defended and the primary issue which came before the Court to be decided was one of limitation. The material question was whether or not the lender had suffered a measureable loss, and whether the claim had been commenced within the statutory limitation period, i.e. 6 years from the date of cause of action.
In its judgment the court confirmed that a “basic comparison” had to be undertaken. This comparison required the court to value both the security, and the borrower’s covenant and whether the combined value, was worth more or less than the amount outstanding under the mortgage at the given dates. In a departure from previous thinking the Court decided that the costs of repossession and sale should be deducted in arriving at true valuation, and also, less controversially, an uplift was also to be applied, taking into account the movement in general market conditions at the date which was to be determined as the date of cause of action. Applying all factors, the Court valued the property at £385,818 as at October 2007 creating an overvaluation of £115,000 (the shortfall), which shortfall amounted to a 29% overvaluation. Prima facie, a negligent overvaluation was established, and notably, liability had been admitted.
Having established the true value of the property the Court compared that value, with the debt outstanding at various dates until repayment ceased. Based on the particular facts of this case, the Judge found that the borrower’s covenant was worth less than the shortfall by early 2007, this being the date that the borrower first fell into default. Although the borrower had made later payments, these had been sporadic and not always in the full amounts. On this basis, the date of first default was taken to be the date at which the borrower’s covenants lacked sufficient value to meet the shortfall.
Therefore the lender had suffered a measurable loss in February 2007, and predicated on that finding, proceedings would have to have been commenced by February 2013. The proceedings had not been issued until October of that year. As a result the lender had failed to issue in time, and its claim against the valuer was lost, even though the valuer had admitted liability for negligence.
There are some significant lessons to be learned for lenders.
Lessons for Lenders
• Where more than one valuation is take or received lenders must establish reliance to support an effective claim. This they should do by documenting the credit sanction, internally evidencing exactly which valuation was relied upon and why.
• The courts when establishing the true valuation of a property will take into account extraneous factors such as the cost of repossession and realisation as well as any other unknown defects or factors at the time. That can give more weight to any prospective claim.
• The test for valuing the borrower’s covenant is fact sensitive, but the starting point will almost always be the date of first default, the cause of action date could be extended to a later date depending upon the facts and the borrower’s payment profile.
• When default first arises, lender’s recovery teams must immediately assess property value, and seek to identify whether an overvaluation has taken place, or whether a shortfall, based upon the borrower’s covenant, is likely to be suffered. At that point, be aware of the limitation date and issue the claim if a prima facie claim lies against the valuer because failure to do so may leave valid claims out of time and lost.