Word is my Bond – How the wording of a solicitors undertaking on completion is a crucial weapon in the war of Identity Fraud.
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.
The fight over what happens to goods, furniture and chattels left in repossessed properties
Default is almost inevitability for secured lenders. Repossession is much rarer than most would believe, rarer in fact that the business media may present. But it does happen.
When lenders do exercise the power of sale, most assume that the process, the sale of security, is the be-all and end-all of the lender duty.
But that’s not always the case, especially in cases where vacant possession is obtained but is not vacant in the true sense of the word.
This month the Court of Appeal was tasked with resolving the claims of disgruntled borrowers, seeking damages for unlawful conversion of chattels, i.e. the misappropriation and destruction of goods left by them at a property upon its repossession.
In Da Rocha-Afodu & Another v Mortgage Express, the lender took possession in 2006. Prior to the eviction date, the lender served notice on its borrowers of its intention , setting out details of the eviction date and time, the requirement to deliver vacant possession, and warning the borrowers to make arrangements to remove their belongings prior to the repossession date. The borrowers did not do so, returning on three occasions, post eviction, to continue to remove some but not all belongings.
The legal duty.
A lender being left with goods over which it holds no charge finds itself in the position of involuntary bailee. The duty in such a position is to act in a way which is right and reasonable.
The contractual position
The contractual position is determined by the agreement made between lender and borrower; this will be contained in the terms and conditions. The lenders mortgage terms provided that on repossession, the lender might take steps to remove and store goods, and either dispose of the goods or return or return the goods to the borrowers or rightful owner but only of if the goods were not removed within 7 days after the lender had written to the borrower at their new address, or if no address provided, then within 7 days after taking of possession.
During the post eviction period, the lender placed notice at the property requiring the removal of all items within a fixed period of 14 days; and warning that the consequences of failing to remove would be destruction by the lender.
When the borrowers returned again, they found a property empty of their goods, which had, been destroyed by the lender’s sub agents.
The borrower argued that the right to dispose existed only if all the triggers contained in the contractual term had been satisfied. Failure to so satisfy, said the borrowers, would mean the lender fell on the wrong side being right and reasonable,
What the Court of Appeal said
The Court applied a purposive interpretation to the wording of the lenders terms and conditions. Taking the text literally, as the borrower asked the court to do, would lead to absurd results. For example if the property was in negative equity, the lender would be required to pay out of its own pocket off-site storage, but left unable to recoup the costs.
The true purpose of the terms and conditions, was to afford the borrower time to make arrangements for removal, and nothing more.in this case 7 days.
On these facts the lender was entitled to dispose as requisite notice has been given. The contractual term was the starting point, the court then had to consider what had been right and reasonable.
The lender had granted the borrowers appointments; it had also discharged that duty.
Lessons to learn
- Check your terms and conditions.
- Make your terms clear, simple and transparent.
- Act in a proportionate, fair and reasonable fashion, and instruct your subcontractors carefully
- Provide your borrowers with notice of your intentions prior to eviction, and after.
A recent case in the High Court tackled two significant areas of risk to bridging lenders, and also provides sensible guidance and warning to inspecting valuers.
In Credit & Mercantile v Kaymuu Ltd, a mortgage lender had repossessed security property but faced a fight for the sale proceeds when competing claims arose from a beneficial owner, who was also the occupant of the property, who had not consented to the mortgage, had no knowledge of it, and who had moved into the property unbeknown to the lender at the date of mortgage advance. The beneficial owner and occupier vigorously argued that he should not be bound by the mortgage in these circumstances, and that his occupational interest should override the interests of the lender.
Mr W and Mr S were business partners and friends. They agreed to enter into a property transaction together to purchase a property, in the name of a company controlled by S. W provided the funding. S dealt with the mechanics of the transaction. The parties agreed that legal title was to be vested in the company name, but both knew and understood that the beneficial interest in the property was to be W’s. No paperwork existed to document the arrangement. Mr S dealt with the transaction entirely and Mr W took no active role. The property was purchased in May 2010. Soon after completion, W moved into the property. In or around the same time, Mr S, without the knowledge of his partner W, commenced steps to mortgage the property in favour of the lender.
The lender carried out their usual due diligence, which included an inspection of the property by its valuer, who reported (wrongly) the property to be vacant. In fact, W and his partner had already commenced moving into the property. It was accepted by all sides that W’s occupancy had begun prior to the actual mortgage date, which was approximately one month after completion of the purchase.
Mr W sought to resist the claims of the lender for its mortgage monies following the realisation of the security, and have his rights to occupy the property prevail over the lender.
In a straightforward and, I think, common sense application of agency principles, the court decided that
• By abstaining from all involvement in the purchase, and in providing to S the means of representing himself to third parties as the beneficial owner with full authority to sell, mortgage or otherwise deal with the property, the beneficial owner is bound by the lender’s charge.
In arriving at that decision, the Court took into account that the lender had innocently entered into the mortgage transaction, and had neither actual nor constructive knowledge of the beneficial owner’s interests.
For the beneficial owner to establish priority of claim, he was required to have brought his interest to the knowledge of the lender. The court noted he had opportunity to do that when the valuer arrived to inspect the property. He could have made his interest clear to the valuer (but did not). He could have requested the contact details of the valuers’ lender principals and have contacted them directly (but again did not).
This case is of particular interest to lenders because it highlights how an occupier’s claim can be defeated when the occupier has given to others the means of representing themselves as the beneficial owner of the property, with full authority to deal with the property, as owner, with the lender. The occupier’s interest, predicated in land law, was defeated by ordinary agency principles.
In Kaymuu, the Court also took the view that the lender’s surveyor was not particularly careful when concluding that the property was unoccupied upon inspection. For this reason Kaymuu, also operates as a timely reminder of the significance of the valuer’s inspection in the mortgage transaction. Valuation, whilst the primary purpose, is not the sole purpose of inspection. A more careful and diligent enquiry by this set of valuers, together with more accurate reporting of the occupancy position, would have saved the lender from costly and contested court action.
In 2007 the Co-op Bank lent sums in excess of £2.1million to a company in which Mr Phillips was a director. The advance was secured over two properties. The loan facility was repayable upon demand in the usual way. The Co-op’s mortgage deed contained in a typical charging clause, enabling the lender to secure all of if costs, charges and expenses in taking, perfecting or enforcing its securities. The charging clause allowed the lender to charge its costs to the security on a full indemnity basis. Mr Phillips fell into default and the Bank issued demand. Mr Phillips made a proposal for IVA, excluding the securities from his proposal. In his IVA proposal, Mr Phillips noted that there was negative equity in both properties; no value to the lender at all. Notwithstanding the negative equity position, the bank arranged to issue possession proceedings. Mr Phillips defended the claim on the ground that the action was an abuse of process; possession proceedings, he said, would not result in any recovery for the Bank; arguing that the Bank had ulterior motive in taking the action.
Indeed and in due course, the Bank discontinued the proceedings for reasons which were never made absolutely clear, though inferences were drawn.
The default position in litigation is that a claimant who discontinues proceedings becomes liable for the defendants costs, and, understandably, Mr Phillips sought to recover his costs from the Bank, on an indemnity basis because, he maintained, the proceedings were issued for a collateral purpose, i.e. not exercise the power of sale, but to coerce the borrower into arranging for payment by alternative means.
The Bank sought to set off any liability for Mr Phillis’ costs against the sums which remained owing to them by him.
The decision of the Court in Co-op Bank v Phillips (2014) is noteworthy in a number of respects.
Power to Enforce
A mortgage confers on a lender a number of powers which are sacrosanct. The powers of enforcement are there to enable the lender to obtain repayment of its loan facility. However “A power of sale is improperly exercised if it is in no part of the mortgagees purpose to recover the debt secured by the mortgage”. Where a mortgagee has mixed motives, one of which is genuine recovery, then he can’t be deemed to be exercising the power of sale illegitimately.
It is notable in this case that the Bank chose to give no direct evidence on its intentions and failed to comply with disclosure. The Court was unable to find any evidence that the Bank truly believed that it would recover the debt from the securities if sought to realise the end of the possession proceedings. Therefore the Court could not find that the Bank’s purpose in bringing the claim was to sell the properties. Further, there was no evidence that the Bank intended to let the properties, which might be a separate and alternative motivation. The inference drawn by the Court was that the sole intention was to apply pressure on the borrower. Indeed at one point, the borrowers daughter did make an offer of £50,000 as a result.
Having so inferred and by reason of the discontinuance, the Bank incurred two sets of costs liability. First its own (which it sought to add to the security under the charging clause) by reason that their costs were incurred for the protection or enforcement of the mortgage deed, which the mortgage deed allowed for, and secondly Mr Phillips’ costs, pursuant to the order of the Court and consequent upon the Bank’s discontinuance of the proceedings.
Mr Phillips argued that the Bank should not be able to recover their costs which he said were unreasonably incurred or in an unreasonable amount, whether or not the mortgage deed allowed for this.
The Court determined that the Bank got absolutely nothing from the proceedings nor could have hoped to – these proceedings were a complete waste of time and expense. It followed therefrom that the Bank’s costs were unreasonably incurred, and so too, the costs that the Bank had made itself liable to Mr Phillips.
The Court refused to allow the Bank to recover their costs and the Bank’s charging clause for all interests and purposes was defeated.
Mr Phillips claimed that his own costs should be paid to him in any event having effectively succeeded in the litigation. The Bank sought to set off Mr Phillips’ costs against his outstanding debt. On these particular facts, the Court refused to allow set off; there being no right to any common law or equitable set off in circumstances where these debts were caught by Mr Phillips’ IVA.
Lessons to be Learned
• A charging clause remains strong, valuable and necessary, but will have no weight in respect of costs, unreasonably incurred and unreasonable in amount.
• A lender must act reasonably in exercising his powers under his mortgage deed and he should exercise those powers in good faith and properly. Motivation, in part at least, must be possession, sale and recovery.
• So far as possession proceedings are concerned never start what you cannot finish and if it becomes necessary or sensible to withdraw, carefully consider when, how and on what terms termination of the proceedings should be made.
A recent judgment in the Court of Appeal has caused concern amongst the lender community, when a dishonest borrower was perceived as successfully avoiding debt, on the back of her own false declarations and deceit.
However the legal reality is somewhat different to general perception.
The borrower, via an introducer, applied for a bridging loan. The loan was placed with the lender, as an unregulated facility by reason that;
1. It was to be provided for business purpose, and
2. It was to be secured upon a property by first legal charge which was not in owner occupation.
In Wood v Capital Bridging Finance Ltd, Mrs Wood was 75 years old. She lived and continued to live at the property intended as security. Her son-in-law had persuaded her to raise finance against her home for his business (not hers) and Mrs Wood agreed. They sought to raise a loan facility in the sum of £64,000. During the application loan process, she was required to provide two declarations to prove the loan fell outside regulation. The first was a declaration that she did not occupy the property, and the second that the finance was for business purpose. Mrs Wood provided both declarations. Both were false. The proceeds were indeed to be for business purpose, not hers, but her son-in-law’s, in which she had no involvement or share. Given her age, it was unlikely that Mrs Wood would have been actively involved in any business.
As a finding of fact, the lender received notice (by email) that the loan purpose was to assist a family member, and notwithstanding, proceeded with the advance on the basis of the business declaration provided. That email, and the business purpose declaration were somewhat inconsistent, but the lender did not pursue the point further.
As regards the non-occupation declaration, it was accepted, that the lender was wholly deceived; Mrs Wood even going to the lengths of providing falsified bank statements to prove an alternative residential address.
The son-in-law who had promised to repay the debt did not do so, and later absconded to North Cyprus, leaving his mother-in-law to face the lender’s actions for recovery of debt.
During the course of the action, issues arose as regards the validity and execution of the Legal Charge, resulting in the lender relying on its money judgment for its debt under the facility and thereafter an Order for Sale of the property, rather than the usual mortgage possession route founded upon a valid mortgage deed. Money judgment in the lender’s favour was granted in the County Court.
The borrower sought to avoid the order for sale, based upon the judgment having been obtained on an improperly executed consumer credit act agreement, and only being capable of being enforced by enforcement order under the special procedure laid down by the Act, and not within the form of the present proceedings.
Where a loan facility is regulated by the Consumer Credit Act, its form and content are prescribed thereby. Agreements which are by character regulated, but where the formalities prescribed by the Act have not been met, may only be enforced by enforcement order under Section 127 of the Act.
Section 127 of the Consumer Credit Act gives the Court an extensive range of powers when allowing a lender to enforce, including powers to reduce the debt (or indeed discharge the entire sum payable).
The burden of proving business exemption falls on the creditor but this can be discharged, by way of presumption where the creditor obtains declaration in prescribed form, and this is typically the case. All lenders in the lending community will be aware of the format of the declaration and the need to obtain such a declaration in unregulated lending.
However if a creditor knows, or ought to know, that the declaration is false, he may have failed to discharge the necessary burden and will face huge difficulty in persuading a court that the loan falls outside regulation. Even if a lender receives a false declaration, but has a reasonable cause to suspect that the loan is indeed for business purpose, he may still be able to prove that the lending falls within the exception.
The Court of Appeal held, that the loan amounted to regulated lending and the lender in this case could not rely upon the borrower’s own declaration of business purpose, which it knew, on a finding of fact, to be false. In this case, the Court held that the lender placed no reliance upon the declaration, and as a result of that, the borrower was not prevented from advancing an argument on regulation later at court, notwithstanding her own misrepresentation, deceit and dishonesty in obtaining the loan on the basis of her own false declaration provided with intent to avoid regulation.
But it is notable the Court did not dismiss the proceedings entirely, and took a pragmatic approach in paving a route for recovery, on the basis that the borrower knew and understood that she had borrowed money, accepted that a debt had arisen, and a sum remained likely to be due notwithstanding deficiencies in the documents. So the Court provided the lender with further opportunity to apply, within the existing set of proceedings for an enforcement order (see above) and, helpfully to the lender, also sought the borrowers undertaking not to dispose of the security in circumstances where the charging order could no longer continue (being based on a judgement which was set aside), until issues are resolved.
Lessons to be learned
Obtaining declarations which deal with taking lending outside the parameters of regulation is not a simple tick box exercise. Underwriting requires the lender to know and satisfy themselves that the declarations have merit, are believable, and are likely to be reliable in the context of the overall facts, circumstances and application detail.
Background and the Importance of Plevin
The mis-selling of mortgages looks set to become the next cash cow for claims management firms following the payment protection insurance (PPI) scandal. PPI claims set to disappear, due to the six-year statute of limitations on claims in conjunction with the fact that lenders stopped offering PPI in 2008. The ground-breaking ruling in the recent Plevin v Paragon Personal Finance Ltd could have far reaching ramifications as Paragon was forced to reopen its mortgage contract despite being held to have acted lawfully, although unfairly. The focus was on s140A of the Consumer Credit Act, which allows the court to reopen a contract where the terms of an agreement are deemed unfair if: any of the terms are deemed unfair; the creditor enforced his rights unfairly; or anything done by, or on behalf of, the creditor is unfair. In the case itself the relationship was deemed unfair due to the failure to disclose how much commission was being awarded to the broker; such a significant amount that the customer would have reconsidered the plan if they were aware of the figure.
This article will address the key aspects of mortgages that may cause the court or the financial ombudsman to reopen an agreement, or force the lender or broker to pay damages to the aggrieved customer. Furthermore, the article will then suggest methods by which these failures can be avoided or overcome in the future.
Suitability of the Mortgage
Suitability is most certainly one of the key criteria in determining whether a mortgage has been mis-sold. When assessing whether a loan is suitable for the mortgagor, brokers and lenders alike must consider a range of criteria including the affordability of the mortgage. In Emptage v Financial Services Compensation Scheme Ltd the claimant met with their broker with the intention of restructuring their current £40000, ten-year mortgage into a more affordable package despite the fact they did not have any other assets constraining cash flow. During the course of their discussions, Emptage was persuaded to take a fifteen year, £110000 interest-only mortgage that would allow her to invest in a property in Spain. When the Spanish market collapsed, Emptage was left with no option but to sell her home to repay the mortgage and, therefore, sought redress from the FSA as the brokerage had also collapsed. The Court of Appeal held that Emptage’s problems flowed from the negligent advice of the broker in respect of the suitability of the mortgage. The compensation, therefore, needed to take into account the loss caused by the occurrence of the risk of the claimant being unable to repay the loan at maturity; the whole loan.
Poor Quality of Advice
Lenders and brokers must ensure that any advice given to customers during the pre-contractual discussions is accurate as the client may seek to rely on it, leading to the potential mis-selling of mortgages. The Financial Conduct Authority (FCA) is the watchdog for such activity and recently fined RBS-Natwest nearly £15million due to the scale of their failures; it was found that just 1% of customers were given ‘appropriate’ advice by sales staff. Improper advice can be in relation to the assessment of a customer’s budget or their debts, to the length of the mortgage and even predictions of interest rates over the course of the loan. Indeed, a mortgage adviser giving personal views on the future movement of interest rates is deemed “highly inappropriate” by the FCA.
Brokers have come under fire for referring clients onto schemes that do not best suit the client. An unnamed equity release company advised Mr and Mrs C that they should take a lifetime mortgage as the most suitable means of raising the £25000 they wanted, despite being aware of the fact that Mr C had a pension that gave him the option of paying the money as a tax-free lump sum. Mr C had also stressed that he wanted to be able to pay the loan back early without too large a penalty – when he tried to do so he was faced with a total bill of £40000 due to a very high interest rate and exit penalty. The ombudsman held that the equity release company should pay the difference between the £40000 and the cost that would have materialised had they used the lump sum, as well as refunding the fees and charges the company had charged them to set up the mortgage.
FCA predictions forecast that only just over half of the 600k interest-only mortgages set to mature before 2020, will be settled. According to the same report, 13% of borrowers were not aware of the terms at the moment they took the loan but the chief financial ombudsman does not believe that this is a case of mis-selling reminiscent of the PPI scandal. More importantly lenders failed to ensure customers set a plan for repayment of the bulk sum, rather than on the mis-selling of the actual interest-only mortgage. An ombudsman spokesman told the Guardian that it has received so few complaints about interest-only loans that it doesn’t even record them separately.
Lending Into Retirement
The Mortgage Market Review came into force late-April 2014 and has led to sweeping changes in the mentality of most lenders when it comes to lending into retirement. Often overlooked pre-recession, lenders are now fully responsible for ensuring the affordability of their loans and so the higher risk mortgages that continue to be paid post-retirement are under review due to their riskier nature. Mr and Mrs E took out a 25-year endowment mortgage running three years past their retirement despite the fact that neither had savings or pension arrangements. Not only did their policy risk their financial stability when they were both out of work but it was a more expensive policy than a 22-year repayment mortgage, which was more affordable and would not have run into their retirement. Therefore, the ombudsman held that they should be compensated the difference.
Short term loans sometimes provide for fees, charges, and stepped interest clauses not typically found in long term traditional vanilla lending. Such provisions are often triggered by specified events of default. And when so triggered, the effect can be game-changing for the borrower who expects to be able to settle at one level, only then to find, that settlement at an altogether different level is required, and beyond means. In these circumstances, lenders may face challenge, that such clauses amount to penalties, in respect of which English law recognises a long established principle that penalty clauses are void on grounds of public policy.
Last month, the High Court confirmed the status quo on penalty clauses, in Edgworth Capital v Ramblas.
A penalty clause is one which requires one contracting party to make payment of a sum of money to another, upon a breach of contract, in circumstances where there is no justifiable commercial basis for such payment. A penalty clause is regarded as a penalty where its purpose is to discourage the other party from breaching its duties. A penalty clause is void and/or unenforceable.
A liquidated damages clause is a clause that provides for a payment which amounts to a pre-agreed estimate of losses for breach of contract. A liquidated damages clause is valid and enforceable.
The borrowers, Ramblas, entered into a series of financing agreements. Ramblas was an SPV owned by 2 investors. The agreements assisted the borrower in purchasing property in Spain. There was a senior loan, a junior loan, and a personal loan to the 2 investors. The investors breached the terms of their personal loan, which breach triggered default provisions in the junior loan. Edgworth commenced proceedings seeking payment of a fee of 105m Euros arising on default. The defendant disputed the fee, as it exceeded any damages which it might be liable for breaching the junior loan agreement. It was, they argued, a clause void and unenforceable as a penalty. As you would imagine, both parties entered into the agreements freely, and with the benefit of legal advice.
The Court considered the facts, and applied four tests first established in 1915 in the case of Dunlop Pneumatic Tyre
1. It’s the facts, not the description, which establishes whether a clause amounts to a penalty or liquidated damages clause – How the clause is labelled is inconclusive,
2. A penalty clause provides for a payment intended to penalise, a liquidated damages clause provides for a payment which is a genuine pre-estimate of damage or loss,
3. The character of a clause is to be determined on the facts and the construction of the document as at the date of the agreement, not the date of breach,
4. To assist in construction, various factors are to be taken into account including,
• Is the sum extravagant and unconscionable relative to the natural loss which flows from the breach
• Does the sum payable arise from non-payment, and if it does, is the amount payable under the clause greater than the unpaid sum which triggered the additional payment
• There will be a presumption of penalty clause , where the payment is by way of lump sum payable on a single default event, or if arising from a series of default events, where some of the series are considered trivial and others serious,
• Is the payment commercially justifiable?
• Are the payments oppressive or wholly disproportionate to the loss suffered as a result of the breach?
And on applying these tests and considering the factual matrix, the court held the rule against penalties did not apply in this case, on these facts, and the borrower was liable to make payment notwithstanding the amount payable.
In arriving at that decision, the court took into account that under the agreement
• The fee was always payable, not just on default
• The true purpose of the fee was to provide consideration for financing not to defer the borrower against default
• The factual matrix, economic climate and context in which the agreement was made was such that the fee represented justifiable commercial consideration for the risks being taken by the lender at that time despite not being a pre-estimate of loss
Lessons for Lenders
• Get your terminology right – whilst the label may not be determinative a poor description may hinder prospects when challenged.
• Ensure any such clauses provide for payment in breach and not breach circumstances
• Payment levels should not be extravagant, disproportionate or above and beyond standard rates, and within market rates