November 09 - www.legalmortgage.co.uk
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November 2009
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| Case name | HSBC Bank Plc v Dyche |
| Neutral citation | [2009] EWHC 2954 (Ch) Birmingham District Registry, 18 November 2009 |
| Legal points | Mortgages – overriding interests – constructive trusts – overreaching |
| Facts | Mr & Mrs C were formerly the beneficial joint tenants of a property, subject to a mortgage with Coventry Building Society. In 1988 Mr C was made bankrupt. The effect was to sever the beneficial joint tenancy. In 1994 Mr & Mrs C transferred the property to their daughter and son-in-law, Mr & Mrs D, with whom they lived. The transfer was with the consent of Mr C’s trustee in bankruptcy but the price of £25,000 was at an undervalue. Mrs C subsequently died. Mr & Mrs D raised the purchase price with the assistance of a mortgage from Lloyds Bank. The Coventry mortgage was repaid and the balance of the purchase price was paid to Mr C’s trustee in bankruptcy. In 2002 Mr & Mrs D transferred the property to Mrs D following divorce proceedings. At the same time Mrs D obtained a mortgage from HSBC, and produced an assured shorthold tenancy agreement between herself as landlord and Mr C as tenant. HSBC made no further inquiry of Mr C who remained in actual occupation throughout. In 2003, Mrs D took on a further mortgage with HSBC, taking her total borrowings to over £80,000. She was made bankrupt in 2006, and following default in payment of her mortgages, HSBC commenced possession proceedings. Neither Mrs D nor her trustee took any part in the proceedings. The claim was defended by Mr C on the basis that notwithstanding the transfer in 1994, he retained a beneficial interest in the property by way of a common intention constructive trust, and that coupled with his actual occupation at the time of HSBC’s mortgages, this gave him an overriding interest pursuant to s 70(1)(g) Land Registration Act 1925 (the mortgages having pre-dated the coming into effect of the Land Registration Act 2003). HSBC argued that insofar as Mr C retained a beneficial interest at all, this had been overreached by the 1994 and 2002 transfers. |
| Held | On the facts, the property had been transferred by Mr & Mrs C against a promise by Mr & Mrs D that it would be retransferred once they had repaid the initial loan with Lloyds Bank – so that in effect Mr & Mrs D were acquiring the property and raising the loan as nominees of Mr & Mrs C. It was accordingly held that the property was held on a constructive trust for Mr & Mrs C. Although the 1994 transfer had the effect of overreaching the beneficial interests of Mr C’s trustee in bankruptcy and Mrs C, it did not preclude a new beneficial interest from arising, pursuant to the parties’ agreement and common understanding. Since the property was also mortgaged to Lloyds, the beneficial interests were converted into interests in the equity of redemption, but upon the subsequent discharge of that mortgage, it attached to the property: City of London Building Society v Flegg [1988] 1 AC 54. Mr & Mrs D acted in breach of trust when they transferred the property into the sole name of Mrs D (and the probability was that Mrs D also forged Mr C’s signature on the tenancy agreement). Since the transfer was clearly unauthorised and Mrs D was not purchasing ‘in good faith’, it would not overreach Mr C’s beneficial interest. Following the redemption of the Lloyds mortgage, Mr C’s interest ranked in priority to HSBC who clearly took subject to his overriding interest. HSBC’s claim for possession was therefore dismissed and since Mr C solely beneficially entitled to the property, he was also entitled to call for a transfer into his own name, free of HSBCs mortgages. |
| Comment | This case turns largely on findings of fact. The most significant issue from a lender’s point of view is how the occupier’s beneficial interest under a common intention constructive trust effectively ‘re-emerged’ following overreaching in 1994, and ‘survived’ overreaching in 2002. As in all cases involving overriding interests however, the bottom line is that unless lenders take proper precautions and make enquiry of the occupiers and take properly executed Forms of Consent in compliance with the Etridge guidelines, they proceed at their own risk and will take subject to whatever overriding interests the occupier may be able to establish. |
| Case name | Southern Pacific Mortgage Ltd v Heath |
| Neutral citation | [2009] EWCA Civ 1135 Court of Appeal 5 November 2009 |
| Legal points | Mortgages – Consumer Credit – multiple agreements Mortgages – Consumer Credit – multiple agreements |
| Facts | H owned a dwelling-house subject to mortgage with Halifax Plc of which £19,000 was outstanding. In 2002 she obtained an offer of advance of (net) £28,000 from a different lender to be secured by a first legal mortgage. The transaction completed; the Halifax mortgage was discharge, and the balance net of costs etc of about £9,000 was paid to H. The lender subsequently assigned the mortgage to SP. H fell into arrears and SP commenced proceedings for possession. It obtained suspended orders for possession in 2004 and 2006, but it was only in response to a warrant of possession obtained in 2007 that H obtained legal advice and sought to defend the proceedings. At the time of the transaction, an agreement providing for credit of more than £25,000 was not regulated under the Consumer Credit Act 1974, and it was common ground that in this case, the lender had not complied with any statutory requirements as regards the content of the documents and the procedures for execution. H argued that the agreement was to be treated for the purposes of s 18(1) of the the Act as if it comprised two separate agreements – one, a restricted-use credit agreement (s 11(1)(c)) relating to the amount required to discharge the previous mortgage £19,000), and the other, an unrestricted-use credit agreement (s 11(2)) relating to the balance (£9,000). In default of compliance with the various statutory requirements, the agreements were unenforceable without a court order. The judge held [2009] EWHC 103 (Ch) that the mortgage was not a multiple agreement within s 18(1)(a) and was therefore enforceable. H appealed. |
| Held | The starting point is that it is from the terms of the agreement itself that one must find out whether the agreement is one under which there are two or more parts, in different categories, or whether it, or part of it, falls into two or more categories. It is not correct to start from the proposition that more than one disparate category is concerned, and to conclude from this that the agreement must fall into two or more parts. Furthermore, it is the agreement which is to be placed in one or more categories, not the credit provided under the agreement. In the present case, H was offered a single facility which could only be drawn down as a whole. It was a single agreement which could not be dissected into separate parts. The agreement was one whose terms placed the whole of the agreement in two relevant and disparate categories under the Act so that s 18(1)(b) applied. It was not one whose terms placed part of the agreement in one category and part in another. The agreement could not be taken apart in that way. It was a unitary agreement. Accordingly, because the amount of credit provided exceeded £25,000 it was not a regulated agreement. Appeal dismissed. |
| Comment | This case contains a helpful analysis of the various relevant statutory provisions, caselaw and academic commentary. The decision is good news for lenders. Any other outcome would have presented serious difficulties. |
| Case name | Scrowther v Watermill Properties |
| Neutral citation | [2009] EW Misc 6 (EWCC) Newcastle County Court 23 October 2009 |
| Legal points | Sale and rentback schemes – enforceability of contractual terms – s 2 Law of Property (Miscellaneous Provisions) Act 1989 |
| Facts | S, who was in arrears with her mortgage and had suffered a possession order, entered into an equity release scheme with a separate provider which involved (1) the immediate payment to her of 75% of market value, which was to be used to discharged the existing mortgage; (2) an assured shorthold tenancy agreement for an initial period of 6 months at a rent calculated at 5.7% of the purchaser price (£593.00 per month); and (3) the payment by the purchaser of a ‘rentback bonus’ payable in certain events out of the balance of the purchase price retained by W (£31,250). S subsequently defaulted in payment of rent and W obtained an order for possession. S claimed repayment of the balance of the purchase price - £31,250. W refused to pay it, relying on a collateral contract. S raised a number of challenges, including that any such contract was void as a result of s 2 Law of Property (Miscellaneous Provisions) Act 1989. |
| Held | The sale had proceeded in accordance with a standard form contract incorporating the Law Society Standard Conditions of Sale, and a standard form of Assured Shorthold Tenancy Agreement. However, the collateral agreement in respect of the rentback bonus was dealt with in a number of separate sources, both orally and in writing, none of which complied with the requirement of s 2 Law of Property (Miscellaneous Provisions) Act 1989 (requiring a contract for the sale or other disposition of an interest in land to be in writing, incorporating all the terms expressly agreed, and signed by the parties). The collateral agreement was central to the whole scheme. The retention of £31,250 involved a reduction in price and was inconsistent with the contract of sale. The collateral agreement was thus within s 2 and was void. S was entitled to the return of £31,250. [The judge also expressed the view that the failure to pay the rentback bonus may not have been a genuine pre-estimate of W’s loss in the event of a breach by S of her tenancy agreement, but ultimately declined to express a concluded view on it]. The judge gave permission to appeal. |
| Comment | This is not a mortgage case. It involves the contractual arrangements entered into between vendor and purchaser under an equity release scheme which involved a sale and rentback. However, given the increasing number of these schemes, and the problems they seem to be causing mortgage lenders, the case is worth noting. |
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