September 2011

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Case name	Bank of Ireland v McQuaid
Neutral citation	(unrep) Middlesbrough County Court 6 Sept 11
Legal points	Mortgages – unauthorised tenants – acceptance by lender
Facts	A bank loaned D1 monies pursuant to facility letters secured by legal charges on (amongst other properties) a farm. D1 ran into financial difficulties and defaulted in repayment. HMRC presented a bankruptcy petition against him. D1 subsequently entered into a farm business tenancy with D2, his brother in law. The legal charge contained a covenant whereby D1 would not, without the prior written consent of the bank, transfer, sell, lease or otherwise dispose of any interest in the mortgaged property. D1 did not obtain the bank’s prior written consent. D1 was subsequently adjudged bankrupt and the Official Receiver disclaimed his interest in the farm. D2 enquired of whom he should pay the rent. He was put in touch with the bank. At a meeting D2 showed an officer of the bank (who was not familiar with the account) his farm business tenancy and handed over a cheque for £2,000 for rent and D2 was given a receipt. The cheque was paid into D1’s farm account. After appointing receivers, the bank subsequently challenged D2’s tenancy. On the bank’s claim for possession, D2 contended that by accepting his rent cheque, the bank had accepted him as its tenant, and that the court must consider the state of the knowledge of the bank as a whole.
Held	In considering the legal consequences of the acceptance by a lender of the payment of rent, the court had to look at all the surrounding circumstances per Nijar v Mann [1997] EWCA Civ 2522 and Parker v Braithwaite [1952] 2 All ER 837. Similarly as to whether there had been an election by the bank, it arose where, with knowledge of the relevant facts, the bank has acted in a manner which is consistent only with with it having chosen one of two alternatives, per Spencer Bower, The Law Relating to Estoppel by Representation. Thus, the choices presented to a mortgagee are not absolute or immediate; they are qualified in two ways. First, there is no compulsion on the mortgagee to make an immediate decision either way. He can act in a manner which is consistent with not having chosen either alternative. Second, any decision is dependent on knowledge by the mortgagee, or the natural person acting on behalf of the mortgagee, if the mortgagee is a body corporate, of the relevant facts. On the facts, there had been nothing said or done by or on behalf of the bank to accept D2 as its tenant beyond the acceptance of the cheque. The officer involved did not accept the payment to the bank as landlord. All the surrounding circumstances demonstrate that there was no intention by the bank to accept D2 as a tenant. The court contrasted the position with Chatsworth Properties v Effiom [1971] WLR 144 in which the mortgagee had written a letter to the tenant referring to the mortgagor as his “former landlords” from which it was held that the only inference that could be drawn was that the mortgagor had ceased to be the landlord and had been replaced as landlord by the mortgagee, and Stroud Building Society v Delamont [1960] 1 WLR 431 in which the mortgagee’s solicitors had sent a letter to the tenant saying that the terms of the tenancy were the same as those between the tenant and the mortgagor. The tenancy was therefore not binding on the bank. Order for possession.
Comment	Lenders have to be wary in their dealings with tenants of borrowers. Borrowers have a limited statutory power to enter into leases under s 99 Law of Property Act 1925. In practice most institutional mortgages exclude the statutory power and prohibit the creation of any tenancy or lease, or parting with or sharing occupation or possession of the property without the prior written consent of the lender. Any unauthorised tenancy is still binding as between the borrower and the tenant but it will not be binding as against the lender. Consequently once the lender is entitled to possession as against the borrower, the tenant has no right to remain and no defence to a claim for possession (subject only to seeking a stay if appropriate under the Mortgage Repossessions (Protection of Tenants) Act 2010). Nevertheless, it is always open to a lender to accept the tenant as its own and thereby create a new tenancy. In order to create a tenancy, the lender must do something expressly or impliedly to recognise the tenant as its tenant – the test is objective: what would a reasonable person understand the relationship to be. The cases referred to in the report - Chatsworth Properties v Effiom [1971] WLR 144 and Stroud Building Society v Delamont [1960] 1 WLR 431 – are clear examples of acceptance. There are other cases in which there was insufficient evidence of acceptance – Towerson v Jackson [1891] 2 QB 484 (tenant remaining in possession after notice to pay rent); Taylor v Ellis [1960] Ch 368 (mere knowledge of the existence of the tenancy); Parker v Braithwaite [1952] 2 All ER 837 (payment of rent to local agents of mortgagee). Since a receiver is an agent of the borrower rather than the lender, his appointment and acceptance of rent will not create a new tenancy (Law of Property Act 1925, s 109(2); Lever Finance Ltd v Needlemans’ Trustee [1956] Ch 375). The present case is useful because it goes a little bit further in identifying what a lender’s options are when faced with an unauthorised tenant. It probably didn’t help D2’s case that the judge considered him to be a wholly unreliable witness who “lies without compunction whenever it suits his purpose”. Where there was a conflict of evidence, the judge plainly preferred the bank’s evidence.

Case name	Rubenstein v HSBC Bank Plc
Neutral citation	[2011] EWHC 2304 (QB)
Legal points	Banks - investment advice- negligence
Facts	R wished to invest funds with HSBC. He was offered a range of investments. He told the bank’s financial adviser that he did not want to accept any risk to his capital. He selected an investment and was told the risk was the same as for cash in a deposit account. Following turmoil in the financial markets, R sought to withdraw his investment and subsequently did so at a loss. He sought to recover the loss from the bank on the basis of negligent investment advice.
Held	(1) The fact that R had not paid the bank’s fees until after the investment had been made did not prevent the bank from becoming contractually liable to R. (2) An objective assessment of the evidence showed that the bank had undertaken an “advisory” role, not an “execution-only” role. (3) the key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation. If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer that advice is given. (4) On the evidence, the bank’s advice had been negligent. (5) However, the loss was not caused by any negligence in making the recommendation. It was caused by turmoil in the financial markets. The loss was not reasonably foreseeable and was too remote to be recoverable as damages for breach of contract or tort. (6) Although the bank had failed to follow FSA rules on advised transactions (Conduct of Business Sourcebook in the FSA Handbook) it would have made the recommendation anyway so only nominal damages would be awarded.
Comment	This is not a mortgage case, but the nature and extent of a lender’s negligence for investment advice often arises in connection with the transactions associated with mortgage lending. It is a curious decision and one cannot help but have some sympathy for the investor. He was told his investment was as safe as a cash deposit. The judge held that it wasn’t. His investment purchased units in an investment fund which was subject to valuation. Following the collapse of Lehman Brothers, investors demanded the withdrawal of their investments and assets had to be sold to meet this and it was this that caused a big loss to the fund. The judge described this as being wholly outside the contemplation of the bank or any competent financial adviser at the time. However, risk of turmoil in the financial markets was clearly something that the investor wished to avoid. Lucky escape for the bank!

Case name	Cheshire Mortgage Corporation Limited v Morna Grandison
Neutral citation	[2011] CSOH 157 Outer House, Court of Session, Scotland
Legal points	Solicitors – breach of warranty of authority – identity of borrowers
Facts	In two separate cases of mortgage fraud, lenders received fraudulent applications for mortgage finance from “Mr & Mrs X” who purported to own certain property which they were offering as security for the loans. The fraudsters instructed firms of solicitors who were themselves deceived as to the identity of the borrowers. The loans completed and the fraudsters disappeared with the mortgage advances. The lenders were unable to recover from the fraudsters, and were unable to rely on the pretended securities over the properties. The lenders therefore sued the solicitors for breach of warranty of authority. The solicitors defended the claims on the basis that they did not warrant the identity of the persons for whom they acted. They said in effect that they only warranted that they had authority from the person or persons who were already known to the lenders and with whom the lenders were already dealing. The cases therefore raised an issue as to the precise extent of the warranty of authority.
Held	Applying Collen v Wright [1857] 8 E&B647; Penn v Bristol & West Building Society [1997] 1 WLR 1356; SEB Trygg Liv Holding v Manches [2006] 1 WLR 2276 and Excel Securities Plc v Masood (unrep 10 June 2009, HHJ Hegarty QC, Mercantile Court, Manchester): (1) The basis of liability is contractual and the measure of damages is the contractual measure. (2) The existence and scope of the warranty of authority are fact dependent. One cannot simply assume the existence of a warranty of authority in all cases. It is necessary to examine closely what was said, expressly or impliedly, by the agent in the context of that relationship; how what was said could reasonably have been understood by the other party (the test being objective); and the extent to which it was so understood and relied on by that other party. (3) Where an implied warranty of authority has been held to exist, the scope of that authority has generally been regarded as very limited. (4) Whatever its scope, liability for breach of warranty of authority is strict. It does not depend on negligence. On the facts, by the time the borrowers’ solicitors became involved, the lenders knew who the borrowers were (or who they thought they were) dealing with; they had made the decision in principle to lend to those individuals; the solicitors were instructed by the borrowers for a limited purpose, namely to help draw up the relevant loan and security documentation and to liase with the lenders’ solicitors. It was difficult to see any room for an implied representation by the solicitors as to the identity of the borrowers for whom they were acting, other than that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction. They did not give any implied warranty going beyond this. The same conclusion was reached by Judge Hegarty QC in the Excel Securities case. Claim dismissed.
Comment	This is a Scottish decision, based largely on English caselaw. It is persuasive authority in England and Wales. It is also quite instructive. This case and the Excel Securities case reflect an increasing reluctance by the courts to extend any implied warranty of authority beyond its reasonable scope. In the absence of clear indications to the contrary, solicitors do not ordinarily warrant the actual identity of the clients for whom they act. The court stood back and formed a realistic view of the role being undertaken by the solicitors. They did no more and no less than warrant that they acted for the same people with whom the lenders were already engaged. If lenders wish to rely on a warranty of authority from solicitors as to the identity of their clients, they should impose duties in clear terms. [Thanks to Anis Waiz, Solicitor and Partner in the firm of Mohindra Maini LLP Solicitors for drawing this case to our attention]

Publication

Council of Mortgage Lenders: Assisted Voluntary Sales

The CML’s News and Views Newsletter No. 18 published on 21st September 2011 contains the CML’s review of a report by the National Homelessness Advice Service and the housing charity Shelter on the potential of assisted voluntary sales as an alternative to mortgage possession. According to the CML, the report recognises that: • Deciding that a mortgage is unsustainable is extremely difficult for borrowers. Lenders and advisers both have a role to play in helping them understand the circumstances they find themselves in, and their options, and this can influence how the borrower may eventually leave home-ownership. • Lenders approach AVS differently, with criteria for and acceptance on to schemes varying greatly between firms. This is partly because AVS is not yet a fully developed concept or standard market practice, and partly because the profile of customers in arrears varies from one lender to another. In the absence of an established model of AVS, its potential to deliver benefits to lenders and borrowers has not been properly assessed. The report says that lenders need a clearer understanding of the regulatory, reputational and commercial implications of AVS. • Borrower awareness of alternatives to possession is minimal. If borrowers do not understand their options in dealing with mortgage payment problems, they may not make the decisions best suited to their circumstances. Some could have benefitted from knowing about the potential of AVS earlier in the process. • Once they understand AVS, borrowers in difficulty are generally attracted to the concept. Knowing that they could get help from lenders with barriers to selling their property, such as upfront costs and fees, and support during the process could lead to more widespread use of AVS. But lenders are concerned about managing the expectations of borrowers on how much support they can offer. • Borrowers with mortgage payment difficulties worry not only about their debt but also about their future housing choices should their arrears become unsustainable. AVS could become more attractive to borrowers if they understood they would get support and advice from lenders, advice agencies and local authorities to help them into alternative forms of housing. • Local authorities may deem borrowers to have made themselves intentionally homeless if they voluntarily relinquish their property, and therefore no longer entitled to housing assistance. But recourse to AVS should not be seen in this way, and borrowers in this predicament should be entitled to the same support as those going through mortgage possession. The CML concludes by saying that lenders need to reflect on whether a structured AVS offering should sit alongside their other options for dealing with borrowers in difficulty.

Update	Civil Procedure Rules 56th and 57th update – 1st October 2011
	Just to confirm – none of the amendments affect mortgage litigation in CPR 55 or the Pre-Action Protocol.

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