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September 2009

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Update Sept 09
Case name Redstone Mortgages Plc v Welch and Jackson
Neutral citation (unrep) Birmingham County Court 22 June 09
Legal points Sale and leaseback schemes – overriding interest - assured tenancies – proprietary estoppel – pro bono costs
Facts Mr & Mrs J, the beneficial co-owners of a residential property, were in financial difficulty with arrears on two existing mortgages. They responded to an advertisement in their local paper “Repossessions Stopped”, in which a firm offered to buy properties from owners in arrears, pay off the mortgages and grant tenancies enabling the occupiers to stay in their homes. The firm was run as a partnership between Mr D and Miss W. At a meeting with Mr D, it was represented (amongst other things) that subject to Mr & Mrs J complying with the terms of the rental agreement (1) Mr & Mrs J could stay in the property for the rest of their lives; (2) that this right would extend to their 18-year old daughter; and (3) that they would be able to buy the property back at a discount of 10% off the market price. The sequence of events was as follows: 17.10.05 Mr & Mrs J enter into tenancy agreement 28.10.05 Contracts exchanged for sale of property to Miss W 31.10.05 Completion – TR1 to Miss W and Mortgage by Miss W to lender Mr & Mrs J remained in possession throughout. Miss W subsequently defaulted in repayment of the mortgage monies, and the lender commenced mortgage possession proceedings. There was no issue that the lender was entitled to possession as against Miss W. The main issues concerned Mr & Mrs J’s position – the nature of their tenancy, whether and to what extent they could establish an overriding interest and whether they had the right to set aside the transaction.
Held (1) On the facts and having regard to the provisions of s 19A Housing Act 1988, the tenancy was an assured tenancy, not an assured shorthold. As a matter of construction, the tenancy agreement ‘contained a provision to the effect that the tenancy was not to be an assured shorthold tenancy for the purposes of Para 1, Schedule 2A, Housing Act 1988. Andrews v Cunningham [2007] EWCA Civ 762 applied. (2) It was accepted that Mr & Mrs J had acted in reliance to their detriment upon the representations that Mr D had made and that accordingly, Mr & Mrs J were entitled to a proprietary estoppel claim against Miss W. The questions were: (a) How should the court give effect to that estoppel? (b) Does it bind the lender? As to (a), on the facts, the minimum equity to do justice required that Mr & Mrs J should benefit from the representations made by Mr D which included their daughter’s right to succeed them, and their right to buy at a discount. Jennings v Rice [2002] EWCA Civ 159 applied. As to (b), having regard to the requirements of Paras 1 and 2, Sched 3, Land Registration Act 2002, Mr & Mrs J’s tenancy and their proprietary estoppel claim (s 116 LRA 2002) would give them sufficient interests; they were in actual occupation at all material times; it was an occupation which would have been obvious on a reasonably careful inspection of the land; and there was no failure on the part of Mr & Mrs J to disclose their rights when they might reasonably have been expected to do so. As to the lender’s argument that where title to property is acquired with the benefit of funds provided under a mortgage, the purchaser’s title is bound by the mortgage which prevented Miss W from granting an assured tenancy to Mr & Mrs J (applying Abbey National Building Society v Cann [1991] AC 56 as applied in Whale v Viasystems Technograph Ltd [2002] EWCA Civ 480) it was held that having regard to the substance and reality of the transaction, Miss W never acquired more than a title to the property subject to Mr & Mrs J’s equitable rights, which in turn have priority over the lender’s mortgage. The court also accepted the ‘registration gap’ argument that since Miss W could exercise owners powers of disposition including the grant of an assured tenancy, which, being for less than 7 years did not require to be registered in order to take effect in law (s 27(2)(b)(i) LRA 2002), the assured tenancy could be treated as a registrable disposition of the freehold estate as if it were registered at the time of the grant (s 29 LRA 2002), and therefore took priority over the mortgage which did require to be registered in order to take effect in law. It was accordingly held that the mortgage was subject to Mr & Mrs J’s tenancy and their estoppel interest. The parties indicated that they could formulate the precise terms of the necessary provisions. (3) It was accepted in principle that Mr & Mrs J also had a right to set aside the transaction and restore ownership of the property, but this would be subject to terms as to ‘counter restitution’ (a) that Mr & Mrs J make “repayments” at the level they would have been paying had the transaction never taken place; and (b) that they pay the arrears of rental on the assured tenancy. Again, the parties indicated that they could formulate the terms of an order or agreement to give effect to this.
Comment On 15 October 2008, the Office of Fair Trading produced a report which recommended statutory protection in the sale and rent back (SRB) market. The Government responded with a consultation and subsequently published a summary of responses. Alongside this, the Financial Services Authority has now introduced the Interim Permitted Sale and Rent Back Activities Instrument 2009 – further details can be found on the FSA website. The interim scheme takes effect from 1st July 2009 and is likely to be replaced with a full regime on 30th June 2010. Sale and rent back arrangements are also key feature in the Government Mortgage Rescue Scheme. The problem in the present case appears to have arisen as a result of misselling by the firm involved – misleading both the homeowners and the mortgage lender. Both the tenancy and the estoppel interest were held to be overriding interests. It is not clear from the transcript whether the homeowners elected to set aside the transaction, or whether the lender was able to pursue any other remedies against the rogue firm. However, the weak link, as it often is in overriding interest cases, is that the lender failed to identify the homeowners in occupation – something which the judge found “was an occupation which would have been obvious on a reasonably careful inspection of the land”. Lenders could reduce the risk by requesting their valuer to make specific inquiry and follow up all signs of occupation or at least to make special note of the nature and extent of any occupation which was obvious. Although not reported, it is understood that the case has also been hailed as a landmark decision on costs in that Mr & Mrs J, who were represented by the housing charity Shelter and Counsel acting pro bono, obtained an order for costs pursuant to s 194 Legal Services Act 2007 which permits the court to order costs to be paid to the prescribed charity – in this case the Access to Justice Foundation – thereby overriding the indemnity principle. The costs are reported to be around £20,000.00. This serves as a warning to lenders not to litigate against pro bono defendants without considering the consequences. There are several articles on the case. See Sandi Murdoch’s article in the Estate’s Gazette at E.G. (2009) No. 936 p 97, and the short casenote by Counsel who appeared for Mr & Mrs J: Andrew Walker of Maitland Chambers: http://www.maitlandchambers.com/Cases/Detail.asp?CaseID=1160
Item Government Information Scheme to help borrowers in difficulty
Details As part of its campaign to provide advice and assistance to mortgage borrowers in difficulty, on 8 September 2009 the Government launched a new mortgage help website: http://mortgagehelp.direct.gov.uk/ The site produces action plans under four main headings: (1) I am struggling to pay my mortgage (2) I have missed mortgage payments (3) My lender is telling me I’m going to be repossessed (4) I have received papers telling me I need to go to court Each action plan provides useful practical guidance, with links to other sites and sources of information. The new site has been endorsed by a number of key institutions – the CML, National Debtline, the CAB, Shelter and the Consumer Credit Counselling Service.
Case name Clark v Lucas Solicitors LLP
Neutral citation [2009] EWHC 1952 (Ch)
Legal points Solicitor – undertaking – discharge of mortgages – whether performance to be ordered or compensation paid
Facts Buyers contracted to purchase Plot 3 - newly built property on a building site. There were two charges secured on the site – one in favour of Nat West Bank, the other in favour of MK. In answer to requisitions on title, the seller’s solicitors gave an undertaking to redeem or discharge both charges on completion etc. On completion the purchase price was paid to the seller’s solicitors who remitted it to Nat West Bank whose charge ranked in priority to that of MK. They subsequently called in all monies due to them and appointed an LPA Receiver in respect of the development (not including plot 3). The seller’s solicitors were able to remit a DS3 in respect of the Nat West Bank charge but not the second charge in favour of MK. Without the DS3 in respect of MK’s charge, the buyers were unable to register title to their home and were equally unable to sell it or raise a mortgage on it. The buyers issued proceedings for specific performance of the undertaking and applied for summary judgment, relying on the inherent supervisory jurisdiction of the court.
Held The court was guided by the general principles in Udall v Capri Lighting Limited [1988] 1 QB 907 – that in the absence of evidence that performance of the undertaking is impossible, it would be usual to require the undertaking to be performed, but that where it would be inappropriate for the court to order the undertaking to be performed, the court may exercise its power to order the solicitor to make good the loss occasioned by his breach of duty. This was not a case of impossibility. A standard form undertaking to discharge a charge was normally within a solicitor’s control and could be performed by the payment of a cheque, albeit a large one (L Morgan & Co v Jenkins O’Dowd & Barth [2008] EWHC 3411 (Ch) applied). Should the fact that the amount demanded is much greater than the value of the plot dissuade the court from ordering performance of the undertaking as was suggested in Angel v Jenkins O’Dowd & Barth [2009] 1 WLR 1220? No – MK was entitled to demand the full sum due to him, even though it exceeded the value of Plot 3. This is something that the seller’s solicitor should be taken to have contemplated. The remedy available should not turn on the attitude of the lender. The application for summary judgment for specific performance of the undertaking would be allowed.
Comment Should a solicitor be required to perform an undertaking to discharge the charge or pay compensation instead? Does it make any difference if the price required to discharge the charge exceeds the value of the land? This case highlights the seriousness of the risk that is inherent in many conveyancing transactions involving the giving of a standard form undertaking to discharge an existing charge, and provides a useful review of the authorities on the court’s approach to the summary enforcement of undertakings under the inherent jurisdiction. The risk can normally be avoided if the seller’s solicitor seeking a redemption figure and reaching agreement over the application of the sale price and the release of the form of discharge.
Article Property: Safe as houses?
Journal New Law Journal 14 August 2009 159 NLJ 1160 New Law Journal 14 August 2009 159 NLJ 1160
Contents This is a useful article by Amanda Eilledge, a Barrister at 11 Stone Buildings, Lincoln’s Inn. The article is based on an increasingly common problem. A mortgage fraudster adopts the identity of a residential homeowner with a high credit rating and no mortgage. He obtains a mortgage in the homeowner’s name and then disappears with the advance. In some cases the fraudster manages to redirect mail and intercepts the valuer sent to inspect the property. The article examines the legal consequences of the fraud and the lender’s cause of action for breach of warranty of authority against the solicitor who purports to act for the applicant – relying on Penn v Bristol & West Building Society [1997] 3 All ER 470 and Bristol & West Building Society v Fancy and Jackson [1997] 4 All ER 582. The article concludes with a suggested checklist to avoid liability.
Comment Note also the safeguarding requirements in Part 1, Section 3 of the CML Lender’s Handbook and the Law Society’s Practice Note on Mortgage Fraud (updated 15th April 2009).