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Third Parties

WHAT IS THE SIGNIFICANCE OF THIRD PARTIES IN THE CONTEXT OF MORTGAGE LITIGATION?

By third parties, we mean parties other than the borrower(s) who were in occupation at the time the mortgage was entered into, and who may have rights, called 'overriding interests' which may take priority over the mortgage, and prevent the lender from obtaining possession. Reference should also be made to statutory rights of occupation known as matrimonial home rights arising by virtue of the Family Law Act 1996.

WHY ARE THEY A PROBLEM?

Because the lender invariably only finds out about other occupiers after it has commenced proceedings for possession against the defaulting borrowers, causing further delays and incurring further costs.

WHAT ARE 'OVERRIDING INTERESTS'?

Mortgage litigators need to be aware that there are two different ‘lists’ of overriding interests in the Land Registration Act 2002 – unregistered interests which override first registration (Schedule 1) and unregistered interests which override registered dispositions (Schedule 3). The lists are slightly different (and the categories will reduce on 13th October 2013 in line with the aim of the Land Registration Act 2002 of eliminating overriding interests as far as possible s 117(1))

We are principally concerned with unregistered interests which override registered dispositions, which include charges.

Schedule 3 lists 15 different types of overriding interest. In terms of their impact on mortgage enforcement, we are really only concerned with the first two:

(1) Leases for a term not exceeding seven years which are not required to be registered. For a list of those required to be registered, see s 4(1)(d), (e) and (f). Leases for a term exceeding seven years require to be separately registered - s 27(b)(i) although this period is likely to be reduced to three years – s 118(d)).

(2) Interests of persons in actual occupation.

LEASES FOR A TERM NOT EXCEEDING 7 YEARS

The risk of lending on the security of residential property which is subject to an undisclosed lease or tenancy for a term not exceeding seven years should be quite rare.

A ‘lease for a term…’ includes for these purposes a periodic tenancy.

‘Problem tenancies’ are likely to fall into one of three categories (1) Rent Act protected tenancies; (2) Assured tenancies; (3) Assured Shorthold tenancies. These are listed in order of their descending security of tenure.

HOW CAN LENDERS AVOID THEM?

Make proper enquiry of the mortgage applicants (with a view to establishing a breach of contract and/or misrepresentation if the applicants fail to disclose the tenancy); ask the mortgage valuer to make specific enquiries and be alert to the presence and identity of other occupiers; and impose specific duties upon the valuer and completing solicitor (with a view to establishing professional negligence for any loss or damage sustained).

HOW CAN LENDERS DEAL WITH THEM?

Form an early view on the evidence as to (a) the existence and terms of the tenancy, and (b) the extent to which the lender is likely to be bound by it.

Check the position regarding compliance with the formality requirements for leases (see the recent decision of the Court of Appeal in Fitzkriston LLP v Panayi & Others [2008] EWCA Civ 283 in which it was held that registered ownership of land took precedence over a prior purported tenancy agreement that had not been dated and signed and, as the rent paid was not the best rent, could not be a valid parole tenancy and therefore not a periodic tenancy amounting to an overriding interest).

Weigh up first the merits of appointing a receiver or electing to deal with the tenant direct and if necessary serve statutory notices etc to terminate the tenancy with a view to taking (usually separate) proceedings for possession.

Consider alternative remedies.

A word on post-charge tenants: Although in the absence of an express or statutory power of leasing, a tenancy granted by the borrower can subsist by estoppel and be enforceable by and between the borrower and the tenant, it will be of no effect as against the lender, and the tenant will have no security of tenure.

Although there is a limited statutory power of leasing in s 99 Law of Property Act 1925 this applies only if and so far as a contrary intention is not expressed in the mortgage deed. In practice most High Street bank and building society mortgages exclude the statutory power and prohibit the creation of a tenancy or parting or sharing occupation of possession of the property without the prior written consent of the lender.
 
Nevertheless, it is always open to the lender to treat the tenant as its own – by doing something expressly or by implication to recognise the tenant as its tenant – for example by a request for and payment of rent (see eg. Chatsworth Properties v Effiom [1971] 1 All ER 604), but mere knowledge of an unlawful tenancy coupled with the failure to take steps to evict the tenancy would not ordinarily be sufficient (Taylor v Ellis [1960] Ch 368).

Clearly, the appointment of a receiver to collect rents, being as agent of the borrower, will not have the effect of adopting the tenancy.

In practice, with the presumption in residential tenancies of an assured shorthold tenancy (subject to two months’ notice to quit) the existence of a pre-charge tenancy may not in fact have much impact.

INTERESTS OF PERSONS IN ACTUAL OCCUPATION

This is a deceptively extensive category to deal with. Note first of all that there are specific exceptions, including:

Schedule 3, Para 2(b): An interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so

The inquiry must be directed to the adult occupier(s) of the premises in question (no inquiry can be made of any minors living at the premises- see the decision in Hypo-Mortgage Services Ltd v Robinson [1997] 2 FLR 422 in relation to the Land Registration Act 1925). If inquiry is made, and the occupier fails to disclose the interest, the effect is to create an estoppel against him.

Schedule 3, Para 2(c): An interest –

(i) which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition, and

(ii) of which the person to whom the disposition is made does not have actual knowledge at that time.
 
This is new to the 2002 Act. Part (i) is concerned with whether the occupation would have been obvious on inspection, not the interest. The effect of part (ii) is that even if the occupation is not obvious, the interest of the person in occupation will only override a disposition if the disponee had actual knowledge of it. It is not enough that the disponee could have discovered the interest had it made reasonable inquiry.

Note that paragraph 2 provides that the interest of the person in actual occupation is capable of overriding a registered disposition ‘‘so far as relating to land of which he is in actual occupation’’- it is no longer possible to protect an interest affecting the whole of the land within a registered disposition by occupation of only part of the land [cf the case of Ferrishurst Ltd v Wallcite Ltd [ 1999] Ch 355 which set out the contrary position in relation to s. 70(1)(g) of the Land Registration Act 1925].

WHAT KIND OF INTERESTS?

The interest must reflect some proprietary as opposed to personal right. The most common example is the interest of a beneficial co-owner under an informal trust (constructive trust, resulting trust, proprietary estoppel). It can also include what are called ‘mere equities’ which include claims to equitable discretionary relief – such as a right to apply to set aside a transfer or charge (and which has effect from the time the equity arises – s 116 LRA 2002). However, the interest must be coupled with actual occupation of the property – occupation for these purposes being a question of fact. For a recent analysis of what consistutes 'actual occupation' see Link Lending Ltd v Hussein [2010] EWCA Civ 424 (April 2010 Update)

HOW CAN LENDERS AVOID THEM?

As with tenants, it requires proper enquiry and/or proper inspection.

In practice, any adult occupier (regardless of the likely nature and extent of any interest he or she may have) who is not joined in to the mortgage as a borrower, should be required to sign a form of consent or deed of postponement – effectively postponing any interest he or she may have to the mortgage.

It is critically important that lenders comply with the Etridge guidelines in procuring this document – ideally it needs to be dealt with at arm’s length and subject to independent legal advice, and compliance with these requirements should be checked prior to completion.

HOW CAN LENDERS DEAL WITH THEM?