Mr McGuiness appealed that decision.  The Court of Appeal considered the different types of guarantees and the type of liability that arose as a result.  The differing types of guarantees are as follows:

• A “see to it” obligation i.e. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor.  This gives rise to a liability in damages.  The obligation undertaken by the guarantor is not one to pay, but consists of a promise that the debt will be paid by the principal debtor.
• A conditional payment obligation i.e. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal and interest which fall due if the principal.  This creates a liability in debt.
• An indemnity.  This gives rise to a claim that is enforceable by way of action for unliquidated damages.
• A concurrent liability with the debtor for what is due under the contract of the loan.  This creates a liability in debt.

The Court of Appeal held that where the guarantee, on its proper construction, contained a promise by the guarantor to pay the principal sum due and interest in the event of the debtor failing to pay, no difficulty arises.  The claim is one in debt.  However, guarantees with a “see to” it liability are not the same as an obligation to pay a sum of money under the contract whether as a debt or agreed damages although the measure of the guarantor’s liability is the amount of the debt.

The court looked at clause 2.2 of the guarantee which stated that:

“You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due.”

Mr McGuiness argued that this clause created a promise to “see to it” that the borrower would perform his own obligations under the mortgage. It was not a promise to pay the mortgage liabilities if the borrower failed to do so.  The court held that the language of this clause taken by itself was ambiguous, but looking at the other clauses in the guarantee it should be read as a direct promise to pay the mortgage liabilities as they fell due and created a liability in debt which it could petition in bankruptcy. 

This decision is useful as it sets out the different types of guarantees and when a creditor can pursue a guarantor for bankruptcy.  However, if a guarantee is merely a “see to it” obligation then the creditor would need first to obtain a judgment for the payment of a specific sum and then commence bankruptcy proceedings.

McGuinness v Norwich and Peterborough Building Society  [2011] EWCA 1286

The Guidance, which should be referred to by all businesses engaged in the recovery of consumer credit debts (e.g. debt collectors, banks and law firms), sets out the standards that the OFT expects all parties engaging in the recovery of such debts to adhere to.

The Guidance is divided into the following chapters:

1. Introduction. This sets out how the ‘fitness test’ under section 25 of the Consumer Credit Act 1974 applies to debt recovery activities;

2. Overarching principles of fair business practice. This sets out the FSA’s overarching principles of consumer protection and fair business practice that apply to all debt recovery activities. This chapter explains that businesses should treat debtors fairly, be transparent, exercise forbearance and consideration, and act proportionately. They should also establish and implement clear, effective and appropriate policies and procedures (especially for dealing with vulnerable debtors);

3. Unfair or improper business practices. This sets out the behaviours that the OFT considers to be unfair or improper business practices for the purposes of section 25(2A)(2) of the Consumer Credit Act 1974 (e.g. using Facebook or Twitter to contact debtors.) If these are engaged in, they may call into question a person’s fitness to retain, or be granted, a consumer credit licence;

4. Regulatory compliance and enforcement. This outlines the OFT’s approach to securing compliance and provides information on the regulatory options available to the OFT.

The OFT has said that it will shortly update its Irresponsible Lending Guidance to reflect this revised version of Debt Collection Guidance.

In this case, Mr and Mrs Harrison took out PPI, the premium of which was £10,200.  Of that 87% was retained by the lender or 677% of the apparent cost of the insurance although, as the Court of Appeal acknowledged, this could be misleading as concealing a cross-subsidy between the cost of the PPI and the annual percentage rate or cost of the loan. The Court of Appeal made the following points:

• First, it is the relationship between the parties which must be determined to be unfair, not the agreement although it is envisaged that the terms of the agreement may themselves give rise to an unfair relationship.
• Although the s140 of the Act came into force from 6 April 2007, they are applicable from 6 April 2008 to a pre-existing agreement unless at that time the agreement was complete.  An agreement is complete if there is no longer any sums payable under the agreement.
• Although Mr and Mrs Harrison’s main appeal relied on s140 of the Act, they attempted to introduce arguments relating to alleged breaches of the ICOB Rules, but these were rejected by the Court of Appeal.
• The main argument was that in the absence of an explanation, the commission was so high that it gave rise to a conflict of interest which it was the lender’s duty to disclose.  Only disclosure could give the borrowers the opportunity to decide whether they wished to purchase a product in circumstances where the lender derived so significant a benefit from the purchase.  The Court of Appeal in rejecting this argument highlighted the following:
  • It is clear that the ICOB regime after due consultation and consideration does not require the disclosure of the receipt of commission.  It would be an anomalous result if the lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness but yet not obliged to disclose it pursuant to the regulatory regime.
  • A seller is not ordinarily obliged to warn his buyer that his product is expensive when compared to other similar products. In any other context the suggestion that the charging of a high price for a product freely and readily available more cheaply elsewhere in the market is indicative of unfairness in the relationship between seller and buyer would be met with incomprehension.
  • There was no suggestion in the FSA publication of March 2007 on PPI, that commission rates similar to this case generated a duty of disclosure which if not discharged would give rise to an unfair relationship.  Again, the FSA policy statement of August 2010 which raised fifteen common failings resulting in detriment and poor outcomes for consumers did not raise non-disclosure of commission as a common failure.

This Court of Appeal case should now prevent similar complaints from being pursued which relate solely to the size of the commission payable in respect of PPI.  Similarly, it should also discourage the use of unfair relationship arguments where the regulatory regime itself does not impose any corresponding duty.

Harrison and Another v Black Horse Limited [2011] EWCA Civ 1128

At first instance, the Judge decided that the employees should be identified by function although not by name as he thought that would maintain the anonymity of the individuals and at the same time ensuring all relevant information was available to the court.  However, it was now common ground that it would not maintain anonymity.  The claimant Mr Shah and his wife appealed against the Judge’s decision not to reveal the employees’ names and the bank cross appealed against the Judge’s decision to make standard disclosure of the names to be revealed in the first place.

The claimants claim was for damages of over $300 million against the defendant bank arising from the defendant’s delay in executing four transactions between September 2006 and February 2007. In January 2009, summary judgment was granted for the bank, but the claimants successfully appealed and the Court of Appeal held that it was for the bank to prove that it held the suspicion that it alleged.

As part of its disclosure exercise to prove that it held the suspicion, the bank had disclosed a series of memos, internal reports and similar documents, but with the exception of one employee, the identities of the writers and recipients of those documents, and the employees referred to in those texts had been redacted. 

The Court of Appeal concluded that was necessary to consider whether this information should be disclosed by reference to the disclosure obligations under the Civil Procedure Rules (CPR”). 

The Court of Appeal was not convinced that there was a good explanation as to why the claimants wanted to know the names of the employees.  The claimants had identified potentially two employees who could be motivated by ill-well.  One of the bank’s employees had unusually asked the claimant to borrow funds of £1.5 million for a week, but the Court of Appeal decided that there was no evidential basis for a positive assertion that either of the employees had been motivated by ill-well.  It was all speculation and surmise.

The Court of Appeal highlighted that prior to the introduction of the CPR, disclosure of this information may have been appropriate as leading to a train of inquiry that might adversely affect the bank’s case, but CPR 31.16 has more stringent requirements and the disclosure of that information did not meet the test of CPR 31.16, which requires a party to disclose documents which “adversely affect his own case” and “support another party’s case”.

Accordingly, the bank was not required to disclose the names and their appeal was successful and so it was not necessary to consider the other question of public interest immunity.  Despite the fact that the bank employee had acted in an unusual way and in the event the suspicions were not justified, analysis under CPR 31.16 did not require disclosure.

As I concluded when considering this decision at first instance, the Judge had been trying to balance the interests of justice to ensure that all relevant information was available to the court, but meanwhile protecting the bank employees.  Ultimately this compromise of identifying by function rather than name would not have achieved its desired effect because the identity of the employees would have been revealed.  As such this decision had to be revisited and a more sensible approach has prevailed, which will protect bank employees.

Shah v HSBC Private Bank (UK) Limited [2011] EWCA Civ 1154

Barclays disputed that it owed Nylon any money for expenses, and issued legal proceedings to obtain a declaration from the High Court that Barclays was under no obligation to pay Nylon those expenses. The High Court agreed with Barclays and ruled that it was under no obligation to pay the expenses that Nylon had claimed.

Barclays also asked the High Court to confirm that Barclays did not have to pay Nylon its profits on its original capital investment, which Nylon rejected, again arguing that Barclays was obliged to do so under the terms of the LLP agreement. Nylon applied for a stay to bring an end to the proceedings brought by Barclays, which was initially rejected but appealed to the Court of Appeal.

The Court of Appeal has now rejected that application for a stay, saying that a satisfactory outcome could only be obtained by a full trial with evidence, entitling Barclays to continue with proceedings. However, in giving its ruling, the Court of Appeal noted that the parties had reached a settlement and had asked the Court of Appeal not to actually give its judgment on Nylon’s appeal. The Court of Appeal decided, however, that there was no reason why the judgment should not be given, despite the settlement that had been agreed.

The main implication from this ruling is that, whilst the parties had reached a settlement, the Court of Appeal still issued the judgment. However, the case is also a useful reminder of the need for clarity and certainty in drafting commercial agreements, including those that define investment relationships.

The first issue to be decided was whether the individuals’ evidence was relevant.  The court decided that the claimants were entitled to explore the detail of the case, namely that suspicion existed at each of the three tiers of reporting.  For such a case to be made out, the bank would have to identify at least three individuals who allegedly formed that suspicion.  This made the identity of the individuals relevant. 

The next issue to consider was whether bank employees who reported their suspicions were covered by public interest immunity.  The court concluded that as a general rule there is a need for anonymity for bank employees raising and reporting suspicions under the Proceeds of Crime Act otherwise the flow of information would be adversely affected if confidentiality was not the norm.

So, the court had to determine on the facts of this case whether carrying out a balancing exercise the individuals were entitled to anonymity.  The court took into account that it was not suggested that the claimants were involved in money laundering and nor was it suggested that the bank’s employees were at risk of reprisals or physical harm from the claimants.  Further, the reality of the matter was that given the relationship between the claimants and the bank it was likely that the claimants had a good idea of the identity of the individuals involved already.

The court therefore concluded that on the particular facts of this case, the balancing act entitled the claimants to a level of further disclosure, but because of the public interest in confidentiality, the court was most reluctant to order the complete disclosure of the names of the individuals.  Instead it was ordered that the bank should provide a schedule of each employee identifying the department where they worked.  In that way the identities of the employee would continue to be protected, but the claimant could then see whether any one or two individuals were repeatedly and closely involved in the writing or receipt of relevant report and then the claimants could make an application to seek the identity of those closely involved individuals.

In this case, the Judge was trying to balance the interests of justice to ensure that all relevant information was available to the court, but meanwhile protecting the bank employees.  When determining whether a party is entitled to know who has reported him and on what basis, each case will have to be scrutinised taking into account the individual circumstances, but bearing in mind the factors highlighted in this case. 

Shah v HSBC Private Bank (UK) Limited [2011] EWHC 1713

Perhaps unsurprisingly, this case was appealed.  The Court of Appeal has now delivered its Judgment. 

The first issue to be determined was whether the buy-to-let purchaser, Mr Scullion had relied on the valuation report.  The Court of Appeal decided that the Judge at the first hearing had asked the right question and therefore this issue could not be challenged.

The second more fundamental question was whether the valuers, Colleys owed the purchaser, Mr Scullion a duty of care.  Much reliance at first instance was placed on the case of Smith v Eric S Bush [1990] 1 A C 831 where the court concluded that as valuers know that 90 per cent of purchasers rely on a mortgage valuation and do not commission their own valuation since many purchasers cannot afford another second valuation the valuer owed the purchaser a duty of care.  

The Court of Appeal concluded that Colleys did not owe the purchaser a duty of care.  There was no inherent likelihood that a purchaser buying a buy-to-let flat would rely on a valuation.  The Court took into account the following factors:

• The valuation was to purchase a residential unit not as the purchaser’s residence, but for the purpose of an investment. People who buy to let are likely to be richer and more commercially astute than people who buy to occupy and can be regarded as more likely to obtain and more able to afford an independent valuation.   
• There was no evidence to support the proposition that anything like 90% of the people who bought to let in 2002 relied on valuations prepared by a valuer instructed by their mortgagees rather than obtaining their own valuation.
• A purchaser buying a property to let is at least just as interested in its rental value as in its capital value.   A valuer valuing a property for a prospective lender for a buy-to-let purchaser would expect the purchaser if he is prudent to obtain his own advice.  A rental value can be a tricky and sensitive issue. 
• A valuer instructed by the prospective lender would appreciate that the lender is primarily interested in its capital value because a mortgagee’s principal concern is that any loan is properly secured.

The Court of Appeal also considered how much Mr Scullion could claim in respect of the rental value.  Although this analysis did not assist Mr Scullion it will be of benefit to others who are entitled to claim against a valuer. 

• Since Colleys had suggested that it would take a month to find a tenant, the first month of rent would not be allowed. 
• Whilst the flat was not let because of the unrealistic rent, then damages for that period could be awarded less the first month.  Once a tenant had been found at a lower price, then the recoverable loss would be the amount estimated by the rental valuation less the amount actually paid by the tenant. 
• Once the tenant left the property, Mr Scullion then made a decision to keep the property empty so as to try and sell it so there was a powerful case for saying that no damages would be attributed as he would have received no rental income whatever the valuation.  However, he may well have been entitled to some damages and so could claim the difference between what a correct valuation would have been and what it was valued at. 

This is a decision that recognises the realities of the buy-to-let market as compared to a purchaser of residential properties to live in.  It will be interesting to see whether this case will have an impact on purchasers of high end properties who may also be able to afford their own valuations.  It  provides a helpful way in which the rental loss could be determined and the question will be whether lenders will now be able to claim loss of rental value when pursing valuers.  Perhaps we have not heard the last of this case and it may be that this case will go to the Supreme Court.  Of course, this will not be of any comfort to Mr Scullions who as the Court of Appeal recognised was taken advantage of and misled by the sellers.

 Emmett Thomas Scullion v Bank of Scotland PLC [2011] EWCA Civ 693

This case is an interesting example of the type of claims a borrower with PPI can attempt to raise and the court’s approach to these claims. Borrowers are notorious for making numerous claims in relation to PPI, some of which may have substance, but the majority of which are, as the court here pointed out, “unnecessary embellishments”.  

This was an application by the claimants Mr and Mrs Barnes to re-amend their Particulars of Claim.  The claim related to PPI policies sold in relation to three different loans made by the defendant Black Horse Limited (“Black Horse”) to Mr and Mrs Barnes.  The first loan was made on 31 July 2002 for £2,000 with the PPI premium of £563.  This first loan was rolled up and discharged by the second loan made on 27 October 2003 for a further £4,500 and PPI of £2,021.48.  This in turn was then rolled up and discharged by a further written agreement dated 8 June 2004 for a further PPI policy of £2,694.48. Monies were still owing in respect of the third loan. 

Mr and Mrs Barnes wished to amend their Particulars of Claim to claim:

• Breach of Fiduciary Duty;
• Duty of Care;
• Breach of Contract;
• Unenforceability; and
• Unfair Relationship. 

Breach of Fiduciary Duty

As the court noted, it is exceptional for a creditor to have any fiduciary duty to the borrower at all.  The mere giving of advice does not itself import a fiduciary relationship and only exceptionally will the line be crossed from that of mere honesty care and skill and the like to a fiduciary obligation such that the adviser is held to be acting in the other party’s interests in terms of advice, information and so on. 

In order to establish a fiduciary duty, Mr and Mrs Barnes relied on the voluntary private customer code produced by the General Insurance Standards Council (the GISC) as evidence of the fiduciary relationship.  The GISC was abolished in 2004 and was replaced by ICOB, a FSA regulated scheme. 

Judge Waksman explained that the notion that you could infer a fiduciary relationship between the lender and the customer taking out a loan with PPI simply because the lender (or the insurers for whom it acted as agent in offering the policy) was a member of the GISC was absurd.

Mr and Mrs Barnes also relied on the OFT non-status lending guidelines for lenders and brokers.  These were guidelines which were specifically said to be operable where there is secured lending to non-status customers.  Mr and Mrs Barnes were not non-status nor was it secured lending.  Although the guidelines contained guidance in relation to all aspects of their business activity, none of this was sufficient to support a fiduciary obligation. 

Mr and Mrs Barnes also placed considerable reliance on the judicial review proceedings British Bankers Association v FSA, but again that did not assist a breach of fiduciary relationship.  The Judge found as a matter of law that there was no fiduciary relationship and explained that, in any event, he would have found it surprising for there to be a fiduciary relationship as it would have meant that every time a lender sold a single product PPI policy to accompany a loan agreement then without more (assuming the insurer was a member of GISC) fiduciary obligations would arise. 

Duty of care

The whole thrust of the Barnes case was that on the first occasion Black Horse sold the PPI insurance they said that in effect that the purchase of the PPI was mandatory and that this was then implicit on the second and third occasions. However, the court found there was no factual basis for pleading a duty of care.  It was not suggested that Black Horse had assumed a responsibility here to give particular advice on the facts of the case nor was it suggested that Black Horse was either asked to or was expected to or purported to give advice of any kind and therefore there was no arguable case presently pleaded in negligence.

Breach of contract

Mr and Mrs Barnes also claimed that the code produced by the GISC was incorporated into the loan agreement.  They alleged that by reason S75 of the Consumer Credit Act 1974 (“the Act”),  the creditor would be jointly and severally liable for any breach of contract.  However, there was no incorporation of the code and therefore any claim for breach of contract based upon it fell away.

Unenforceability

Mr and Mrs Barnes alleged that when the first PPI was taken out they were told that it was “needed”. If that statement was made, it is arguable that taking the PPI policy was a condition of taking the principal loan and if so, the premiums should have comprised part of the total charge for credit.  As this was not done in the first agreement then it would be improperly executed.

As there were issues of fact and inferences this would be matters for a trial to consider. Full particulars of the factual allegation in relation to what exactly was said on the occasion of the first agreement and what was said and/or understood in relation to the second and third agreements about the necessity or otherwise of the PPI policy must be given and also as to how precisely the claim that there has been a failure to state the credit should be provided. Accordingly this claim could be made.

Unfair relationship

Under Section 140A of the Act the court can make an order in relation to the credit agreement if there is an unfair relationship between the creditor and borrower. Black Horse contended that the court had no jurisdiction to entertain a claim for unfair relationship because the relevant statutory provisions exclude the ability to make such a claim where one or both of the borrowers had the opportunity to make that claim in the context of prior proceedings.  The court found that Mr Barnes was not able to mount his own unfair relationship claim because this could have been raised by him in previous proceedings between Black Horse and Mr Barnes, but Mrs Barnes could raise this argument since she was not a party to those prior proceedings.

Black Horse also attempted to argue that the court was excluded from considering the two earlier agreements as they ceased to operate before 6 April 2007 when the relevant statutory provisions came into force.  The Judge disagreed with Black Horse and said that the court was entitled to take into account two earlier completed, but related agreements and therefore the Particulars of Claim could be amended to refer to the first and second agreements.

The court also looked at the factual matters raised to support the claim of unfair relationship. Their complaint was that:

a.  They were sold benefits when they already had such benefit;

b.  The policies were very expensive;

c.  Black Horse did not advise them to shop around for PPI policies;

d.  They were told the policies were compulsory when they were not;

e.  Black Horse did not establish that the policies were in their interests; and

f.  Black Horse failed to follow the terms of certain documents.

The court pointed out that the unfair relationship jurisdiction is very wide and although there may be matters which were not sufficient to found a fiduciary relationship, they may be sufficient for an unfair relationship.  Accordingly the court was not prepared to rule out the claim in respect of point a. above.  The Barnes claimed that the policies were very expensive.  However, they never produced an appendix which they had indicated they would do and so no permission was granted at this stage to include this factual matter although permission may be granted in the future.

The Judge was prepared to allow the amendment in relation to the claim under point d.. As to points c. and f. the Judge stated that that these were not particularly strong allegations, but he allowed these claim to be made because the unfair relationship jurisdiction is quite wide. He also allowed the claim to be made in relation to the documents.

 Conclusion

Despite Mr and Mrs Barnes’ attempts to raise numerous claims, the court concluded that the only viable claim was for an unfair relationship alongside the narrow unenforceability claim.  All the rest were “unnecessary embellishments”.  Even in respect of the claims that has been allowed to go forward, the court pointed out that this should not give the Barnes any particular encouragement in terms of their prospects of success.

Comment

This is a useful decision as it demonstrates that the “kitchen sink” approach of alleging numerous claims in an attempt to attack PPI cannot be sustained.  Where, however, an allegation is made that the borrowers were told that PPI was compulsory, the court will need to look at all the evidence and the circumstances of the case in order to evaluate this allegation.  It is clear that the scope of unfair relationship claims under section 140A of the Act can be wide although as the Judge hinted in this decision, this will not necessarily mean that the borrowers will ultimately succeed.

Shelley Barnes and Darren Barnes v Black Horse Limited [2011] EWHC 1416

Mr Binney asserted that:

• The alleged agreement was a term of the agreement or a condition subsequent.  Mere production of a written agreement does not render inadmissible evidence of other terms not included expressly or by reference in the document.
• The agreement was a collateral warranty so that if a person gives a promise and the other party relies on that promise, it is binding.
• The Bank was estopped from enforcing its strict rights under the guarantee.

The Bank in turn submitted that:

• Where the Court is satisfied that the terms of the parties’ agreement are wholly contained in a written document then oral evidence adding or qualifying to that document is not admissible.
• The Court should be satisfied that the agreement was wholly contained in the written document.  The alleged agreement should not be permitted to override the clear terms of the guarantee.
• Any alleged warranty is unenforceable where it contradicts or is inconsistent with the terms of a written guarantee.
• Estoppel by representation only arises where there is a representation of existing fact.

The Court examined the central issue, which was what was said or represented at the meeting on 17 November 2006 so as to give rise to a binding agreement, collateral warranty or representation as alleged by Mr Binney. The Court decided that there was no agreement, warranty or representation giving rise to any estoppel as Mr Binney alleged.

Accordingly it was unnecessary to consider the legal arguments.  It took into account:

• The burden of proof was on Mr Binney to establish any such agreement. 
• Although the relationship manager, Mr Thomson could not recall what was said in the meeting, the Judge was prepared to accept  that the overwhelming likelihood is that any specific request would have been so unusual that Mr Thomson would have remembered it and it would have necessitated both a review of the Bank’s lending and some authority higher to authorise the review if it had happened.
• Mr Binney was a highly articulate business man.  He had trained as an accountant and qualified as an economist.  A person of Mr Binney’s considerable financial experience would have made sure that he notified the Bank and confirmed what he now says was the position with regard to the guarantee. 
• Mr Binney had a propensity to lie or was willing to deceive or to mislead.  Although a witness may lie or give unsatisfactory evidence in regard to certain matters, this does not mean that their evidence is untruthful with regard to other matters.  However, these were matters that the court was entitled to take into account.
• The events both at the time and subsequent did not support Mr Binney’s assertions.

Accordingly the Bank was able to recover the sum of £100,000 from Mr Binney.

This case serves as a useful reminder of the legal issues involved, but ultimately the case came down to whether the Court believed Mr Binney’s assertions.  Even where a manager cannot recall what happened at a particular meeting, this is not fatal to a claim and the Court can look at a variety of circumstances in determining whether the oral agreement was made. Here, the court considered the burden of proof, whether what was said was unusual, the type of person making the assertion, whether the witness was truthful and the events surrounding the alleged statement.

National Westminster Bank plc v Binney [2011] EWHC 694

The difficulty many of the banks faced was that they could not locate the original agreement although they could provide information from their records.  On 23 December 2009, His Honour Judge Waksman QC after selecting a number of test cases held that a creditor was not obliged by section 78 to provide the debtor with a copy of the original agreement, but could meet its obligations by providing the information contained in that agreement drawn from other records.  As a result of this decision many of the cases were simply discontinued. 

In March 2010, seven cases including the two under appeal here, were brought before Judge Waksman on an application by the claimants that despite the orders against them, they should be entitled to their costs from the banks. The Judge summarised the principles relating to discontinuance as follows: 

• When a claimant discontinues the proceedings, there is a presumption by reason of CPR 38.6 that the defendant should recover his costs, the burden is on the claimant to show a good reason for departing from that position;
• The fact that the claimant would or might well have succeeded at trial is not a sufficient reason for departing from the presumption;
• However, if it is plain that the claim would have failed, that is an additional factor in favour of applying the presumption;
• The mere fact that the claimant’s decision to discontinue may have been motivated by practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case will not suffice to displace the presumption;
• If the claimant is to succeed in displacing the presumption he will usually need to show a change of circumstances to which he has not himself contributed;
• However, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule. 

On this basis, the Judge held that the claimants should pay the defendant’s costs.  Two of the claimants appealed.  Following Judge Waksman’s decision, further guidance was given in the case of Messih v MacMillan Williams where it was decided that a claimant who seeks to persuade the court to depart from the normal position must provide cogent reasons for doing so and is unlikely to satisfy that requirement save in unusual circumstances. 

The appellants’ position was that they had both brought proceedings to obtain performance by the bank of its obligations under section 78 of the Act and had discontinued as soon as they had obtained what they were seeking and so should be entitled to their costs.  In substance they claimed that they had been successful. 

The Court of Appeal, held that the claimants may have had a legitimate interest in seeking a copy of the agreement, but it does no follow that the debtor has the right to bring proceedings at the creditor’s expense in order to obtain relief which goes beyond what he is entitled to obtain under the statute or relief by way of a declaration which has no practical utility.  

In the light of the way the proceedings were conducted, the Court of Appeal was unable to accept that the proceedings were brought simply to obtain a copy of the original credit agreement.  With respect to Ms Brookes, the bank was not unwilling to provide the information; it was unable to provide a copy of the original agreement that the claimant was seeking to establish as the basis for making good her contention that the agreement was unenforceable.  The real purpose of her claim had been to obtain a decision that the provision of a reconstituted agreement was not sufficient to comply with its duty under section 78.  Accordingly, the decision to order her to pay the bank’s costs was correct. 

In Mr Jemitus’ case, his real purpose was not to obtain a copy of the agreement, but to establish that in the absence of a copy of the agreement, the debt was unenforceable.  Once the bank produced a copy of the original agreement the case inevitably collapsed.  If the claimant had not sought more than the copy of the agreement it is unlikely that proceedings would have been issued at all.  He had asked for more extensive relief and accordingly he was liable to pay the costs. 

This case is good news for the banks.  Although the claimants asserted that they were successful, the Court of Appeal was able to see through this argument and to ascertain that the true purpose of the claims was to try to establish that the debts were unenforceable, which had been unsuccessful. 

Erica Brookes v HSBC Bank Plc and Jemitus v Bank of Scotland Plc [2011] EWCA Civ 354

The lender – North Shore Ventures Ltd (“North Shore”) agreed to provide Anstead Holdings Inc (“Anstead”) with a loan facility for $50m.  North Shore was owned by Mr Boris Berezovsky and or his daughter Ms Ekaterina Berezovskaya.

 This facility was guaranteed by a Mr Fomichev and a Mr Peganov. Mr Peganov was a business associate of Mr Berezovsky. The guarantee included a term that a certificate signed by the lender North Shore for the amount of the indebtedness would be conclusive evidence for all purposes unless manifestly incorrect.

 North Shore obtained a judgment in default against Anstead for over $35m.  Proceedings were also brought against the guarantors who raised the following defences:

• The guarantee was unenforceable because North Shore, the lender failed to disclose to them that Mr Berezovsky was being investigated by the Swiss authorities for embezzlement of money due to Aereflot and as a consequence money paid to an associate in Switzerland would be frozen.
• North Shore and Anstead had varied the terms of the interest rate and therefore the certificate of indebtedness was incorrect.

 The Court of Appeal considered a number of previous cases.  The main one dating back to 1845 – Hamilton v Watson, where the House of Lords concluded that if it was necessary for a banker to disclose everything that is material for a surety to know, no banker could ever be satisfied that they had proper security.  Disclosure ought to be made voluntarily where there is anything that might not naturally be expected to take place between the parties, but the lender is not obliged to disclose other matters which might be material for the guarantor to know.  A guarantee is not like an insurance contract which is uberrimae fidei, where the insured is required to disclose all material facts to the risk.

In Royal Bank of Scotland v Etridge [2002], the House of Lords stated that it is well-established principle that a creditor is obliged to disclose to a guarantor any unusual features of the contract which makes it materially different in a potentially disadvantageous respect from what the guarantor might naturally expect.

The Court of Appeal concluded having reviewed all the previous cases that there is no duty of disclosure to disclose facts which are not unusual features.

In this case, it was agreed that the matters on which the guarantors relied were not unusual features and therefore it followed that there was no duty to disclose them. However, the lender had argued that where a lender knows that a guarantor is aware of unusual features, then a duty does not arise.  The Court decided that a lender is not absolved from his duty to disclose merely because he believes the guarantors may know these facts already.   In any event, the Court explained that if a guarantor knows of the relevant unusual facts normally the point would not arise because the failure to disclose the material fact does not constitute a misrepresentation on which the guarantor relied.

The lender also argued that the guarantors could not rely on an agreement to change the interest rates payable because a certificate had been issued which was conclusive evidence of the amount outstanding.  The court at first instance considered there was no consideration for the change and so was not enforceable.  The Court of Appeal disagreed and held that there was a variation, which was enforceable in law, which then meant that has been a manifest error and so the certificate was not conclusive evidence of the amount due.  This meant that the guarantors were obliged to pay sums owing to North Shore, but for a lesser sum.

This case is a useful reminder of the duty of disclosure owed to a guarantor.  The law takes a pragmatic approach to the extent of the duty. It is not sensible to disclose everything to a guarantor, but if a lender knows of unusual features then a lender is obliged to disclose this to the guarantor even if the lender believes the guarantor is aware of these unusual facts already.

North Shore Ventures Ltd v Anstead Holdings Inc and others [2011] EWCA Civ 230

In September 2001, Mrs Chandra gave  a guarantee in favour of Royal Bank of Scotland Plc limited to £700,000 and a legal charge to support company borrowings.  The company was involved in hotel development.  Although Mrs Chandra was a director of the company, her evidence was that at all material times she placed trust and confidence in her husband in relation to business matters.  Despite being a co-director she had no involvement in the business and had only visited the hotel once after the receivership had commenced.  A solicitor had been nominated to advise her on the meaning of executing the guarantee.

The Court of Appeal accepted that it was impossible to classify every type of situation in which improper or undue influence can be said to have been used to persuade a person to enter into the transaction under review.  However, clear examples are where there is a conscious deception, an abuse of confidence or a trusted adviser who prefers his own interest.

Undue influence is concerned with the abuse of relationship of trust and confidence between husband and wife.  At first instance there was no finding of undue pressure and this was not relied on in the appeal.  Mrs Chandra therefore had to rely on what was said by Mr Chandra as being a material misrepresentation which entitled her to have the guarantee set aside.

Mrs Chandra claimed that she had signed the guarantee as a result of her husband’s misrepresentation.  The misrepresentation was that the amount being borrowed would be enough to complete the development of the hotel.  Did this amount to a misrepresentation?  There was a lot of analysis in the judgment of the status of this statement.  However, the Court of Appeal concluded that this was not a misstatement.  It was an over-optimistic assessment of the chances of a future overspend.

As Lord Nicholls explained in the renowned House of Lords’ judgment of Royal Bank of Scotland Plc v Eteridge, which was delivered some 19 days before the execution of the guarantee: “when a husband is forecasting the future of his business and expressing his hopes or fears, a degree of hyperbole may only be natural and the courts should be slow to treat such exaggerations as misleading.”

Having decided that there was no misrepresentation, there was no need to consider the question of whether the bank was fixed with constructive notice of the undue influence or misrepresentation.

This case provides a good example of how a wife may attempt to set aside the guarantee that she has provided.  Mrs Chandra was unsuccessful as she was unable to establish that there had been undue influence nor could she establish a misrepresentation.  Where an allegation of misrepresentation is made, the courts will examine carefully the meaning and the impact of the alleged statement.  Merely because a statement is incorrect it does not automatically amount to a misrepresentation entitling a person to set aside the guarantee.

Royal Bank of Scotland Plc v Mr and Mrs Chandra [2011] EWCA Civ 191

Where, as in this case, the fundamental motivation for the transfer was a fear on the part of the director that he was going to be subject to a major claim against him arising out of his misappropriation of funds in a bank account in respect of which he had fiduciary obligations, the director could not of his own volition tranfer some of his shares in the company by way of a gift to his daughter and wife.  The company had not authorised the director to issue share certificates to his wife or daughter or to record them as shareholders in the company’s register of members. Accordingly, legal title had not been effectively transferred.  In effecting the gifts, the director had tried, without success, to realise an immediate and outright transfer of his beneficial interest. However, no amount of benevolent construction of those transactions could lead to a conclusion that the director was intending to declare himself a trustee in respect of  his shareholding. Moreover, the director had failed to take the necessary steps sufficient to enable his wife and daughter to obtain a transfer of the shareholding without further recourse to assistance from him. All they received were documents purporting to be new share certificates in their names which the director had created without the company’s authority. The result was that, without the director’s assistance in making available the duly completed stock transfer forms, neither his wife nor his daughter could perfect the intended gifts. Accordingly, no beneficial interest had been transferred.

This case highlights once again that people trying to put their personal assets (in this case shares) beyond the reach of creditors will come unstuck if their motivation is to defeat the interests of those creditors. Furthermore, the case also highlights the importance of company board meetings approving share transfers. A proper transfer of shares requires: (i) the transfer to be approved by the directors passing the requisite resolution (usually at a duly convened board meeting, but as an alternative, the resolution could be passed by directors’ unanimous written resolution); and (2) the directors also resolving to approve a person (normally another director or the company secretary) to deal with the mechanics of recording the transfer in the company’s statutory records, and to issue new share certificates. Furthermore, if a transferee only wishes to transfer the beneficial and not the legal title, then he or she should enter into an appropriate trust instrument, for example, a Declaration of Trust over the shares, clearly setting out who the beneficiaries are and the exact details of the shares which are the subject the trust. Otherwise, as this case highlights, going forward there could be be serious question marks over the validity of the share transfer as well as the the validity of any purported transfer of the legal and/or beneficial title to the shares.

The first question the court was asked to determine was whether with reference to section 29 of the Land Registration Act 2002 were any of the interests sufficient to be overriding interests?

The court had much sympathy for the occupiers. However, based on the previous case of Abbey National v Cann [1991], the court held that the purchaser of land who relies upon a building society or bank loan for completion of his purchase in fact never acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. On this basis the mortgagees’ rights under the charges had priority over any equitable rights that the occupiers may have acquired.

The second question the court determined was whether any of the tenancy agreements obtained priority. The leases were of a short duration and were non-registrable and in almost all the cases the registration of the mortgagee’s charge was made within the period of a priority period. The court held that these agreements did not obtain priority. Prior to registration the grant of the leasehold interests was not made out of a registered estate and only takes effect in equity.

Various mortgagors v various mortgagees and various occupiers [2010] EWHC 2991

The Solicitors’ Code of Conduct 2007 provides that where a lender asks for a conveyancing file, the solicitor cannot, without the consent of the borrower, send the whole of the file to the lender unless the lender can  show that there is a prima facie case of fraud.

The lender accepted the code, but relied on declarations which the borrower had signed when applying for the loan.

These declarations provided an authorisation from the borrower to their conveyancer to send to the lender the entire file relating to the whole transaction (not just the loan) at the lender’s request.

The court held that these declarations were clear, unambiguous, irrevocable and binding on both the borrower and the lender.  The clause had to be looked at in the context of the transaction.  It enabled the lender to police the transaction.  Four of the six files involved a transaction funded by different lender and a subsequent re-mortgage of the same property on the same day to the lender.  The lender argued that this was precisely the kind of information the solicitors should have given to them.

The court held that the clause must be construed as a clear waiver of privilege and was not unduly onerous or unfair.   Accordingly the lender was entitled to the entire files relating to its mortgage transaction.

Where a clause is a matter of commercial commonsense and is essential to make the transaction work, if it expressly provides for a waiver of privilege, the court will uphold it notwithstanding the implied default position in law.

Mortgage Express v Sawali [2010]  EWHC 3054

The company (now in administration) claimed that the charging order should be set aside. First, they claimed that when the company failed to make the payment into court in the sum of £30,000, the claimant should have applied to enter judgment, but as they failed to take this next step the charging order for the full amount should not have been granted. The court agreed and held that there was no jurisdiction to grant the charging order for the full sums claimed as the claimant had failed to take the next relevant step and it should be varied to limit it to the sum of £11,500. Secondly, the company claimed that in any event when the charging order was made, the company was in fact insolvent. The court also agreed with this argument and held that, on a balance sheet basis, the company was insolvent and so the whole of the charging order should be set aside as there was a real risk that it would operate to the disadvantage of creditors as a whole, as it appeared that there was a shortfall of assets over liabilities.

This case demonstrates that a charging order cannot be obtained in respect of an order which requires a party to take a next step such as entering a judgment until that next step is taken. Further, where a judgment debtor is insolvent at the time a charging order is made, the court will exercise its discretion and refuse the charging order so as to prevent a judgment creditor from gaining an advantage over other unsecured creditors.

Monte Developments Limited (In Administration) v Court Management Consultants Limited and others [2010] EWHC 3071

Problems uncovered by the OFT’s investigation were specific to each business, as set out in the individual requirements.  However, across the sector the problems include:

• A failure to consider the customer’s circumstances or proportionality before asking the court to put a charging order in place;
• Not building adequate checks into the lender’s decision-making process; and
• Applying substantial charges for referring cases to a debt collection agency.

In a minority of cases, lenders sent oppressive and/or misleading correspondence.

The requirements imposed on some of the lenders included:

• providing a case file note seting out in reasonable detail why it was appropriate and reasonable to seek a charging order taking into account:
  • the extent to which a customer had responded to reasonable requests made by the lender;
  • such information about the personal and financial circumstances of the customer as the lender was able to obtain through its reasonable endeavours;
  • the amount of the sum owed;
  • the length of time that the sum has been owed;
  • whether it is reasonable for the lender to take steps other than those proposed.
• a requirement that the lender should consider whether the steps it proposed to take were proportionate having regard to the amount of the sum owed;
• a requirement that the lender should not state that it will seek a court order or judgment where the lender has no intention of seeking a court order or judgment;
• a requirement for new terms to be put in place where the lender wished to impose charges for default or impose charges to recover the costs of third parties and that any proposed new terms should be given to the OFT.

As part of the review of consumer credit and personal insolvency call for evidence, the Coalition is consulting on the impact of a £25,000 threshold before being able to enforce by means of a charging order and an order for sale.

Mrs Qutb had suffered from Alzheimer’s disease for a number of years.  In 2001, she sold her property to Mr Hussain. Mr Hussain entered into a charge in favour of the Bank of Scotland (“the Bank”) as security for the loan to fund his purchase of the property.  In 2005, Warren J  held that the sale to Mr Hussain should be set aside as it was at an under value, it had been procured by Mr Hussain’s undue influence and it was an unconscionable bargain.  The Court ordered that the property should be transferred back to Mrs Qutb, but should be subject to the legal charge in favour of the Bank.  Mrs Qutb was granted an indemnity from Mr Hussain in respect of the sums payable under the charge.

The Bank commenced possession proceedings and Mrs Qutb now sought to deny that she was bound by it.

As a first  point, the Court considered whether Mrs Qutb could challenge the charge in the light of the previous proceedings.  

The Bank sought to argue that in the light of the previous decision, Mrs Qutb was now prevented from disputing the Bank’s charge.  The Court decided that the cause of action which she now asserted against the Bank was not the same as the cause of action in the previous action.  The basis of her claim against the Bank was different to that of her claim in the previous proceedings.  Findings had been made in relation to allegations which were advanced only against Mr Hussain and, therefore,  this did not prevent her from raising these different issues against the Bank.

The Bank also claimed that her defence and counterclaim represented an abuse of process as the defence she now raised, which was that she had an overriding interest could have been brought in the previous action.  Previously, the Bank had applied,  but without success, to strike out the claim on this basis.  As the Court had previously refused to grant this application, the Court here decided to bar the Bank from asserting the abuse of process argument once again.

 Section 70(1)(g)

The Court could now consider the claim that she had an overriding interest which took priority to the Bank.  Mrs Qutb relied on section 70(1)(g) of the Land Registration Act 1925, which was the relevant provision in force when the charge was taken.  In essence, the effect of section 70(1)(g) was that if Mrs Qutb was in actual occupation of the property and the Bank had not made enquiry of her then it would be bound by any right that she had.

The first question the Court had to consider was whether she was in actual occupation. There was no doubt that Mrs Qutb had occupied the property in the past, but the question was whether she was still in occupation when the charge was granted on 29 January 2001.  It was accepted that a person can be in “actual occupation” of more than one property.  On the evidence there was evidence that Mrs Qutb had occasionally stayed at the property and although the mere presence of her furniture would not usually count as actual occupation, it appeared that she was not intending to leave the property and so in the circumstances the Court found that she was in actual occupation.

The Court then looked at the position where persons with overriding interests have been taken to have authorised the charge and so are bound by it.  The Court held that a person claiming not to bound by the charge can be held to have given the legal owner actual authority to enter into it or to have ratified it.  As such, the charge will be binding on ordinary agency principles or it could be explained as a form of proprietary estoppel. Proprietary estoppel arises where one party represents that he is transferring an interest in land to another, but what is done has no legal effect, or knows that the other party will spend money or otherwise act to his detriment in reliance on the supposed or promised transfer.

In the case of Paddington Building Society v Mendelsohn (1985), the court decided that the mother knew and intended that the charge was to be granted to the society and that without the charge, the flat which she claimed to have an interest could not have been acquired.  The only possible intention was to impute to the parties an intention that the mother’s rights were to be subject to the rights of the society.

In this case, the Court held that:

•  Mrs Qutb will have (or ought reasonably to have) appreciated that Mr Hussain was going to charge the property. 
• Mrs Qutb represented to Mr Hussain’s solicitors who were also the Bank’s solicitors that the property would be sold with vacant possession and that she would not retain any rights to it.  In the contract for the sale of the property and in the replies to the requisitions on title she confirmed that vacant possession would be given on completion. The transfer stated that the property was being transferred with full title guarantee.
• The Bank relied on these representations by proceeding with the loan.  It was reasonable to do so as it had no notice of Mrs Qutb’s incapacity or undue influence or unconscionable bargain.
• Almost all the money advance by the Bank found its way into her bank account.  It accrued to her benefit regardless of whether Mr Hussain then misappropriated it.

The Court also considered whether her lack of capacity meant that there could be no estoppel.  The Judge held that as the Bank had no notice of her lack of capacity it could not be affected by it.  

Mrs Qutb also sought to argue that the Bank should have been alerted to the fraud by the fact that the property price was reduced and the size of the gift fluctuated in accordance with Mr Hussain’s requirements.  However, the Bank had no reason to doubt that vacant possession would be given since it is not unusual for properties to be transferred at less than market value when being transferred to a friend or family member. 

Accordingly the Bank was entitled to possession.

This case is very helpful to lenders as it confirms that even though a person may have been in actual occupation of the property when the charge is taken, they may still be bound by it.  If faced with a claim that an occupier has an overriding interest, which takes priority to a bank’s charge, consideration should be given to the following factors:

• Whether the occupier should (or ought reasonably to have) appreciated that the property was going to be charged.
• Whether the occupier made any representations to the lender.  The court will look at the contract of sale, the requisitions on title and the transfer documentation.
• Whether the lender relied on any representations and if so, whether it is reasonable to rely on those representations.
• Whether the occupier received any benefit from the transaction.

In these circumstances, despite the existence of an overriding interest, it may not be possible for the occupier to deny that they are bound by the charge.

 The Governor And Company Of The Bank Of Scotland v Afzaal Hussain and Mona Qutub (by her litigation friend) [2010] EWHC 2812

In this case, Chelsea Building Society had repossessed and then sold a property, but then wished to pursue the mortgagors for the shortfall. The mortgagors were a husband and wife who had subsequently got divorced.  The Building Society reached an agreement with the ex-husband only that it would settle the matter on payment of £5000 in full and final settlement, but then still wished to pursue the ex-wife. 

The ex-wife claimed that the full and final settlement with the ex-husband released her from her liabilities. 

In a multi-party situation if a creditor is settling with one party, but wishes to pursue the other parties, it should expressly reserve that right in an agreement.

If that term is not expressly reserved, the court will need to determine whether a term is necessarily to be implied from the circumstances which existed at the time of the agreement.

The way the court at first instance had considered the matter was by asking the question whether there was a positive agreement between the ex-husband and the Building Society to the effect that the ex-wife’s liability would be discharged.  In posing the question this way, the court at first instance had reversed the burden.  The burden of establishing whether a term could be implied lay with the Building Society.  The Court of Appeal looking at the evidence did not consider that it was a necessary implication of the agreement that it was reserving its rights and so the Building Society failed to meet the burden of proof of establishing the reservation either expressly or by implication. Accordingly it could not pursue the ex-wife.

At a late stage in the proceedings,  the Building Society also attempted to argue that it was not bound by the agreement because it is not bound by part payment of an undisputed debt and so no consideration moved from the ex-husband to the Building Society.  As the Court noted, this is a point which is of interest and it is not necessarily straightforward.  However, as the point was made at a stage when no evidence could be taken on the issue, it was too late to make this point.

This case is a salutary reminder that when settling with one party in a multi-party situation, a creditor should expressly reserve its rights to pursue the other parties.

Chelsea Building Society v Lorraine Nash [2010] EWCA Civ 1247

This case is useful as it is an interesting example of how marshalling is to be applied and it explains the legal basis for marshalling. 

Mrs Szepietowski owed debts to National Westminster Bank Plc (“the Bank”) and the Serious Organised Crime Agency (“SOCA”).  The Bank held charges over two separate properties known as Ashford House and the Claygate Properties. As a result of a compromise agreement, SOCA held a charge over the Claygate Properties.  The Claygate Properties were sold and the proceeds of sale were nearly exhausted in paying off the Bank, leaving only a small sum for SOCA.  SOCA wished to step into the shoes of the Bank in respect of the Ashford Property for the unsatisfied balance owed to it.

Counsel for Mrs Szepietowski argued that had the compromise agreement referred to the Ashford Property, it would have said so.  The Judge, however, decided that the compromise agreement neither explicitly or implicitly prevented SOCA from rely on the principle of marshalling. The Ashford Property had not been excluded from the compromise agreement nor was it contrary to the agreement and neither should SOCA be estopped from advancing the claim.

The Judge explained that marshalling is a doctrine of equity and like other equitable principles it should only be applied in order to do justice.  The right to marshall can be excluded or varied by contract and the equitable defences to an application should be available.  However, in this case there was no unfairness in allowing SOCA to rely on  the doctrine.

Counsel for Mrs Szepietowski argued that marshalling was a form of equitable subrogation, designed to prevent unjust enrichment and that it could not be invoked  by a lender who has obtained all the security for which he bargained or so as to put him in a better position than he would have been in if he had obtained all the rights for which he had bargained.  The Judge held that it was far from clear that the doctrine of marshalling was a species of subrogation and it was a doctrine with its own particular and distinct characteristics.

There were no obstacles to the claim and so SOCA could now steps into the shoes of the Bank in respect of Ashford House as security for the shortfall which was left following the sale of the Claygate Properties.

Serious Organised Crime Agency v Szepietowski [2010] EWHC 2570

In March, this year the court held that a valuer had breached duties owed to a buy-to-let investor where the valuation report had been provided to the mortgage lender Scullion v Bank of Scotland PLC [2010] EWHC 572.  The Judge found that the valuers had acted negligently both in over-stating the capital value of the property and the expected rental value.  The court has now ruled in the same case as to what damages could be claimed.

Applying the principles set out in the House of Lords case of SAAMCO, the court held that Mr Scullion, the buy-to-let investor, was only entitled to recover the difference between the price paid for the property and the true value of the property.  In this case because Mr Scullion had ended up paying £200 less than the true valuation, he had suffered no loss.

More interestingly was the court’s assessment of the damages owed in respect of the overstatement of the rental value.  The court noted that Colleys who were the valuers, knew that Mr Scullion was a buy-to-let purchaser and so should have appreciated that the statement of rental value was critical as Mr Scullion needed to ensure that when he committed himself to make periodic payments under the mortgage and to pay the normal outgoings, that he would receive sufficient rent to discharge those liabilities. 

Counsel for the valuers argued that the scope of the duty owed to Mr Scullion could not exceed the scope of the duty owed to the mortgage lender and the rental value was merely a further piece of information relevant to the decision whether to lend rather than a piece of information upon which the lender had placed, or was entitled to place any independent reliance.

The Judge disagreed.  First, he took the view that the scope of the duty owed to Mr Scullion could be wider than that owed to the lender.  He explained that the purpose for which reliance may be placed on the valuation may differ between lender and the borrower and that there may be a contractual limitation which will not apply to the borrower or which was not communicated to the borrower. 

Secondly, although the capital value was of great importance, “it was also very important to both lender and borrower in this buy-to-let transaction that the rental which could be achieved by letting the flat should exceed the mortgage payments by a specified margin, and that Colleys knew or ought to have appreciated this.”

In calculating the damages, the court excluded any items which were relevant to the market value of the property such as legal fees for the purchase of the property, stamp duty and carpets to furnish the property.  Mr Scullion was entitled to recover damages to compensate him for losses caused by the fact that he was unable to let the property to cover his mortgage payments.  On a year to year basis, the court calculated his mortgage payments and then deducted the rental obtained and added his costs incurred due to the cash flow difficulties he had encountered.

The valuer asserted that the claim for damages should be reduced because of contributory negligence.  However, the claim of contributory negligence failed because Mr Scullion did not do anything to cause or contribute to these losses.  The anticipated rental value was entirely of the valuer’s own making. 

It is believed that this may be the first case where a court has held a valuer liable in respect of its valuation of the rent to be obtained on a property.  It was significant in this case that the valuers knew that this was a buy-to-let mortgage and therefore the valuers knew or ought to have appreciated that the rental to be achieved was important to both the lender and the borrower.  There may now be the possibility that other cases can be brought where there has been a negligent overvaluation of the rent, where the valuer is aware or ought to be aware of the importance of its rental valuation and where the rental value has been relied on. 

The question remains as to whether such claims will be open to lenders as well as borrower landlords.  The Judge noted that the rental valuation was of importance to the lender and the borrower.  If it can be established that a lender had relied on the rental valuation when agreeing to lend and it had placed independent reliance on this valuation rather than it being merely a factor in deciding to whether the property was adequate security then this may give rise to potential claims by lenders.  Not surprisingly, however, the Judge gave permission to appeal on the legal issues of (1) whether the valuer owed a duty of care in tort to Mr Scullion at all; and (2) whether the scope of that duty extended to the losses in respect of the defective rental valuation.  No doubt how the Court of Appeal approach these two questions, will be followed with interest by all concerned.

Scullion v Bank of Scotland PLC [2010] EWHC 2253

The decision contemplates other measures to improve competition, such as ensuring that PPI cannot be paid for in a single premium, ensuring that marketing information is easier for the customer to understand, and increased information availability throughout the life of a PPI policy allowing the customer to review the insurance that covers them. More PPI information will also be available for pricing comparison tables produced by such bodies as the FSA.

It is expected that the new regulations will come into force in April 2012.

It appeared that the whole transaction was a fraud.  The registered owners of the property had no knowledge of the transaction and the money disappeared. There was no allegation that the defendant was involved in the fraud. 

The claimant lender brought a claim for breach of trust.  Counsel for the lender argued that the solicitors did not have the authority to pay away the moneys except to achieve completion and completion was never achieved.  The solicitors’ counsel argued, however, that the authority was to pay away in connection with the purchase of the property and this is what the defendant did.

The court came down in the middle.  The authority entitled the defendant to pay away on receipt of the documents necessary to register title or if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents.  Here the solicitors paid away the money without receiving the requisite documents and without a solicitor’s undertaking to provide such documents.  As such, the solicitors were in breach of trust.

The solicitors then sought to rely on s61 of the Trustee Act 1925 which enables a trustee to claim relief for breach of trust if he has acted honestly and reasonably.  The solicitors submitted that the circumstances of the loan were unusual and the loan was approved by the lender in haste.  Even if that were the case, the court could not accept that the solicitors had acted reasonably having paid away the money to a firm of solicitors even though the necessary documentation had not been provided combined with the failure to investigate the firm of solicitors to whom they were sending the money.  

The solicitors also attempted to argue that any loss or damage suffered by the claimant was caused or contributed to by the lender because of its own fault. As the Trustee Act did not provide for this, the court were not prepared to extend the law in this way.

This case is a good example of when a claim for breach of trust can be brought.  By bringing such a claim, the lenders avoided having to show any negligence or fault by the solicitors and there was no issue of contributory negligence.

 Lloyds TSB v Markandan & Uddin [2010] EWHC 2517

Despite the certificate from the solicitors, the court found that Mr O’Sullivan had not received legal advice on the guarantee.

Mr O’Sullivan claimed that the certificate amounted to a fraudulent misrepresentation.  The court, however, found that this was without value as these representations were relied on by the bank and the bank alone.  The fact that, in consequence of the bank’s reliance, Mr O’Sullivan suffered a loss did not change the position.

Strangely, counsel for the firm of solicitors accepted that although no cause of action or argument had been advanced to this effect, the firm had assumed a duty in tort to Mr O’Sullivan to advise him to the extent required by the bank.  However, this could give rise to no liability as Mr O’Sullivan had suffered no loss. 

The court took the view that there was no legal basis for the existence of such a duty.  In circumstances where the guarantor did not seek advice, was not offered advice and was ignorant of the requirement of the bank that he should be advised, there was no basis for such a duty.  Counsel for the firm of solicitors opportunistically sought to build on this concession and the court found the approach of both counsel unhelpful.

In any event, the advice would have not added to Mr O’Sullivan’s understanding since it was improbable that it would have led Mr O’Sullivan to torpedo the project by refusing the guarantee, which was a condition of the finance from the bank.

This is an interesting judgment as it considered the legal relationship between the guarantor and the solicitor providing a certificate that independent legal advice has been given.  These are common issues raised by guarantors and this judgment clarifies the position. The case confirms that where no advice is given or sought, no duty can exist.  Also useful was the Judge’s comments that even if he had received advice, it would have made no difference as Mr O’Sullivan would not have wanted to jeopardise the project and it was most improbable that he would have refused to sign the guarantee. 

Ben O’Sullivan v Healys (a firm) 14 October 2010

On 30 June 2000, the borrower executed a legal charge over his property in favour of Halifax, which was registered with the Land Registry on 29 September 2000. On 1 September 2006, Bank of Scotland (“the Bank”) lent the borrower sums to discharge the Halifax debt. Although the borrower executed a charge in favour of the Bank, unfortunately it was not registered. Subsequently on 16 July 2007, London Scottish Finance Limited (“LSFL”)  registered a charge at the Land Registry. Further, on 4 October 2007, Anfield (UK) Limited (“Anfield”) registered a notice for a pending land action for a charging order and on 3 April 2008, Anfield’s equitable charge was registered. On 1 April 2009, the Bank sought to register their interest by way of a unilateral notice. 

The question for the High Court was whether or not the Bank could be subrogated to the Halifax charge and so step into its shoes notwithstanding the subsequent charges.  Would Anfield and LSFL be unjustly enriched in circumstances where the lender claiming subrogation expects to receive a first legal charge over the property but does not do so solely because of its failure to register the charge under the Land Registration Act 2002? 

Anfield sought to rely on the previous case of  Burston Finance v Speirway Ltd [1974] 1 WLR 1648.  In this case the lender had registered its charge at the Land Registry, but had failed to register it at Companies House.  Here the court ruled that in the case of non-registration of a company charge the charge was effective when made and therefore it had it obtained everything it bargained for and consequently, the lender would not be entitled to subrogation.

 The Bank, however,  relied on the case of Cheltenham & Gloucester plc v Appleyard [2004] EWCA 291 where the Court of Appeal took the view that a lender who is entitled to a legal charge which only obtains an equitable charge does not obtain all that he bargained for.  He bargained for a legal charge and so will be entitled to be subrogated to an earlier legal charge that was discharged with its advance.

 The court concluded that the Bank was entitled to be subrogated to the Halifax charge preferring the analysis in Cheltenham & Gloucester plc v Appleyard.  The lender’s carelessness in obtaining the desired security did not, by itself, defeat a claim for subrogation.

The court was influenced by the fact that the subsequent lenders would have been unjustly enriched because the Bank funded the repayment of the Halifax charge on the basis that it would obtain a legal charge.  It did not matter that the borrower had performed the terms of the bargain between the borrower and the lender.

This decision reinforces the position that where moneys are advanced by a lender and are used to discharge an earlier security, the lender is subrogated to the rights under that earlier security and will obtain priority over incumbrances subsequent to that security.

 Anfield (UK) Limited v Bank of Scotland (and others) [2010] EWCH 2374 (Ch)

The growth in the letting of property and the effects of the recession have resulted in an increase in the number of evictions of unauthorised tenants. As a consequence, the previous Labour Government introduced the MRPTA 2010, which came fully into force on 1 October 2010, in order to protect residential tenants by ensuring that they are entitled to a reasonable period of notice to leave a property if their landlord is repossessed

In short, the MRPTA 2010:

1. Gives courts the power to postpone a possession order for up to two months (thus allowing tenants the opportunity to find alternative accommodation); and

2. Requires lenders to give notice of the proposed execution of the possession order.

Further comment on the Act is available here.

The Guidance aims to inform lenders, landlords and tenants of their rights and responsibilities under the MRPTA 2010.

Trading Standards Officers conducted onsite visits, a website sweep and a mystery shopping exercise.  They found that:

• Misleading advertising is the most significant area of non-compliance, in particular failing to disclose fees and misrepresenting debt management services as being free when they are not;
• Frontline advisers working for debt management companies are lacking in competence and are providing poor advice on inadequate information;
• There is low industry awareness of the Financial Ombudsman Service (FOS) for resolving consumer complaints.

 The OFT plan to update their Debt Management Guidance and will carry out robust enforcement action against licensees that fail, or refuse, to change advertising and/or behaviour.

 Attached is a link to the detailed report http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/OFT1274.pdf and the Debt Management Guidance  http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366.pdf.

In this case, the contract was for the construction and sale by the claimant of a yacht costing €38 million. The buyer of the yacht failed to pay the first instalment and the claimant terminated the contract.  The claimant sought to rely on a clause in the contract which provided that upon lawful termination the claimant would be entitled to recover 20% of the contract price by way of liquidated damages as compensation for its estimated losses.

The claimant pursued the defendant under his personal guarantee and the defendant asserted that the clause entitling the claimant to 20% of the contract price was a penalty and therefore unenforceable.  The guarantee itself contained a provision that the liability of the guarantor was “not to be impaired, diminished, discharged or released by reason or in consequence of ……. the irregularity, unenforceable or invalidity in whole or in part” of the principal contract. Accordingly the claimant argued that liabilities of the guarantor and the principal debtor were not co-extensive and the defendant was liable even if the principal debtor was not.

The Judge stated that should the clause be a penalty, the claimant would not be able to recover the sum due from the guarantor as the reason for it being irrecoverable from the principal debtor was ultimately based on public policy.    Since a penalty clause does not bring into existence any obligation on the part of the debtor, there is no relevant liability covered by the guarantee and nothing in the guarantee upon which the  protective provisions could operate.

Ultimately the Judge decided that the clause was not a penalty as it was not a deterrent and was commercially justifiable as providing a commercial balance between the parties on lawful termination by the claimant.  The Judge also noted that both parties had the benefit of expert representation in the conclusion of the contract.

Although the Judge’s comments on the effect of the co-extensive provision in the guarantee were obiter and not binding, the case demonstrates that there are potential limitations to such a clause and it may not always be possible to rely on this provision where the principal contract is not enforceable.

Azimut-Benetti SpA v Darrell Healey [2010] EWHC 2234

The Independent Commission on Banking will consider the structure of the UK banking sector, and look at structural and non-structural measures to reform the banking system and promote competition.

It will formulate policy recommendations with a view to:

• Reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function;
• Mitigating moral hazard in the banking system;
• Reducing both the likelihood and impact of firm failure; and
• Promoting competition in both retail and investment banking with a view to ensuring that the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.

It aims to produce a final report by the end of September.

The claimants alleged that the APR stated in the agreement should be regarded as the primary figure and the monthly interest rate should be calculated from and should correspond (as closely as possible) to the APR.  They produced an expert report from a mathematician and computer expert who concluded that the APR rates on the monthly cash advance balance rate were incorrectly stated.

A regulated agreement is not properly executed unless the agreement contains all the prescribed terms.  If improperly executed, it is only enforceable by an order of the court.  The court cannot grant such an order in respect of agreements signed before 6 April 2007 and so those agreements which did not contain all of the prescribed terms are irredeemably unenforceable.  The claimants alleged that the APR was misstated and as a consequence the agreements were unenforceable.

The Judge explained that there is a very clear difference between the nature and function of the stated monthly (or annual) rate and the APR. The stated monthly or annual rate is (on its face) a contractual term.  The APR is designed to provide information to consumers and is arrived at by a complex formula designed to include not only interest rates but also other charges.  The APR is not a prescribed term.  Merely because the APR is included does not make it a prescribed term of the agreement.  The APR is not the driver of the figures and in any event,  if it were,  it would be unworkable as the APR figure only needs to be stated at the inception of the agreement.

Accordingly the claims that the agreements were irredeemably unenforceable because of an alleged mismatch between the APR and the stated rate of interest were struck out.

This case involved calculating the interest rates retrospectively, which as the Judge pointed out had “a surreal quality to it”. In the light of the series of cases which have resulted in a positive outcome for lenders, this is yet another nail in the coffin for those who seek to use the courts to bring consumer credit related claims on a very tentative and speculative basis.

Sternlight v Barclays Bank Plc and others [2010] EWHC 1865

Please see the link for guidance.  The regulations come into force on 1 February 2011. 

The existing Consumer Credit Act regime is unchanged in relation to agreements secured on land and consumer hire agreements (although lenders may choose to comply with the new requirements in respect of agreements secured on land).

In summary, the regulations make amendments to the following:

•  The right to withdraw from the credit agreement and the requirement to provide adequate explanations.  Creditors are required to assess the borrower’s creditworthiness before granting credit or significantly increasing the amount of credit.  The borrower can withdraw from an agreement within 14 days following conclusion of the agreement or (if later) once the borrower has received a copy of the executed agreement or notification of the credit limit on a credit card.
• How to set out and calculate the total charge for credit and the annual percentage rate of charge (APR) in advertising and consumer information.
• What information to provide consumers before they enter into a credit agreement and the way in which that information must be provided. They largely replace regulations on the disclosure of pre-contractual information. The information must be clear and easily legible, and the borrower must be able to take it away to consider and to shop around if he wishes.
• What information must be included in a credit agreement and how it must be presented and the requirements on the signing of a credit agreement.
• What information must be included in advertisements for consumer credit agreements and how that information must be presented.  If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example.
• The borrower is entitled to seek redress from the creditor in certain circumstances if he is unable to obtain satisfaction from the supplier of goods or services.  This applies where s75 of the Consumer Credit Act is not applicable.

• How consumers enter into credit commitments, including the way in which credit is sold and the extent to which consumers understand what they are committing to;
• What issues arise during the lifetime of a loan from both the consumer and the lender perspectives; and
• What happens if things go wrong: are the current insolvency solutions fit for purpose?

A consultation on specific proposals is anticipated later this year or early 2011.

 The judge refused permission for the representative to act as advocate taking into account that:

•  the representative had “sailed very close to the wind” as regards conducting litigation on behalf of the claimants in the past without the necessary permission, contrary to the Legal Services Act 2007.  There was some concern as to whether the representative was charging for his services although the judge was prepared to proceed on the basis that he was not charging in this case;
• the claim was based on unparticularised but serious allegations including conspiracy to defraud, and the representative appeared to be encouraging the claimants to make these allegations when there was reason to doubt that he had given adequate thought to the proper basis (if any) for making these allegations.  The defendants had a legitimate interest to be protected by the safeguards that the law regarded as proper in such cases;
• there was conflict of interest between the claimants; and
• there had been many applications over a relatively short period with claimants losing application after application.  The lender had added their costs to the security so far.  These applications suggested that the representative did not have the necessary judgment and experience to decide which applications should be made and when, and how they should be best presented.

Following this case and in the light of the increase in the number of litigants in person, the Master of the Rolls and the President of the Family Division has now published helpful guidance on this issue:

 http://www.judiciary.gov.uk/docs/pub_media/mckenzie-friends-practice-guidance-july-2010.pdf

Francis & Ors v Barton Bridging Capital Ltd & Anor [2010] EWHC 152

Mr Cowey and Ms Cowlam charged their property in favour of the claimant, Annulment Funding Company Ltd.  The claimant provided funds to bankrupts to obtain, as their name suggests, an annulment of their bankruptcy.  Following annulment, the intention was that the former bankrupt would obtain a mortgage from another lender to pay off any prior charges on the property.  The funds advanced by the claimant were short term at a level of interest to reflect the fact that the borrower was bankrupt and not in a position to borrow elsewhere. 

In August 2007, Mr Cowey and Ms Cowlam signed a mortgage deed in favour of the claimant over their house in order to obtain an annulment of Mr Cowey’s bankruptcy.  The annulment was obtained.  Efforts were made to find a mortgage lender to repay the claimant, but those efforts were unsuccessful.  As a result, the loan from claimant, which was meant to be short term was not repaid and claimant called in the loan.

At first instance, the court decided that Ms Cowlam entered into the charge as a result of the actual undue influence of Mr Cowey and the claimant was bound by that.   Mr Cowey had taken advantage of Ms Cowlam and caused her to enter into a transaction which was very much against her interests. They had both misunderstood the position and had not realised that they had agreed to enter into a charge over their house.

 The claimant appealed on the basis that the original defence had relied upon an inference of undue influence or presumed undue influence and it was not open to the judge to make a finding of actual undue influence.  Somewhat unsurprisingly this appeal did not succeed.  Secondly, the claimant argued that there was insufficient evidence to have made a finding of actual undue influence, but again the Court of Appeal rejected this ground of appeal. 

In addition, the claimant asserted that although the charge could be set aside, the loan should be allowed to stand as Ms Cowlam had understood that she was entering into a loan.  However, a finding that Ms Cowlam was liable to repay the loan and a judgment against her would mean that it would be open to the claimant to obtain a charging order. Although the claimant argued that it was possible to sever the part of the transaction which is not affected by the undue influence, the court held that both the loan and the charge were disadvantageous and both were affected by undue influence.  Accordingly no question arose of severing a part of this transaction. 

 Annulment Funding Company Limited v Cowey and Cowlam [2010] EWCA Civ 711

An OFT investigation into Creation Consumer Finance demonstrated that a firm of solicitors acting on behalf of the company was issuing proceedings against Scottish debtors in English courts.

The OFT regards this practice as unfair because the unfamiliar law and procedure involved in a court claim in a different jurisdiction, and any associated travel costs, may deter consumers from defending such action.

The OFT is warning all consumer credit licence holders that taking action or threatening to take action against consumers in a court outside their home jurisdiction is a breach of the OFT’s Debt Collection Guidance. Where there is evidence that businesses are engaging in such behaviour, the OFT will take action to ensure compliance with its guidance so that there is no repetition of the practice.

The requirements imposed on Creation Consumer Finance also stated that the law of the consumer’s domicile shall govern any agreements.

Lenders will need to take this guidance on board when dealing with non-English based consumers.

Please see link to the OFT website .

http://www.oft.gov.uk/news-and-updates/press/2010/65-10

Could the bank claim restitution?

The Court of Appeal concluded that although the swaps contracts were invalid and void there is no longer any general public policy rule of English law that either prevents or restricts the right to claim restitution.  If, however, such a claim is inconsistent with the express provision of a statute then English law will not permit the claim as a matter of public policy.  This is because a common law claim for restitution cannot be allowed to circumvent legislation whose object and effect is to bar such a recovery. Here there was no such legislation and so the bank could claim in restitution.

Could the local authorities rely on a change of position defence?

The Court of Appeal pointed out that at no stage did the local authorities think the transaction was a gift that would never have to be repaid.  If the contracts were void, then the cause of action for restitution arose at the moment the moneys were paid to the local authorities. The court concluded that justice required that the local authorities repay the money.  The local authorities received the money and took the risk (in good faith) that the investments may go up as well as down.  Accordingly a change of position defence did not succeed.

Comment

This case demonstrates the flexibility of the law of restitution and will provide comfort to lenders. 

• A lender is able to recover borrowed sums even where a contract has been held to have been void.
• Restitution cannot be used where legislation prevents recovery, but where a contract has been held to have been void, this is not a bar to a claim in restitution.
• Where money has been lent under a void contract and the borrower is aware that the money has to be repaid, the borrower takes the risk that an investment may go up as well as down and so justice requires that they repay the borrowed money. 

 Haugesund Kommune and Narvik Kommune v DEPFA ACS Bank and Wikborg Rein & Co [2010] EWCA Civ 579

Using this remedy means that lenders can demand that rent is paid to them directly from tenants which can then be used towards the account which is in arrears.  This also acts as an alternative to repossession and LPA receivership appointments.

If the property is in negative equity, the lender may be best served delaying repossession and using the above method until property prices once again rise to a level once where the lender will not suffer a shortfall should it repossess and sell.

It is also a feasible alternative to appointing an LPA receiver as such a receiver will only collect rent so the lender can do it directly and avoid extra fees. 
Some lenders of course may still wish to appoint an LPA receiver as it may not have the resources to deal with the administration involved with direct rent collection but at least this is an additional option.

The lender should ask the borrower to sign an assignment containing a fixed charge over the rental account held by the landlord together with an assignment of the landlord’s/borrower’s right to receive rent.

Some borrowers would likely welcome this as an option as it may mean that they get to keep the property until they are able to arrange their finances.

The security assignment must be registered at Companies House to bind liquidators and notice of the assignment must be given to the tenant.

The investigation found that there were 25 High Court cases in 2009, compared to only one case in the previous five years. Claims were brought against valuers for many reasons, including:

• negligently overvaluing commercial premises that dropped in value because tenants became insolvent during the recession;
• negligently overvaluing residential property development sites which dropped in value because of falling house prices and a big increase in similar new build properties built during the housing boom;
• negligently underestimating the cost of putting a development project on hold; and
• negligently valuing a property that was subject to a fraud.

Banks and building societies have launched legal action against surveyors, claiming that they had overvalued properties that they had repossessed and been forced to sell for much lower sums. However, surveyors have hit back at these claims, stating that many of these properties had securitised loans against them and that lenders, rather than valuers, were to blame for the upward pressure on prices.

The Court of Appeal concluded that the guarantors were not to be bound unless they signed a guarantee document, which they did not.  Accordingly no oral agreement to vary the terms of a guarantee was concluded.  On the basis of this conclusion, the Court of Appeal did not need to consider the other arguments as to whether s4 of the Statute of Frauds Act 1677 had been complied with.

In this case, the Court of Appeal took a pragmatic approach as to whether an oral agreement had been reached by considering the relevant circumstances and in particular the lack of legal advice.

Investec Bank (UK) Ltd v Arnold Zulman and David Zulman [2010] EWCA Civ 536

The Competition Commission initially announced its plans in October 2009, after its investigation found that banks and building societies faced “little or no” competition when selling PPI to their credit customers. However, the proposed ban was challenged by Barclays, supported by Lloyds Banking Group and Shop Direct Group Financial Services, who argued that a point-of-sale ban was unjustified and that it would inconvenience customers. 

Consequently, the Competition Appeal Tribunal ruled that further investigation was needed, but, after further analysis, the Competition Commission concluded that a ban would bring greater competition, more choice and lower prices – benefits that would outweigh any inconveniences for customers.

14,373 mortgage possession claims led to orders being made, which was 15% lower than in the first quarter of 2009. 

46% of mortgage possession claims led to suspension orders being made, which was a similar figure to the first quarter of 2009.

“The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into court under this Act of a sum to meet any prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges, and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and secondly, in discharge of the mortgage money, interest, and costs, and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof.”

The highlighted part is what I want to discuss as the rest is quite standard. 

When a mortgagee sells a property and is left with a surplus following redemption of its charge, where should it be sent?  If there is a second registered legal charge, this is usually simple.  The surplus should be sent to the second mortgagee or its representatives.

In my opinion, the situation is not as simple when the next registered entry is not a legal charge.  Some interpret the above highlighted passage to mean that they are entitled to simply pass the surplus to the proprietor of the next registered entry.  I do not agree.

If the next entry is a Restriction pursuant to a Charging Order against the beneficial interest of one of two owners, does the beneficiary of the Charging Order qualify as being “entitled to the mortgaged property”?   In my view it does not.  The beneficiary’s interest is in the proceeds of sale of the interest of the debtor in the property.

For example, let us say that Mr and Mr Smith own the property as joint tenants.  There is a first legal charge to Bank X.  Bank X  has repossessed and sold the property.  Bank X’s charge has been fully redeemed and the next entry is a Restriction in favour of Bank Y pursuant to a Charging Order against Mr Smith’s beneficial interest for an unpaid credit card bill.

Bank Y would only be entitled to up to 50% of the surplus funds in respect of Mr Smith’s interest and Mrs Smith would  be entitled to 50% in respect of her interest.  Sending Bank Y the entire surplus, in my view, is a recipe for disaster as Bank Y would probably utilise the whole of surplus in discharge of the debt owed to it. and ignore, or be oblivious to the fact, that it is only entitled to up to 50%.  Bank X will then face a potential complaint/claim by Mrs Smith for sending her share of the surplus as well.

As a matter of course, we request a settlement figure from the lender and then send it what it is entitled to.  If it is the full 50% of the surplus, we then distribute the remaining 50% correctly.  This involves more work for us but it is better  to distribute the surplus correctly rather than leave our client open to a claim by its borrower.

The key changes are as follows. 

• Adequate explanations.  A duty for lenders to provide adequate explanations to consumers about the credit on offer to enable them to decide whether it is suited to their needs and circumstances.  (Regulation 3 and 4 of the Directive).
• Assessment of creditworthiness.  An obligation for lenders to assess the creditworthiness of consumers before concluding a credit agreement or increasing the amount of credit available under an existing agreement.  Lenders can decide how to assess creditworthiness, but are required to base their assessment on information obtained from the consumer, where appropriate and from a credit reference agency, where this is necessary. (Regulation 5 of the Directive).
• Refusal of credit.  If an application is refused on the basis of information from a credit reference agency, the lender must inform the creditor of this when it declines the credit.  (Regulation 40 of the Directive).
• Right to withdraw.  The consumer has the right to withdraw from a credit agreement within 14 days without giving any reason.  This replaces the current more limited right to cancel some types of agreements in certain circumstances.  (Regulation 13 of the Directive).
• Assignments of debts.  If a debt is assigned, the consumer must be informed of this by either the lender who buys the debt or the lender who sold the debt.  (Regulation 36 of the Directive).
• Credit intermediary links.  Credit intermediaries must disclose their links to lenders and disclose and agree fees for their services with the consumer. (Regulation 41 of the Directive).
• Right to repay early.  The consumer has the right to repay an agreement early in part and to receive a reduction in the total cost of the agreement as a result.  The existing legal framework for full early repayment has been retained and extended to cover partial early repayment.  (Regulation 29-34, 59-62 and 77-84 of the Directive).
• Right to terminate.  The consumer has the right to terminate an open-end credit agreement at any time unless the parties have agreed that a period of notice not exceeding one month should be given.  The lender can also terminate subject to given the consumer at least two months’ written notice.  The lender can also terminate or suspend the consumer’s right to draw down an open-end credit agreement provided they give objectively justified reasons for doing so. (Regulation 37-38 of the Directive).

The Directive also amends or extends existing requirements:

• Advertisements.  Advertisements that contain specific information about the cost of the credit need to provide a representative example of a credit offer.  The Consumer Credit (Advertisement) Regulations 2010 will dispense with the typical APR approach.
• Pre-contractual information. Consumers must be given pre-contractual information in writing according to a specific format set out in the Directive. This information is set out in the Consumer Credit (Disclosure of Information) Regulations 2010.
• Contractual information.  Other contractual information required is set out in the Consumer Credit (Agreements) Regulation 2010.
• Unsecured overdrafts.  Non-business unsecured overdrafts will be subject to the requirements for both pre-contractual and contractual information although an overdraft can be arranged urgently without prior written information.  Where a current account allows the account holder to overdraw without a pre-arranged overdraft, information about the charges must be included in the agreement. (Regulation 19 of the Directive).
• Obligation of the creditor in respect of goods.  Where a credit agreement is used to purchase goods, the consumer can pursue the creditor for a remedy. The value of the goods must be at least £30,000, the credit agreement must be for £60,260 or less and the consumer must have tried to obtain satisfaction from the supplier first.  This supplements s75 of the Consumer Credit Act where the cash price of goods is not less than £100 and not more than £30,000. (Regulation 25 of the Directive).
• The total charge for credit and the APR.  The total charge for credit and the APR must be calculated in accordance with a specified formula.  The formula is different to the one which already applies in the UK , but the result it produces is the same and the assumptions are broadly similar.  (Total Charge for Credit Regulations 2010).
• Variation of interest rate.  Where an agreement allows for variation of an interest rate,  notice of variation must be provided to the consumer before the change takes effect.  This is similar to the current requirements. 

Some just cannot understand this concept.  A first mortgagee can sell a property free of any subsequent charges registered against a title. 

The relevant legislative provisions for this are Section 104 Law of Property Act 1925 and Section 52 Land Registration Act 2002.

Some solicitors acting for a purchaser know this but still ask us to confirm the fact.  Some however, whether solicitors or subsequent lenders, just do not comprehend it.

I recently had a conversation with a fellow solicitor on this point.   She just could not understand the fact that as my client sold the property as first mortgagee, her client’s second charge was overreached and automatically removed by the land registry upon production of the executed Transfer.

She kept insisting that we needed consent from her client or a DS1 to remove its charge.  No matter how many times I informed her that she was incorrect, she just could not understand it.

I think I finally made her understand when I asked her what the point of having a first legal charge was if the lender could not sell free of subsequent charges.  Why would a first mortgagee be bound by subsequent mortgages?  She had no answer for this question.

I have not heard from her since.  I suspect she researched the point and discovered I was correct.

When it does appear, it is usually the first indication that the lease may be a shared ownership lease.

Some mortgagees, especially when they are taking a second charge on a property, instruct its solicitors that they do not need to check the lease when certain criteria are met.

Indeed, some mortgagees do not even use solicitors when securing an advance by way of a second legal charge and again, they do not insist on seeing a copy of the lease.

The above statement should therefore act as a warning.  I have seen many smaller lenders make seemingly sound second charge advances only to discover that when the first mortgagee repossessed and sold, there were insufficient funds to pay the second charge.  This was because the lease was owned on a shared ownership basis with 50% of the sale proceeds payable to the housing association.

Therefore, whatever the lender’s policy, if you see the above statement or notice that the original landlord was a housing association, check the lease to make sure.  Sometimes the Land Registries do fail to register the above statement even when the lease is owned on a shared ownership basis but this is quite rare.

It is always advisable to instruct a solicitor to check the lease in any event.

Consumer Credit Litigation Solicitors (“CCLS”) were the solicitors for all the claimants. CCLS was the trading name for the sole practice of Mr Burley.  The claims management company was Cartel Client Review Limited (“CCR”).  Following on from the judgment, permission was given to  join Mr Burley trading as CCLS and CCR in respect of an application for a non-party costs order against them.  In addition, Mr Wright who was the sole shareholder and managing director of CCR was also joined to the application for a non-party costs order.

CCR conceded that it should be jointly and severally liable with the claimants for the costs.  The court decided that a costs order was justified against CCLS.  The solicitors failed to obtain after the event insurance (“ATE”) for its clients.  Not only did it fail to obtain ATE, but it failed to tell the clients and was effectively acting without instructions.  The overwhelming likelihood was that if CCLS had acted as it should have done these cases would not have been issued or progressed and the costs incurred by the lenders would not have been sustained. 

As for Mr Wright, the court decided not to make a non-party costs order against him. CCR was not itself the relevant claimant or defendant.  Although CCR as a claims management company would benefit in the event of success, there was nothing improper in that.  The claimants were genuine claimants who decided to make these claims.  CCR was not itself the relevant claimant or defendant.  The real causative factor on the issue of costs was the failure to obtain ATE, which was CCLS’s fault not CCR or Mr Wright.

Mohammed Adris and others v The Royal Bank of Scotland plc and (1) Cartel Client Review Limited (2) Richard Burley trading as Consumer Credit Litigation Solicitors (3) Mr Carl Wright [2010] EWHC 941

The changes are designed to encourage mortgage lenders to provide funds in the purchase of these properties.

The changes all involve the Mortgagee Protection Clause claim.  The mortgagee will now be able to claim the following when staircasing and selling the property following repossession:

1.  All loans advanced by the mortgagee secured by way of a first charge over the property if the advances were approved by the Housing Association.

2.  18 months’ of interest (up from the initial 12 months’).

3.  Amounts advanced by the mortgagee in protecting its security by paying arrears of rent and service charges.

4.  Fees and costs of enforcing the mortgagee’s security capped at an amount equal to 3% of the market value of the leasehold interest at the time of enforcement, i.e. 3% of the 100% staircased interest.

The last one is the main difference between the old and new regime.  The mortgagee can now claim, inter alia, administration fees, early redemption charges and capitalised interest as long as it falls within the 3% threshold.  These could not be claimed under the old regime.

This is very significant for mortgagees as the shortfall they will now suffer will be much lower than under the old regime.  If the mortgagee acts swiftly, it is possible that it may not even suffer a shortfall at all. That would be novel.

Both parties to the litigation were innocent parties duped by a third party, but which party was going to miss out; either the claimant who suffered from Korsakoff’s Psychosis, a severe medical condition which affected her understanding, memory, insight, cognitive faculties and judgment or the defendant, a lending institution.  

The claimant had been swindled into parting with her property and the lender had granted a charge over the property.  The inspection of the property by the lender was a “drive-by” inspection by a surveyor, who noted signs of occupation. 

As the Court of Appeal noted, some of the facts pointed to Ms Bustard’s continuing actual occupation:  it was her furnished home and the only place to which she genuinely wanted to return; she continued to visit the property because she still considered it her home; those who had taken responsibility for her finances regularly paid the bills.  On the other hand when the lender’s charge was taken she had been in a residential home for over a year; she was incapable of living safely in the property and her visits to the property were brief and supervised.

The court decided that the first instance decision that Ms Bustard was a person in actual occupation should not be disturbed.  It was not a mere fleeting presence.  There was a sufficient degree of continuity and permanence of occupation, of involuntary residence elsewhere, and of a persistent intention to return home when possible, as manifested by her regular visits to the property.

The case provides further meaning to the expression “in actual occupation” although obviously the facts of this case were unusual and such a situation is likely to be rare in practice. 

Link Lending Limited v Ms Susan Bustard[2010] EWCA Civ 424

I met the news of the introduction of HIPs like most conveyancers, with some concern, but I now concede that in most instances, they have assisted the conveyancing process.

My main concern was and still is the reliability of the local search contained within the pack.  Due to time and cost, most HIPs contain a personal search which is obviously not as reliable as a search conducted by the local authority.

There is also a concern that one cannot market a property until he has a market ready HIP.  This can cause delay but some HIP providers can now produce a market ready HIP within 24 hours so this is not as problematic as it may have been to begin with.

The final concern is that due to the fact that a proposed seller must pay for a HIP, there are less sellers placing their properties on the market speculatively in the hope of achieving a price that they simply cannot resist.  On the other hand, this does weed out sellers who are not serious about selling their property.

Having said all of this, I would not like to see HIPs abolished.  The plain fact is, like them or loathe them, they do speed up the conveyancing process and when acting for a mortgage lender in the sale of a property, speed is very important.

Some providers are actually using “exchange ready HIPs” with legal documentation such as the agreement for sale included.  I am not convinced this is necessary or wise as what is the next step?  Will the HIP provider be exchanging contracts soon as well? 

If anything needs to change, I would like to see local authority searches becoming a mandatory part of the HIPs rather than allowing personal searches.  This would improve the quality of the HIPs at least.

Without HIPs, we would basically see a return to the times when many sales fell through before they even reached the halfway stage.

Should they win the next election, the Conservatives should concentrate on improving the HIPs rather than abolishing them.