The main issue was whether the Vendors could claim that they had a right of occupation which was an overriding interest within paragraph 2 of Schedule 3 to the Land Registration Act 2002 (“the Act”) binding on the lenders by virtue of s29(2)(a)(ii)? The following issues were considered:

• First of all the Court of Appeal considered the transaction generally.  The correct approach was that there were two transactions, one for the sale of the freehold and one for the leaseback to the Vendors upon completion.  No reference was made in any of the contracts for sale to the grant of a leaseback to the Vendors.  The clear impression created by the contracts was that the Vendors would be selling without reserving any beneficial interest or other rights in the property.  There was nothing to alert the lenders to the possibility that the Vendors expected to remain in possession after completion or that the Purchasers would obtain anything less than the entire legal and beneficial interest in the properties.
• Reference was made to the House of Lords case of Abbey National Building Society v Cann.  Mrs Cann had contributed to the purchase price of a property from money she received on the sale of her previous property.  She was given an assurance by her son that she would always have a roof over her head.  She claimed that she had an equitable interest in the property by virtue of her actual occupation. The House of Lords held that to acquire an overriding interest against a lender by virtue of occupation, the person claiming the interest had to have been in actual occupation at the time of the creation of the legal charge. Where a purchaser relied on a bank or building society loan to complete his purchase, the transaction – that is the transfer of the property and the completion of the mortgage – were one indivisible transaction, and that there was no moment in time (scintilla temporis) during which the property vested free of the mortgage. The House of Lords had held that a purchaser who can only complete the transaction by borrowing money cannot in reality ever be said to have acquired even for a moment of time an interest in land whereby he could grant interests having priority over the mortgage.  Accordingly Mrs Cann took subject to the lender’s charge.
• The Vendors sought to distinguish Cann.  They asserted that Mrs Cann’s beneficial interest arose from the proceeds of sale of her previous house whereas the Vendors in the present case were already in occupation of the properties.  This transaction reflected a change in social and economic conditions created by the fact that people live longer and many have a need to release equity from their property to meet the debts and living expenses to enable them to continue to live in their homes.  The driver of this economic activity was the need or desire of people usually of modest means advancing age and limited legal knowledge and experience to stay in possession of their homes. Lenders could easily protect themselves by making direct enquiry of occupying vendors as to what right they thought they would have on or after completion in relation to the property.
• The Court of Appeal decided that it was not possible to distinguish Cann.  Mrs Cann gave up occupation of her former home in which she had a beneficial interest.  The driver of these transactions was the Vendors’ need or desire to sell the properties.  Without such a sale the charges on the Vendor’s properties would not be discharged.  There was no reason to suppose that the purchase price would not be funded in the usual way by secured loans.  Finally, it would not be appropriate to place on the lenders the risk of carelessness or fraud in the carrying out of the promises or representation made to the Vendors because the lenders could have and should have made direct enquiries to the Vendors.  If persons intend to retain any interest in their property after completion they should make that clear in the contractual and associated documents, the inspection of which will form the basis of the report on title.  There is, therefore, no point in a lender making direct enquires of a vendor as opposed to the other occupier.  It would be difficult to envisage that it would be appropriate or proper for the lender to by-pass the vendor’s solicitors and communicate directly with the vendor.
• The Vendors also argued that between the sale of registered land and the registration of the transfer, the purchaser was by, virtue of the Act, entitled to exercise the owner’s powers in relation to a registered estate including the power to make a lease. A lease of 7 years does not have to be registered.  It followed that the Vendor’s rights under a lease for 7 years or less had priority over the lender’s right under a subsequently registered charge even though the charge was executed before the grant of the lease.
• The Court of Appeal held that any leases of 7 years would have expired and therefore it was hard to see its relevance. In any event, prior to registration of the transfer, the grant of any lease takes effect in equity only and does not fall within the Act at all.  The Court of Appeal did not accept that a lease of 7 years or less granted by the purchaser pending his registration acquired priority even where the lease is granted and the charge is executed within the priority period conferred by the mortgagee’s official search. Prior to registration the purchaser’s interest in the property can only subsist in equity.  As a matter of basic land law, an equitable owner of land cannot grant a legal interest. 

Accordingly the appeals were dismissed and the lenders were entitled to the possession orders the right to obtain vacant possession of the properties.  The Vendors had not acquired any interest which the lenders were subject to and the lender’s charge took priority.  The problem had arisen because the contracts for sale had not given details of the contractual deal.  If this had been clearly stated and recorded then it would have alerted the lenders.  As the Court of Appeal noted, this omission seems, on the face of it, plainly inconsistent with proper conveyancing practice. The Vendors may now consider whether to make an appeal to the Supreme Court.

Denise Cook v Mortgage Business PLC and other related cases [2012] EWCA Civ 17

In this case, the borrower which was a limited company borrowed money from the Bank of Ireland (“the Bank”) on the security of mortgages over properties and of guarantees given by two directors.  The borrower then defaulted and the Bank took steps to recover possession of the properties.  The Bank’s legal costs came to £123,984, which the Bank paid.  Subsequently the mortgages were transferred to another party and soon afterwards the borrower repaid the sums owed including the legal costs and in that way the borrower had paid the sums demanded including the legal costs. 

The borrower applied for the assessment of the costs under s71 of the Solicitors Act 1974.  S 71 (1) entitles the borrower, although a third party, to obtain an assessment of a bill as if he were the client.  The Court of Appeal held that under s71 the court is only entitled to interfere with the hourly rate agreed between the solicitor and the client to the extent that it could have interfered with it at the behest of the client.  He can eliminate items that are not within the scope of the mortgage and items which are only allowable as between the client and the solicitor on a special arrangement basis under the terms of the Civil Procedure Rules, but generally this is quite limited.

The Court of Appeal, therefore, considered that in a mortgage case an account should be taken of what was due under the mortgage rather than bringing proceedings under s71.  Such proceedings would enable the court to determine the correct issue as between the correct parties and if, appropriate, to order repayment by the Bank to the borrower.  In those proceedings it would be possible to disallow part of an amount claimed on the basis that something was due, but not as much as is claimed – for example by substituting a lower hourly rate.

Instead of seeking an assessment under s71, therefore, in almost all cases a borrower or other party seeking to challenge the costs claimed should bring a claim for an account of the sums due under the mortgage.

In the light of this judgment, it may be anticipated that third party assessments will become rare where the real issue is as to the reasonableness of legal costs.  It seemed to the court that the appropriate procedure for a dispute of this kind is a subject worthy of the attention of the Civil Procedure Rules Committee.

Tim Martin Interiors Ltd v Akin Gump LLP [2011] EWCA Civ 1574

In addition, an agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. However, section 28 (3) provides that if the court is satisfied that it is just and equitable in the circumstances of the case it may allow the agreement to be enforced.  Section 28 (5) states that the issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement.

On the facts of this case, it was held that the making of the loan and charge to Mr Helden by Strathmore Ltd (Strathmore) was a regulated mortgage.  At first instance, the Judge held that it would be just and equitable to permit Strathmore to enforce the charge and the obligation to repay the loan together with two increases in the rate of interest agreed in 2007.  In reaching his decision the Judge took into account that Strathmore employed solicitors to represent them in connection with the loan for the purchase of the land and those solicitors did not inform them that FSMA was applicable.  The financial services legislation had not until quite recently extended to any mortgages.  They did not usually enter into transactions where FSMA applied.  Other factors the court took into account were as follow: 

• The mortgagor, Mr Helden had had the use of the property since 2006 without making any rent or interest payments;
• The property had increased substantially in value.  It was bought for £1 million and it was suggested that it should be marketed at £1.8 million.  The loan from Strathmore thus enabled Mr Helden to achieve a large profit;
• Strathmore would not have been willing to make the loan on an unsecured basis;
• Strathmore could be expected to have generated a return on the £1 million by investing it elsewhere had it not been lent to Mr Helden;
• There was no question of Mr Helden having been taken advantage of.  He had considerable experience in property matters including as a mortgage broker.  The rates of interest were agreed with Mr Helden and were not exorbitant;
• Mr Helden preferred not to pursue alternative funding because of his concern that he should be able to make lump sum repayments without penalty;
• Mr Helden did not identify respects in which he would have been better placed if Strathmore had been an authorised person;
• Strathmore did not realise that FSMA could apply and it was reasonable for them not to do so.

There was some debate in the Court of Appeal over whether a person could rely on section 28 (5) and contend that they reasonably believed that they were not contravening the general prohibition by making an agreement if they were wholly unaware of the existence of the prohibition at the time of the agreement. However, the Court of Appeal concluded that it was unnecessary to decide this issue.  Strathmore could rely on section 28 (3) even though it had contravened FSMA by entering into the charge because it was nonetheless just and equitable to permit Strathmore to enforce its charge.

This case provides a useful example of the sort of circumstances and the factors the court will consider when deciding whether it would be just and equitable to enforce a charge despite a contravention of FSMA.

Charles Helden v Strathmore Ltd [2011] EWCA Civ 542

The proposal covers all loans to consumers to buy a home as well as certain loans to consumers to renovate a home. It also covers credit intermediaries. 

The proposed directive includes measures relating to:

•  Advertising and marketing.
• Pre-contractual information.
• Advice.
• Credit worthiness and suitability assessments.
• Early repayment.
• Regulation of credit intermediaries and non-credit institutions providing mortgage credit.

There will be a European Standard Information Sheet to assess consumers’ ability to repay the loans. Creditors will be required to refuse to grant credit if the creditworthiness assessment determines that the credit would be unsuitable for the consumer.  Equally however borrowers must provide all necessary and correct information to enable the creditworthiness assessment to be carried out.

The proposal has been submitted to the EU Parliament and Council but will need to be adopted and then need national measures to come into force.

The Commission at the same time published a working paper outlining national measures and practices to avoid foreclosure procedures for residential mortgage loans.  Please see link. http://ec.europa.eu/internal_market/finservices-retail/docs/credit/mortgage/sec_2011_357_en.pdf

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

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

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

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)

It was accepted that the trustees had a right of indemnity against the trust assets, but the trustees claimed that clause 17.6.1 of the debenture ensured that any assets which were needed to satisfy the right of indemnity were not trust assets, but belonged to the trustees and therefore would not be affected by the debenture.  The judge could not agree with the trustees’ construction of the clause.  There was no reference in the debenture to the expenses incurred by the trustees and by clause 12 the trustees covenanted to indemnify the lender and any receiver against all costs, expenses and liabilities.

Further, the court was not satisfied that such a term could be implied:

•  A term is to be implied to give effect to the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available.
• It must be necessary to give effect to the presumed intentions of the parties. 
• It was not difficult to accept that the parties might have reasonably agreed that the trustees’ lien should rank ahead of the mortgage, but the circumstances were not such to require such a term to be implied.
• This was because it would contradict the terms of the debenture, which provided that at the point of sale, the receivers should apply the proceeds of sale after his own expenses and remuneration towards payment of the secured loan. 
• If there were to be protection, it was far from clear that it would be by giving priority to their lien. 
• The fact that there was no mention in the debenture for its priority was a significant factor against its implication.

This case provides a useful example of the court’s approach to (1) a claimant’s attempts to construe terms in a debenture which are not obvious and (2) the circumstances when it is possible to imply terms in a debenture.

 Dominion Corporate Trustees Ltd v Capmark Bank Europe Plc [2010] EWHC 1605