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Secured recoveries update

Secured recoveries update

  • United Kingdom
  • Financial institutions - Secured recoveries

12-06-2017

Claims for support for mortgage interest

Support for Mortgage Interest (SMI) is a benefit received by circa 135,000 borrowers where payments are made direct to lenders by the DWP. Around 70,000 of those borrowers are in receipt of pension credits. SMI is being reformed. Twelve months ago the waiting period for claims for SMI was extended from 3 to 9 months and from April 2018 SMI will cease to be a benefit and will only be paid where the recipient agrees it can be treated as an interest bearing loan to be secured by a second charge on the mortgaged property. 

The practical way this will be achieved is the DWP will appoint an Information Provider in June (delayed by the election) to write to all current recipients of SMI.  A relatively limited contact strategy will be deployed to contact the recipient. If the recipient signs a loan agreement and (with some limited exceptions) a second charge is registered against the mortgaged property the payments will continue to be made to lenders. The loan will be repayable on a future disposition (e.g. sale) of the property. It appears shortfalls will not be pursued by the DWP. However, if the recipient does not sign the loan agreement and second charge before the end of March 2018, all payments will cease. 

There are clearly some significant concerns here for lenders including:

  • It is not clear how lenders will deal with consent to second charges being registered.  It is suggested that lenders should liaise direct with the DWP to agree the position they propose to take. 
     
  • Clearly only limited steps are being taken by the DWP to contact borrowers in respect what is a relatively complicated change and there is a concern many may not engage sufficiently.
     
  • That is compounded by the apparent under-estimate by the DWP of the number of vulnerable recipients (1,000) which seems implausibly low given the number of pension age recipients.
     
  • Lenders will not receive notice of the cessation of payments – payments will simply stop in April 2018.
     
  • It may be difficult for borrowers to rectify the situation.  If they act quickly they may be reinstated.  If they do not act quickly they will need to re-apply for SMI which is likely to cause long delays before payments recommence.

Lenders will want to investigate their SMI population exposure and formulate a strategy.

The Payment Services Directive II

PSDII will start to have an impact in late 2018/early 2019.  This is in essence open banking permitting customers the option to consent to authorised persons being able to access 3 months of their current account data. This opens opportunities for the FinTech industry to develop tools to use that data across many markets (e.g. automated loan applications, accurate price comparison sites, budget managing products, tools to maximise the interest your money earns, tools to improve your credit rating, etc).  Specifically in the arrears space the key opportunity is to correct information asymmetry. 

Information asymmetry arises where the creditor knows less about the customer’s financial and personal circumstances than the customers, making it difficult to proactively target customers for help or to ensure the right help is offered. Access to three months of current account data would go a long way to rectify this asymmetry and will significantly improve a creditor’s ability to target specific customers or customer segments (e.g. those about to fall into arrears); to develop solutions and to have better conversations with customers.  This will particularly help creditors who do not also hold their customer’s current account. Technology solutions could analyse and present the data to arrears agents.

The key challenge is likely to be around consent.  Consent needs to be express and cannot be indefinite.  So for example a consent in an application form for a credit product will not permit a creditor access to the data for life of the product.  However, innovation may enable creditors to overcome this – for example through arrangements with third parties; or by offering incentives for consent to be given.

The Return of Pursuers Offers

The Act of Sederunt (Rules of the Court of Session 1994 and Ordinary Cause Rules 1993 Amendment) (Pursuers Offers) 2017 came into force on 3 April 2017.

In essence the new Rules introduce a formal system for Pursuers to put forward an offer to settle a case early. This is similar to the current system where Defenders can tender an offer and brings the position in Scotland in line with that in England and Wales where it is open to either party to lodge a Part 36 offer which is then relied upon if a sum greater (or lower), than the amount offered is awarded by a court. 

For a limited period of time Pursuers offers did form part of the Rules of the Court of Session but the applicable Rules were revoked in 1996 and have only now been re-introduced in their current form.  The applicable Table of Solicitors Fees has also been amended (see Act of Sederunt (Fees of Solicitors in the Court of Session and Sheriff Court Amendment)(Pursuers’ Offers) 2017.

Points to note about the new Rules are:

  • the Pursuers offer can be made in any case in which the Initial Writ or Claim form includes a  financial crave (a statement of the order being sought), other than where evidence has to be heard;
     
  • the Pursuers offer must be lodged in court and includes interest to the date of the offer together with the Pursuers’ expenses; 
     
  • there is no pre-requisite for the Pursuer to exhibit vouching (supporting documentation) before lodging an offer;
     
  • the Pursuers offer can be made at any time before the court issues its judgment (or a jury retires to consider the verdict), and may be accepted by the Defender at any time before its withdrawal;
     
  • if the Defender wants to accept the offer they must do so by lodging a Minute of Acceptance which has to be unqualified; and 
     
  • where the Pursuers offer relates to more than one Defender, it is only valid if accepted by all the Defenders.  Where only one Defender in the action wants to accept the Pursuers offer, the Pursuer can seek Decree against the accepting Defender subject to obtaining their consent.

Sanctions apply if a Defender delays unnecessarily in accepting an offer made by the Pursuer or where a Defender fails to accept an offer at a sum which is no greater than what is awarded by a court to the Pursuer.  Ultimately a Defender can be found liable for payment of a 50% uplift on the Pursuers account of expenses attributable to the period following the making of the offer.  It is open to a Defender, on cause shown, to argue that there should be no uplift. Arguably the absence of vouching to support the Pursuers offer may be one such reason for the court to refuse to award an uplift on the Pursuers expenses. It is advisable therefore, that Pursuers are realistic when making an offer.

That being said there will undoubtedly be added pressure on a Defender not only to give serious consideration to an offer but to do so without delay.  Arguably it is unfair to try and force a Defender to settle a case early for fear of being faced with a financial penalty where there are no such similar provisions in the tender process if a Pursuer fails to beat a tender or then delays in accepting a tender. It is understood, however, that changes relating to expenses and how they are dealt with are due and which, it is expected will address this inequitable position.

For now it remains to be seen how effective the re-introduction of Pursuers offers will be in achieving an early settlement.       

Case Law updates

Abdulla v Whelan [2017] EWCH 605 (Ch)

Summary

Mrs Amin was declared bankrupt on 8 June 2010 and Mr Whelan was appointed as the Trustee in bankruptcy with effect from 2 February 2011. At the time of the bankruptcy order, the Bankrupt was a joint tenant of business premises in Kingston Upon Thames pursuant to an Underlease. On 24 June 2011, the Trustee served a notice of disclaimer pursuant to section 315 of the  Insolvency Act 1986 (‘the Act’).

S.315 states that a trustee may, by the giving of the prescribed notice, disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it or otherwise exercised rights of ownership in relation to it. Onerous property for these purposes is any unprofitable contract or any other property comprised in the Bankrupt’s estate which is unsaleable or not readily saleable, or is such that it may give rise to a liability to pay money or perform any other onerous act. A disclaimer under this section operates so as to determine (end), as from the date of the disclaimer, the rights, interests and liabilities of the Bankrupt and his estate in or in respect of the property disclaimed, and discharges the trustee from all personal liability in respect of that property as from the commencement of his trusteeship.

The parties in this case did not agree upon the effect of the notice of disclaimer. The Trustee and landlords of the Underlease took the view that the notice of disclaimer did not end the legal estate in the Underlease and that the estate of the Bankrupt remained liable for the payment of rent. The Appellant contended that the notice of disclaimer was effective to disclaim all of the Bankrupt’s interest in the Underlease and so the estate of the Bankrupt was not liable for any further rent after the disclaimer.

Held

At first instance and on appeal, the Judge agreed with the Trustee and landlords.  S.283 of the Act states that a Bankrupt’s estate comprises all property belonging to or vested in the Bankrupt at the commencement of the bankruptcy but that property held on trust for any other person is excluded from this. This decision was upheld on appeal. The legal interest in the Underlease remained in the names of the Bankrupt and her joint tenant and had not been disclaimed. The Appeal was dismissed.

Relevance for secured lenders

Whilst this decision confirms what we already knew, the case is worth mentioning as it serves as a reminder that jointly owned property can’t be disclaimed by a trustee in bankruptcy notwithstanding service of a notice of disclaimer.

However, notices of disclaimer should always be treated with care as they present some risk to secured lenders, particularly when they relate to leasehold properties. We would always suggest seeking legal advice on whether a vesting order application should be made as the decision to do so will vary depending on the specific facts of the case and there is only a short period (3 months) in which such an application can be made.

Dammermann v Lanyon Bowdler LLP [2017] EWCA Civ 269

Summary

The Appellant, Mr Dammermann entered into a legal mortgage with his lender in February 2002. He subsequently defaulted in payment and the lender appointed receivers to sell the property under the terms of the mortgage and the Law of Property Act 1925. The receivers appointed the Respondent firm of solicitors to conduct the sale and their fees were added to the mortgage debt. Mr Dammermann sought to challenge the level of fees charged by the solicitors and thereby obtain a refund of the sums paid to them and in turn charged to him via his mortgage.

Held

At first instance it was held that there was neither an agency nor any contractual relationship between Mr Dammermann and the solicitors and therefore he had no standing to make a claim against them. Accordingly, the claim was dismissed. Mr Dammermann appealed that decision and that appeal was also dismissed. The Judge concluded that there is no contractual or agency relationship between the borrower and any solicitors appointed by the receivers.

On a  separate point, although the claim had been allocated to the small claims track, unusually Mr Dammerman was ordered to pay costs on the grounds of unreasonable behaviour pursuant to CPR 27.4. The Court of Appeal subsequently allowed an appeal against the costs order replacing it with an order of ‘no order for costs’.

Relevance for secured lenders

The case is worthy of note for its discussions around the nature of the agency between a receiver and borrower and because it confirms that a borrower has no ability to challenge the costs of solicitors appointed by receivers.

Armstrong v Onyearu [2017] EWCA Civ 268

Summary

Where property jointly owned by A and B is charged to secure the debts of B only, A may be entitled to a charge over B’s share of the property to the extent that B’s debts are paid out of A’s share.

This is known as the equity of exoneration. The practical implications of it are that where a property is sold, a secured creditor will be paid out of B’s share of the property first and will only have recourse to A’s share once B’s share has been exhausted.

In this case, the property was originally purchased in 2000 in the sole name of Mr as the matrimonial  home for Mr and Mrs and their children. In 2005 Mr obtained a loan to assist with his business and this loan was secured against the property. Mr was declared bankrupt in 2011. Although Mr was the sole registered proprietor of the matrimonial home, both Mr and Mrs maintained that they owned the property in equal shares and a declaration to that effect was made by the Court. Mr’s trustee in bankruptcy did not oppose this declaration.

In November 2014, the trustee’s application for the sale of the property was dismissed on the grounds that Mrs was entitled to a charge on Mr’s half share of the property by way of an equity of exoneration. The trustee appealed against this decision on the grounds that Mrs received a benefit from the business loan because she and her husband operated as a family unit and the loan enabled Mr to continue with his business and thereby to continue to meet payments under the mortgage.

Held

On appeal it was held that the purpose of the business loan was to pay the creditors of Mr’s business. Those creditors and Mr were the people who directly benefitted by the loan. Any benefit that might have been anticipated for Mrs was subject to the double contingency; first that Mr’s business would survive and secondly that it would make profits from which he could make drawings. Any benefit to Mrs was too remote to provide a basis for inferring or presuming that her intention was to bear the burden of the loan equally with her husband. Further, as at the date of the loan, any anticipated benefit was incapable of valuation and unlikely to bear any relation to the amount of the loan. Furthermore, Mr and Mrs did not operate as a single unit financially. They kept their finances separate, with each having their own income and their own bank accounts, albeit family expenses were shared, with Mr paying the mortgage and Mrs paying all the other household expenses. By denying her the equity of exoneration, she would be paying not only her share of the expenses but also his, a result that would not be in accordance with equity. The appeal was therefore dismissed.

Relevance for secured lenders

Whilst lenders may find themselves caught up in arguments between co-borrowers regarding the equity of exoneration, it should be remembered that a joint mortgagor cannot be exonerated from liability to repay the mortgage unless his/her co-mortgagor has a sufficient interest in the secured property to permit the mortgagee to be repaid out of the other mortgagor’s interest. Therefore the equity of exoneration cannot be used by a mortgagor against a mortgagee to avoid liability for the mortgage and is no defence to a claim for possession of property.

Comment

This is the first occasion on which any issue on the equity of exoneration has arisen before the Court of Appeal since Paget v Paget [1898] 1 Ch 470 and so will now be regarded as the leading authority on that subject matter.

Barclays Bank Plc v Boyd [2017] NICA 14

Summary

This was an appeal by borrowers against an order made on 1 December 2015 entitling the lender to delivery of possession of a property in Belfast. Payments towards the mortgage account were not maintained and a notice to quit in the form of a demand for possession was served. The lender issued an Originating Summons on 14 August 2009 to pursue its claim and in June 2010 the Court made an order for possession suspended upon payments. Payments ceased and in September 2014 the lender was granted liberty to enforce the 2010 order for possession.

The borrowers appealed the September 2014 decision (out of time) asserting that they had a defence to the claim for possession on various grounds which included an allegation against the lender that it was negligent in lending to them in light of the content of a valuation report which the borrowers said they did not receive the 4th and crucial page of until 2012. They asserted that, had they seen this page of the valuation before the loan was granted, they would not have proceeded to purchase the property due to the existence of the major structural problems detailed in the last page of the valuation report. In December 2014, the borrowers also brought a separate claim against the lender, valuer and third party for damages arising from the valuation report.

Held

At first instance the lender maintained that the borrowers were confined to the relief which can be obtained under S.36 Administration of Justice Act 1970 (as amended by S.8 Administration of Justice Act 1973).

Most lenders will be familiar with the above provisions but by way of recap, S.36 states that the court may adjourn proceedings, stay/suspend enforcement or postpone the date for delivery of possession for such period or periods as the court thinks reasonable if it appears to the court that the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default.

The borrowers relied on the discretion to stay proceedings under S.86(3) of the Judicature (Northern Ireland) Act 1978 which states ‘Without prejudice to any other powers exercisable by it, a court acting on equitable grounds, may stay any proceedings or the execution of any of its process subject to such conditions as it thinks fit.’

The Judge at first instance recognised the basic principle that a mortgagee is entitled to possession of the property when the mortgagor is in default. However, he also considered that the power to suspend enforcement should be available in rare and compelling circumstances including those where the mortgagor had a clear and strong case against either the mortgagee or a third party which made it likely that the mortgagor would recover compensation, greater in extent than the sums overdue to the mortgagee, within a reasonable period of time. Nevertheless, the Judge concluded that the borrowers would face real difficulties in overcoming limitation obstacles in their separate claim for damages and declined to exercise the Court’s discretion to stay proceedings under S.86.

On appeal, the Court found that the trial judge had set out in some detail why he came to his discretionary judgment and that there was no proper basis to interfere with that decision. Accordingly, the appeal was dismissed.

Relevance for secured lenders

This was a decision of the Court of Appeal in Northern Ireland. It may be of use to lenders who are faced with applications to suspend possession pending the outcome of a speculative claim for damages with no guarantee of a successful recovery.

Taylor v  Van Dutch Marine Holding Ltd [2017] EWHC 636 (Ch)

Summary

In July 2016, the Claimant obtained a freezing order against the Defendants. The Second Defendant had previously given a debenture to secure a large sum, with a fixed charge over some of its property, in TCA’s favour in November 2014.  TCA sought to enforce its right under the debenture to appoint a receiver to dispose of the charged property. 

TCA asked the Claimant to consent to its enforcement action, by way of an amendment to the freezing order i.e. that nothing in the order should prevent or restrict it from enforcing any rights under the debenture. However, the Claimant refused, stating that another party may own some of the Second Defendant’s property, and that party may in turn be owned by some or all of the other Defendants. TCA applied to vary the freezing injunction and the Claimant applied for TCA’s application to be adjourned.

Held

Mann J held that in a normal security enforcement situation a secured creditor does not collude in an infringement of the freezing order, or aid and abet a breach of the order, if it does not vary a freezing order varied before exercising its rights.  TCA’s  disposal rights would not be affected by the order, and this included if the disposal was made by a receiver, who acts as the agent of the chargor and not the secured creditor. 

A freezing order does not give security in itself and does not affect the rights of third parties over the frozen assets. TCA had a prior right via its security over the charged property; any enforcement was not a disposal by the Defendants, but an exercise of TCA’s own independent rights. TCA had therefore not needed to seek a variation of the freezing order. 

Comment

The Claimant opposed TCA’s application on the basis that there was issues regarding the charged property’s ownership.  This does not matter; the secured creditor will still not need to seek permission and if it transpires that the chargor does not own the assets, that is a separate issue between the chargor and secured creditor. 

Relevance for secured lenders

It is not uncommon for secured lenders to find that the property they are seeking possession of is subject to a freezing order. This decision suggests that in a standard case, the secured lender will not need to vary the order when seeking to take enforcement action if the action does not involve a disposal of the assets by the borrower himself. However, care should always be taken to ensure that the proposed enforcement action does not breach the precise terms of the freezing order and if in any doubt, a variation of the freezing order should still be sought.

Morris v Godiva Mortgages Ltd [2017] UKUT 44 (TCC)

Summary

The Appellants appealed against the decision of the First-Tier Tribunal to reject their application to HM Land Registry for alteration of the register for a property known as ‘Toad Hall’.

The Appellants purchased Toad Hall in 2001. In 2009 a transfer of the property to the second Respondent was registered. In 2012, the Appellants applied to alter the register to be reinstated as the registered proprietors and to restrict the amount owing to the First Respondent lender to £100,000 being the sum that redeemed their prior mortgage together with a cash payment of £9,274. The Appellants asserted that either they did not sign the transfer or if they did sign it, they did so in the belief that it was a mortgage not a transfer.

Held

At first instance, the well named Judge Brilliant directed the Appellants’ application to alter the register to be cancelled as he reached the conclusion that they did sign the transfer. That decision was upheld on appeal.

Relevance to secured lenders

A case worth mentioning purely because it demonstrates that not all allegations of forgery are true and such allegations should always be properly investigated. However, it helped on this case that a secret recording was taken of a discussion with one of the Appellants in which she did not express any surprise when told that the First Respondent owned the house, despite later saying that this was the first time she learned of the transfer. The Judge was content that the recording was admissible as evidence.  It will obviously be rare to ever have such compelling evidence.

Professional negligence/title rectification/mortgage fraud

BPE Solicitors v Hughes-Holland [2017] UKSC22

An important Supreme Court decision which clarifies the SAAMCO (South Australia Management Corporation v York Montague Limited [1997] AC 191) principle and sets out useful guidance regarding the limits of the duties of professionals in the context of commercial transactions.

Summary

Mr Little (L) and Mr Gabriel (G) were friends.  In November 2007, L approached G to borrow £200,000 in respect of the development of a disused heating tower (the property) in Gloucester.  It was agreed that the loan would be repaid by 12 March 2009 together with a sum lump of £70,000.

Based on their conversation, which took place in a pub, G thought that L (or a company L controlled) owned the property. L told G that planning permission had been granted for development of the property into offices and that the development project would cost c £200,000. G assumed from their conversation that his loan of £200,000 would be used to finance the development albeit this was not expressly stated by L.

In fact, the property was owned by a company called High Tech (which was owned and controlled by L), and was subject to a secured loan of £150,000. L planned to transfer the property from High Tech to a special purpose vehicle (SPV).  G’s monies were to be used by the SPV to pay High Tech in order to discharge the loan and charge with the balance to be used to pay High Tech’s VAT liability. Therefore, the monies advanced by G were being used to pay off debt, and were not being used for development of the property.

G instructed BPE to draw up a Facility Letter and Charge over the property. Unusually, BPE’s instructions were received in a voicemail left by L. L told BPE he intended to sell the property to the SPV and that G had agreed to lend him the money.  BPE did not clarify the instructions with G.  BPE used a template from a previous abortive transaction involving the Parties which incorrectly stated that the loan monies would be used to assist with “development costs”.  The documents negligently drafted by BPE served to confirm G’s understanding of the transaction.  The transaction was a failure. Ultimately, the property sold for £13,000 at auction. G did not recover any of his investment, other than a sum of £8,191.56 paid to him personally by L.

Held

The First Instance decision

G’s negligence claim against BPE was successful as the trial Judge found that BPE should have explained that G’s funds would be applied for L’s benefit and that L was not putting anything into the transaction himself.  BPE argued that its duty was limited to drawing up the facility letter and charge and that on any analysis the transaction was not viable and G would have suffered the same loss even if the transaction had proceeded in line with his understanding. Instead, the trial Judge was persuaded by G’s argument that he was entitled to damages essentially on a “no transaction” basis, because if he had not been misled about the proposed use of his money and if his misunderstanding had been corrected by BPE, he would not have leant £200,000 to L. G was awarded £200,000 damages less the £8,191.56 received from L.

The Court of Appeal decision

Gloster LJ found that there was no evidence that the transaction was viable, and therefore no evidence that if the £200,000 had been used to develop the property in line with G’s understanding of the transaction, that this would have enhanced the appeal of the property and that G would have recovered his loan. Instead it reduced the damages to nil on the basis that this was a bad investment, and it found that the whole loss was caused by G’s commercial misjudgement. Further, if G had suffered a loss this would have been reduced by 75% for contributory negligence on the part of G.

The Supreme Court decision

The Supreme Court upheld the Court of Appeal decision and found that none of the loss suffered by G was within the scope of BPE’s duty as it arose from his own commercial misjudgements.

Firstly, the Supreme Court considered the viability of the development project. It agreed with the Court of Appeal that the value of the property would not have been enhanced if the £200,000 had been spent on development costs. It was always a poor investment.

Secondly, the Supreme Court considered and affirmed the application of the SAAMCO principle and Lord Sumption stated that “where the contribution of the Defendant is to supply material which the client will take into account in making its own decision on the basis of a broader assessment of risks, the Defendant has no legal responsibility for his decision”.

His judgment therefore clarified the distinction between information and advice.

In cases falling within the information category, the professional must take reasonable care to ensure that the information is correct. However, where the professional “contributes a limited part of the material on which his client will rely” he is only responsible for the “financial consequences” of the information that they have provided being wrong as opposed to the “financial consequences” of its client’s decision to enter into the actual transaction itself.  Therefore, it remains the client’s responsibility to assess the overall merits of the transaction as a whole. 

For cases which fall within the advice category: where the professional is under a duty to advise someone as to what action he should take; the professional must take reasonable care to consider all the potential consequences of the course of action. If negligent, the professional is responsible for all the foreseeable loss incurred as a consequence of the advice.

The Supreme Court considered whether BPE had assumed responsibility for G’s decision to lend the money to L and found that BPE had not.  It found that this was an “information” case and BPE’s duty was limited to drafting the facility letter and charge.  BPE did not take responsibility for the whole transaction.  BPE were merely responsible for confirming an incorrect assumption by G about how his loan monies were being applied, but this was one of a number of factors in G’s overall “assessment of the project”. 

The Supreme Court then considered what loss was attributable to BPE’s failure to correct G’s assumption. It found that it made no difference what G’s monies had actually been used for because the loan monies in the sum of £200,000 were insufficient to develop the property and the project had been doomed to fail and G would have always suffered a loss. It concluded that none of the loss suffered by G was within the scope of BPE’s duty and that the loss arose from G’s commercial misjudgements.

Comment:

The facts of the case may be unusual but the Supreme Court’s clarification of the distinction between information and advice cases is of broad significant to more typical cases:

  • Typically most conveyancing transactions will fall within the scope of “information” duty. Such cases are fact sensitive and will always depend upon the scope of the professional’s retainer. Lenders should take steps to tighten up their retainers to make them as robust as possible so that the scope of the professional’s duty is clearly defined. This is particularly important because “information” does not transform and become “advice” just because it is important to a particular transaction.
     
  • In view of the notional 75% deduction for contributory negligence the case is a cautionary tale of the need for proper due diligence prior to making an advance to ensure that that an investment is viable.
     
  • The judgment also demonstrates the need for robust expert evidence in negligence claims as the burden of proof is on the Claimant to specifically prove that he has suffered a loss and that the loss fell within the scope of the Defendant’s duty. 
     
  • Subject to the facts of their cases, lenders may wish to consider claims in dishonesty or breach of fiduciary duty against Professionals where traditionally they have just pleaded negligence. Due to professional indemnity coverage concerns regarding this type of claim, lenders should be particularly mindful of the partnership and insurance arrangements of their panel firms.

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