This note contains a synopsis of five recent cases impacting upon real estate and lender issues

Incomplete execution of security

A development loan was provided to a trust and secured by a charge. The charge was signed by the individual trustees but not witnessed. Section 52 of the Law of Property Act 1925 requires charges to be completed as a deed which, under section 1(3) of the Law of Property (Miscellaneous Provisions), required that the trustees signatures were witnessed. Without the witness attestations, the document was not properly signed as a deed and therefore failed to create a legal charge.

The document did however create an equitable charge because it was in writing, contained all of the terms and was signed by all the parties (in compliance with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989). In a subsequent action (No. 2), the bank obtained an order to perfect the equitable charge into a legal charge.

However, this case is more notable for the arguments on estoppel. The bank argued that the trustees were estopped from denying the validity of the charge. This argument failed because there was no witness attestation at all, whereas the authorities   on estoppel require some form of witness attestation, albeit incorrect - Shah v Shah [2001] EWCA Civ 527 distinguished from Briggs v Gleeds [2014] EWHC 1178 (Ch).

Bank of Scotland Plc v Waugh [2014] EWHC 2117 (Ch) and No. 2 [2014] EWHC 2835 (Ch)

Enforcement for collateral purposes

The High Court has confirmed that a secured lender is permitted to enforce its security even if the lender has no real prospect of recovery. In other words, where the lender enforces its security solely to apply pressure on the borrower to extract payment. This often arises for a second chargee where there is no equity above the first chargee’s interest.

However, in this case, the Court ordered that the lender could not recover its enforcement costs from the borrower, even though this is usually recoverable from the borrower under the terms of the charge. This case was fact specific because the lender withdrew the proceedings which has automatic costs consequences.

Lenders should therefore consider costs consequences if they intend to enforce security in order to extract payment rather than realise the asset. If any payment is extracted and the lender wishes to terminate the proceedings, a consent order should be considered in order to try and avoid this costs  position.

Co-operative Bank Plc v Phillips [2104] EWHC 2862 (Ch)

Borrower’s counterclaim or set-off

A lender agreed to advance over £12m for a development and refinance loan. The lender went into administration before all  of the funds were advanced and the borrower defaulted. The lender sought to enforce its security. The borrower argued he had a cross-claim or right of set off for damages against the lender which would exceed the debt.

It is well established that, even if a borrower has a valid claim against the lender, he cannot rely on this to prevent the lender from enforcing its security. In practice, the borrower will usually seek a stay of enforcement pending the trial of a counterclaim.

The borrower had also argued that the charge should be rescinded because it was procured by misrepresentation. However, as part of the loan had been used to discharge an existing charge, the lender was able to rely upon its subrogation rights to defeat this argument.

Day v Tiuta International Ltd [2014] EWHC 4583 (Ch)

Enforcement sale at an undervalue

A bridging lender enforced and sold its security over a substantially completed development. The development was subject to conditions under a local authority grant. The property had previously been marketed by the borrower but no sale completed. The borrower argued that the lender  had been negligent and had not obtained the best price reasonably obtainable.

The Court determined that the lender’s duty to obtain the best price was not synonymous with the RICS Standards (the Red Book). The court’s focus had to be on price and whether the mortgagee took reasonable care to sell for that price. It was relevant that the price would be affected by a distressed sale and the risk that the local authority grant conditions would be breached.

This case confirms the well-established principles on the lender or Receiver duty to obtain the best reasonable price. It is worth remembering that there is no requirement to improve the property, only to properly expose it to the market. These arguments tend to resurface with every market cycle, particularly when the property market is beginning to pick up again and borrower’s expectations are increased.

Aodhcon Llp v Bridgeco Ltd [2014] EWHC 535 (Ch)

Subrogation

If a lender’s security is set aside (e.g. for undue influence), it is important to consider if the lender’s advance discharged a prior mortgage. The lender may be able to claim subrogation relief and ‘step into the shoes’ of the prior lender, otherwise the borrower would achieve an unfair advantage.

This case concerned an unusual set of facts. The lender released a charge over the borrower’s property so that he could downsize. The borrower was to buy a new house in his daughter’s name and charge that to the lender.

The charge over the daughter’s house was defective but the lender was subrogated as an unpaid vendor’s lien against the property purchased in borrower’s daughter’s name. It did not matter that the new house was in the daughter’s name because that property could not have been purchased unless its charge was released from the first property.

This case is seen as a non-traditional application of subrogation because the lender did not advance the purchase money for the daughter’s house. Instead the ‘value’ provided by the lender was its agreement to release its existing charge. There was a sufficient connection between the lender’s agreement to part with its interest in the property and the owner’s enrichment to hold that there had been a transfer of value.

Menelaou v Bank of Cyprus UK Ltd [2013] EWCA Civ 1960