A lender that does not make enquiries of persons known to be in occupation of a property runs the risk that such persons' interests in the property, if any, may override that of the lender.

This was the position in HSBC Bank Plc v Dyche & Anor. The Dyches bought Mrs Dyche's parents' property for £25,000 (which was less than its market value) with the benefit of a loan from Lloyds Bank for £17,000. The reason for the transaction was to avoid the property being sold by Mrs Dyche's father's trustee in bankruptcy. The parents continued to reside in the property as their home and paid the loan sum, plus interest to the Dyches so that the Lloyds' mortgage was redeemed. Contrary to the agreement between the parties, the property was not transferred back to the parents following payment but, following her divorce, was transferred into Mrs Dyche's sole name. She took out a loan with HSBC providing HSBC with a forged assured shorthold tenancy agreement showing her father as tenant. Mrs Dyche became bankrupt and HSBC sought possession of the property.

The court dismissed HSBC's claim holding that the Dyches had held the property on constructive trust for the parents and that Mrs Dyche's father (the surviving parent) was solely beneficially entitled to the property. His interest overrode HSBC's interest as he was in actual occupation throughout. He was entitled to a transfer of the property to him free of the mortgage.

Things to consider

Lender's solicitors should make enquiry of any one known to be in occupation of a property. As per the CML Handbook, a signed deed or form of consent to the lender's interest taking priority should be obtained from any occupier aged 17 or over who is not a party to the mortgage. Failure to make such enquiry here meant HSBC assumed the risk of the tenancy agreement turning out to be forged, so losing their security.