Sparks of Time, South Pacific, and a Harsh Result

In 2005, Mrs Rosemary Scott, from Longbenton near Newcastle-upon-Tyne, had money problems. She and her husband had separated and she was finding it difficult to manage. She owned her home, having bought it with her husband from North Tyneside Borough Council in 1999, and she had tried to sell it to raise money, but the only offer she had received was well below the asking price of £156,000.

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Things must have looked pretty hopeless until someone put Mrs Scott in touch with a company called North East Property Buyers. NEPB offered to buy Mrs Scott’s property from her at a price of £135,000, but to allow her to continue to live at the property as a tenant at the discounted rent of £250 per calendar month. She would also receive a lump sum of £15,000 if she stayed as a tenant for ten years. She was to receive £24,000 from the net proceeds of sale. She told the NEPB representative that she wanted to live in the property indefinitely, and he assured her that she could stay as long as she liked and that if she died, the tenancy would be automatically transferred to her son and he would receive the £15,000 lump sum.

It was the answer to her prayers: but perhaps Mrs Scott would have been wise to heed St Teresa’s observation that more tears are shed over answered prayers than unanswered ones. NEPB agreed to pay her legal fees provided she used solicitors nominated by them, which she agreed to do. In the event she sold not to NEPB itself but to a nominee purchaser named Wilkinson. Ms Wilkinson financed the purchase by means of a buy to let loan from Southern Pacific Mortgages Ltd, and her solicitors also acted for Southern Pacific. During conveyancing, Ms Wilkinson’s solicitors asked about vacant possession and Mrs Scott’s solicitors replied that arrangements could be made directly with her “as to both handover of the keys and the time that vacant possession will be given”. On the Standard Conditions of Sale, neither seller nor buyer specified whether the property was being sold with vacant possession or subject to a tenancy. The sale contract, the execution of the legal charge and the completion of the TR1 all took place on the same day, namely August 12, 2005; the transfer and the charge were registered on 16 September.

Those of my readers who are wondering how a company called South Pacific Mortgages came to lend on a property which is considerably closer to the Bank of Dogger than to Bali H’ai may be interested to know that SPML was originally one of three English secured lending entities of Lehman Brothers, although it has been operated by another company since 2008.

On 16 August 2005 a company called “UK Property Buyers” acting as agents for Ms Wilkinson granted Mrs Scott a two-year assured shorthold tenancy at the reduced rent. After the term expired, the tenancy would become a monthly periodic tenancy terminable on not less than two months’ notice in writing. On the same day, Mrs Scott received a document promising that she could remain in the property as the tenant and that she would get the £15,000 loyalty payment after 10 years.

This was of course not what Mrs Scott had been promised before she sold her house, though she did not realise that at the time. The tenancy she had been granted was one with very limited security of tenure, and certainly did not come anywhere near a tenancy which would entitle her to remain in the property for as long as she wanted; it was also not capable of being inherited by succession. She was also not to know that the tenancy for life which she had initially been promised was not permitted by the terms of the SPML mortgage, and that SPML were unaware of that promise. Nor was she alone. By 2008 the Office of Fair Trading estimated that there were about 50,000 people in these “sale and leaseback” arrangements, many of whom were extremely vulnerable to eviction.

But by August 2008 Mrs Scott had her own problems. She received a letter from “North East Property Lettings” suggested that because of issues surrounding an office move, some tenants might have received letters from mortgage companies saying that their accounts were in arrears, but that this was incorrect. This seems to have been the first time that Mrs Scott was made aware that there might be a mortgage on the property. Then in about March or April 2009 she accidentally opened a letter addressed to Ms Wilkinson which had come to the house, and discovered that a possession order had been made on 17 March 2009. This was swiftly followed by a warrant of possession due to be executed on 20 May 2009. That warrant was then suspended so that Mrs Scott could be joined as a defendant in the possession proceedings. The main plank of her case was that she had an overriding interest as a person in actual occupation under the Land Registration Act 2002 which was binding on Southern Pacific. If she could not succeed on that point, then she would be evicted.

By this time there were quite a number of people in the same position as Mrs Scott: when the matter was heard by HHJ Behrens in Newcastle in 2010, she was one of nine sellers to NEPB who were facing eviction in the greater Newcastle area, and there were others farther afield. By the time the matter reached the Supreme Court in August of this year, Collins LJ noted that there were now 90 or so cases in the Newcastle area involving 20 different lenders, and many more in other parts of the country. They all revolved around the same issue, namely whether sellers such as Mrs Scott had an overriding interest under LRA 2002 which was binding on the mortgagee. Mrs Scott’s case was selected as a specimen case and it was therefore the history of her predicament which the Supreme Court looked at it in detail.
Before looking at the law, I bring to your attention the prefatory words of Collins LJ in the Supreme Court judgment on Mrs Scott’s case and the associated cases:

“It is impossible not to feel great sympathy with Mrs Scott and the former home owners in her position, who may have been not only the victims of a fraud which tricked them out of their homes, but also of unprofessional and dishonest behaviour by the solicitors appointed to act for them …. “ [paragraph 24, p. 6].

He further noted, at paragraph 88, that

“it is also important to emphasise that the scheme in the present case could not have worked if the solicitors for the vendors and the solicitors for the purchasers/lenders had complied with their professional obligations and proper and normal conveyancing practice … “ .

But none of this could lessen the impact of the harsh truth, which was and is that Mrs Scott and her fellow sellers do not have an overriding interest which is binding on Southern Pacific, and which therefore prevents Southern Pacific from obtaining possession against them. The result is therefore that she and her fellow-litigants will be evicted from their homes unless Collins LJ’s recommendations to mercy (“I express the hope that the lenders will, before finally enforcing their security, consider whether they are able to mitigate any hardship caused to the vendors”) [para 94] bear some fruit. Hale LJ also made some extremely interesting observations about this result, which I’ll come back to in due course. For now, let’s look at the law. Continue reading

Double Indemnities … and Exoneration

“Equity of exoneration”. It’s not exactly a phrase that whets the appetite, is it? Nonetheless, you should read on, because  it’s sometimes a weapon of considerable power in advising a client who has acted as a guarantor or surety. A recent case, Day v Shaw & Shaw [2014] EWHC 367 (Ch) (on BAILII here) has extended an existing line of thought that it’s a weapon of particular strength and force when considering “husbands and wives”.¹

double-indemnity-title-still

When the principle is correctly applied, the difference to the surety (and also to the disappointed creditor) can be huge. In Day v Shaw, Mrs Shaw’s share of the net proceeds of sale doubled from approximately £22,000 in round figures to about £45,000. Nor was that all. In spite of the fact that there was sufficient equity in the property to repay his debt, a creditor [Mr Day], who had his judgment secured on the property under a charging order, got nothing at all.

Perhaps, therefore, it’s fairer to say that exoneration is an equity with a dull name, but interesting results!

The Facts

On a wide-angle view of the case, Mrs Shaw had acted as a guarantor of the debts of a business run by Mr Shaw and their daughter, Mrs Shergold. Mr Shaw and Mrs Shergold were directors of the company. There was some evidence at trial that Mrs Shaw owned shares in the company, though that point was never seriously pursued.

The story starts back in 1997, when Mr Day loaned a sum of money [not specified in the judgment] to Mr Shaw and Mrs Shergold. The loan was unsecured. No more is said about it than that, but we can assume it was loaned to them for the purposes of the business; it would seem, however, to have been loaned to them personally and not to the company. The repayment date was in 2007.

In 2002, Avon changed its business bankers from RBS to Barclays. On the same day in March 2002, Mr Shaw and Mrs Shergold executed personal guarantees to the Bank in respect of all debts owed by the company, and Mr and Mrs Shaw executed a second mortgage over their home. Avon was also a party to that second charge.

The terms of the charge referred to Avon as “the Principal Debtor” and to Mr and Mrs Shaw jointly as “the Mortgagor”.

The terms identified by Morgan J as material were:

  • Avon covenanted with Barclays that it would repay all monies on demand;
  • Mr and Mrs Shaw covenanted that they would pay to Barclays the sums due from Mr Shaw [including those due from him as guarantor];
  • This covenant expressly applied to any liability of Mr and Mrs Shaw jointly whether “entered into solely or jointly with any other person and whether as principal or surety”;
  • Mr and Mrs Shaw charged the property with the payment of all monies and liabilities covenanted to be paid under the charge whether by the Principal Debtor or by the Mortgagor.

As is fairly common, the Bank was (at least) doubly protected: it had a double indemnity in the personal guarantees of the directors, and it had security for Avon’s debt and any debt of Mr Shaw’s by way of the mortgage.  Continue reading

Putting the brakes on charging orders

New York orphans off on a trip to Coney Island; from the New York Public Library collection on Flickr.

Further to my comments recently about the folly of paying mortgage instalments via credit cards, I was interested to see this announcement of an MoJ consultation on whether there should be a minimum level of consumer credit debt before charging orders can be made or enforced. A brief look at the consultation paper reveals a concern that there is potentially a disaster waiting to happen here. There is lots of unsecured credit or credit secured against the (now diminishing) equity in property, and although statistically the number of charging orders obtained has actually fallen over the past couple of years, the threat that these orders could be used to enforce defaults in the future is still out there and the government is clearly apprehensive. Personal insolvency is increasing – record numbers were recorded last year – and lenders will be looking more and more to get hold of security to increase their chances of repayment. Do follow the link and contribute to the consultation if you have clients who have already been affected by this problem.

Beneath the surface

Photo by Cortomaltese from Flickr

Normal service will be resumed within the next day or so, but in the meantime I found this story on the Shelter website interesting. Tenants and homeowners are resorting to paying their mortgage instalments or rent via credit cards. This recession may be less brutal on the whole than the one of the early 90s, but there are still victims who are finding it a struggle. It speaks volumes about the UK attitude to what seems, at first glance, like cheap borrowing: the rationale, I suspect, is that it is worse to go into arrears on your mortgage than to borrow money on plastic that you might have trouble repaying. As Martin Lewis points out, it is not. Ironically of course the mortgagors who are borrowing on credit cards to keep up with their payments have less protection if they fall into arrears than if they simply fell into arrears with their mortgage, particularly now the Horsham Properties/Clark & Beech loophole is to be closed – but more of this anon. Those advising clients in this position will probably be well aware of Martin’s site, www.moneysavingexpert.com, but I will give it a shout here for those who don’t.