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Banking and Finance Litigation – Autumn 2019

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25/11/2019

High Court rejects customer’s ‘unfair relationship’ claim

In the recent case of Promontoria (Henrico) Ltd v Gurcharn Samra, the High Court has rejected unfair relationship allegations made by a customer against its bank and distressed debt creditor. Walker Morris highlights key takeaways for lenders.

FCA final rules could free ‘mortgage prisoners’

Louise Power summarises key points arising from the FCA’s new rules which pave the way for so-called “mortgage prisoners” to switch to a more affordable product.

Last year we reported on the plight of so-called “mortgage prisoners”.  That is to say, customers trapped in expensive deals and unable to remortgage because of the tightening, in recent years, of affordability assessment criteria and/or because their “zombie banks” (or closed book lenders that subsist only on running down their existing accounts) no longer offer new products.

In October 2019 the FCA published new final rules and guidance which will allow lenders to conduct a more proportionate affordability for customers who are up-to-date with their existing mortgage and want to switch to a more affordable product without borrowing more (except to cover certain fees).  The FCA has therefore paved the way for freeing these mortgage prisoners, albeit whether a lender lends to an eligible consumer remains a matter for the lender, depending on its own commercial and risk appetite.

The new rules apply with immediate effect and lenders can begin to apply the modified affordability assessment as soon as they are ready.  There are some practical steps which lenders will need to take before doing so, including:

  • Identifying and contacting customers about the new rules and explaining the changes and possibilities in a simple and engaging way. This includes customers of inactive lenders and firms not authorised for mortgage lending
  • Implementing a strategy for assessing the eligibility of consumers. This might involve enabling consumers to identify themselves whether they might be eligible
  • Reviewing and updating responsible lending policies to address how the new rules will be applied
  • Implementing an appropriate internal switching policy. (Both the lending and switching policies must be approved by the firm’s governing body)
  • Educating staff and other interested parties (such as intermediaries) about the new rules and the business’ strategies relating to/arising from them
  • Informing customers who are subject to modified assessment criteria of the basis on which their affordability has been assessed, and providing to them additional disclosures about potential risks
  • Adapting regulatory reporting processes and procedures to capture and submit to the FCA data on sales involving the modified affordability assessment.

A responsible lending implementation group, set up in August 2019 and including lenders and other industry representatives, is currently developing proposals for key messages to be included in consumer communications.

There are long-stop dates of 1 May 2020 and 1 September 2020 by which lenders must, respectively, have put in place their communication strategy and notified consumers of the new rules.

WM Comment

There can be no substitute for lenders familiarising themselves with the FCA’s new rules and guidance directly.  However, if you would like any more detailed advice or assistance in relation to implementing any of the practical steps mentioned in this article, please do not hesitate to contact Louise Power or any member of Walker Morris’ Financial Services team.

Salutary lessons in possession proceedings: Beware informality in occupation arrangements and amending pleadings

Banking & Finance Litigation specialist Kate Hicks explains a recent beneficial ownership dispute which highlights salutary lessons for anyone involved in the possession process.

Why is this case of interest?

In any economic downturn people increasingly look to purchase, share, invest in and occupy properties in ever more wide-ranging and varying circumstances. As friendly or familial relationships and/or informal business arrangements come to an end or change over time – in particular where parties experience financial difficulties – the courts encounter increasing numbers of beneficial ownership disputes [1].

In the recent case of Kensington Mortgage Company Ltd v Mallon and Others [2], the High Court dismissed the occupiers’ appeal and upheld the County Court’s decision to grant the lender possession of the property. The occupiers, as second defendants to the action, raised arguments in relation to proprietary estoppel, mistake in title and constructive and resulting trusts.

This case is therefore of interest to lenders, their advisers and anyone involved in the possession process as it provides interesting analysis on a variety of circumstances in which occupiers may claim beneficial ownership and seek to challenge possession proceedings.

On a very practical level, the case also offers a useful insight into the court’s discretion to exercise its case management powers and highlights the importance of adhering strictly to the Civil Procedure Rules (CPR).

What are the key takeaways?
  • Pursuant to the Practice Direction to CPR 16 8.2(4), details of any breach of trust on which a party wishes to rely must be set out in the particulars of claim. In addition the specific type of trust must be pleaded.
  • Parties should not underestimate the importance of complying strictly with procedural rules and cannot assume that late amendments, however crucial to a case, will be allowed.
  • Trusts can be established not only in familial situations but also in commercial situations.
  • No presumption of a resulting trust was found where there was an express (albeit oral) agreement between the parties.
  • It is not only the type or existence of a trust which can impact upon beneficial ownership, but also (and perhaps of paramount importance) the timing as to when any trust arose.
  • All parties should beware informal occupation arrangements.
What happened in the case?

Facts

Mr and Mrs Zaman were the occupiers of a property owned by their friends, Mr and Mrs Fadia. The Zamans agreed that they would make regular payments to the Fadias and the property would eventually be transferred into their names. Following payment of the full amount, however, it was agreed that the property would instead be transferred to a Mr Mallon, as a form of security for debt owing to him by the Zamans.

The transfer was agreed orally between Mr Zaman and Mr Mallon on the basis that once the Zamans’ debt was repaid, the property would be transferred to the Zamans. However, despite the debt being repaid, the transfer never took place.

In 2003 Mr Mallon obtained a buy-to-let mortgage over the property.  Following a period of arrears, the lender issued possession proceedings against Mr Mallon, and also against the Zamans as second defendants to the action.

The Zamans initially argued that the oral agreement between themselves and Mr Mallon created a charge by legal mortgage, such that Mr Mallon should have been registered as a charge holder rather than as the proprietor of the property. The Zamans alleged that, on this basis, there was a mistake in the Register which should be rectified [3].  They also argued that any interest the lender may have in the property was secondary to their rights, by virtue of the doctrine of proprietary estoppel [4].

On the morning of the County Court hearing the Zamans attempted to either introduce a further pleading or to amend their existing pleadings to contend that “a constructive and/or resulting trust” existed in their favour over the property.

Possession proceedings

The judge noted that the Practice Direction to CPR 16 8.2(4) requires that details of any breach of trust on which a party wishes to rely must be set out in the particulars of claim and, crucially, that the specific type of trust must be pleaded. The judge therefore rejected their application for amendment and the lender was otherwise successful in obtaining an order for possession. The Zamans appealed.

The appeal was dismissed by the High Court.  It decided that, the late amendment having been disregarded, there was no real question that Mr Mallon was rightfully registered as the proprietor of the property.  He was therefore legally able to enter into a mortgage and, following the accrual of arrears, the lender could rightfully obtain possession.

Even though it was not necessary in these circumstances, the High Court went on to analyse the Zamans’ remaining arguments.

The High Court stated swiftly that the presumption of a resulting trust would not apply in the present case, as it would likely be rebutted by the terms of the oral agreement [5].  In relation to the possible existence of a constructive trust, the High Court concluded that it would not have come into existence until the debt was repaid to Mr Mallon in 2006. The mortgage was entered into in 2004 – before the formation of any trust. The lender therefore had a first ranking legal charge over the property and was entitled to seek possession in any event.

Similar principles were discussed in relation to a finding of proprietary estoppel. The crucial point made by the High Court judge was that the court would not grant proprietary estoppel retrospectively in order to allow any interest in the property owned by the Zamans to be registered in priority over the mortgage.

The High Court found that there was no mistake to be rectified on HM Register:  “the disposition represented by the TR1 in the present case was neither void nor voidable… it embodied precisely what all concerned intended, namely to transfer title to Mr Mallon… the Judge was right to decide that there was no mistake in registering Mr Mallon as proprietor, and there was no ground for ordering the register to be rectified or altered” [6].

WM Comment and practical advice

When it comes to occupation of premises, the question often arises whether a party whose name is not on the deeds to a property nevertheless owns a share. Today the issue arises between couples whose relationships have ended, between friends, family members, business partners and others, who have shared living or working space on all sorts of informal, quasi-legal arrangements, perhaps with a view to stepping on to the property ladder, or getting a business off the ground. The recent case of Kensington v Mallon highlights that informal arrangements can have unexpected results.

The best advice is for parties to record their intentions at the outset of any such arrangement in writing – and ideally by way of a formal deed of trust. Remember the old adage: a stitch in time saves nine. In attempting to avoid any formal legal process or documentation, the Zamans and Mr Mallon ended up having the matter resolved via litigation.  Apart from the fact that the Zamans ended up with no interest in the property, Mr Mallon also lost out to the extent that additional costs will inevitably have been added to his mortgage account, reducing the surplus (if any) which may have been awarded to him at the end of the day.  From the lender’s perspective, whilst it did ultimately obtain possession and can pass on the costs of the litigation, it had to incur significant time and risk in getting to that point, which could have been avoided if arrangements had been properly documented by all parties throughout. Taking the time to seek specialist advice, and to investigate and document occupation arrangements as appropriate in formal, written contracts or deeds, can minimise the scope for dispute and/or can assist with the timely and cost-effective resolution of any disputes which do nevertheless arise.

[1] For briefings on key prior beneficial ownership disputes, see Walker Morris’ earlier briefings: Wishart v Credit & Mercantile and Mortgage Express v Lambert
[2] [2019] EWHC 2512 (Ch)
[3] See our earlier briefings (accessible via this link) about what is a ‘mistake’ for the purposes of rectifying HM Land Register
[4] For a proprietary estoppel to arise, there has to have been a representation or promise made to the person claiming estoppel, which it is unconscionable to subsequently deny. Proprietary estoppel is an equitable remedy. Equitable remedies are underpinned by fundamental fairness and awarded by the court at its discretion.
[5] A resulting trust may be presumed to give effect to the implied intentions of parties where there is no express declaration of trust. The presumption of a resulting trust can therefore be displaced by the existence of any express terms. A constructive trust, on the other hand, is an equitable remedy which can be imposed by the court where, in terms of fundamental fairness, it would be unconscionable to deprive a beneficial owner of its interest.
[6] Ibid para 129

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