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Lending on shared ownership property – sharing the blame with professional advisors?

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19/11/2014

The High Court has determined preliminary issues in a professional negligence claim against a firm of conveyancing solicitors brought by a mortgage lender.

In Redstone Mortgages Ltd v B Legal Ltd [2014], a lender (the Lender) provided loans secured by way of residential mortgages and instructed B Legal Ltd (B Legal) to act as its conveyancing solicitors. The loans were then sold to Redstone Mortgages Ltd (Redstone) and some time later a number of borrowers defaulted.

Redstone brought proceedings against B Legal, alleging that it had failed to advise the Lender, in four separate cases, that; (1) the sale of one property would be without vacant possession, as the property was being leased back to the sellers (which had not been disclosed by the borrower); (2) one property consisted of two houses knocked together but the mortgage was granted in respect of only one house; (3) the borrower held a shared ownership lease and had a restricted ability to sell; and (4) the property was held on a further shared ownership lease.

In the first case, the Court held that B Legal were justified in relying on the information given by the borrower regarding occupation as there was no evidence to suggest that information was false, the information did not suggest there would not be vacant possession; and the borrower had also lied to the Lender about occupation.

In the second case, the Court held it would have been apparent to a reasonably competent solicitor that it was uncertain which property was to be mortgaged. However, B Legal produced a document which had drawn the Lender’s attention to the issue with the title and the Court held that it had therefore discharged its duties.

In the third and fourth cases, B Legal produced further evidence that it has notified the Lender of the shared ownership leases. The Court held that the notifications did not go far enough, as in the third case the document did not use the words “shared ownership” and failed to inform the Lender of the “adequacy of the title to the security” and its “conformity to the valuation“. In the fourth case the Court held that B Legal were required to draw the Lender’s attention to the implications of the shared ownership lease, and in particular, advise of its inability to certify the title as free from restrictions which may affect the property’s value because the property could not be disposed of for full market value and was subject to a restriction on disposal. B Legal had drawn the Lender’s attention to the existence of the shared ownership lease, but had failed to consider the lease’s terms and/or inform the Lender that B Legal could not provide an unqualified certificate of title. The Lender would have been told of the issues by a reasonably competent solicitor, and therefore, B Legal had failed to discharge it duties in both cases.

This case (although yet to be fully heard) reinforces that lenders must be made aware by their completing solicitors of the implications of (a) the specific terms of shared ownership leases and (b) any restrictions on a sale of shared ownership properties which will increase the difficulty of realising its security. This case is also a warning to legal advisors to ensure they fully advise their clients of the implications of the interests of those in occupation of their client’s security.