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Receivership Update – January 2015

Receivership Update – January 2015

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22/01/2015

A legal charge may be invalid if it is not properly executed but a lender can still rely on it as equitable security

In the recent case of Bank of Scotland v Waugh [1], the High Court considered […]

In the recent case of Bank of Scotland v Waugh [1], the High Court considered the execution of a legal charge and the impact of signatures on the document not having been witnessed in accordance with the statutory provisions which are required to make an effective deed set out in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989.

Trustees executed what was intended to be a legal charge to secure monies that were lent by the Bank.

It was clear from the legal charge document that the signatures had not been witnessed; in fact, there was no provision made in the document for the attestation of any signatures. There was also a further error in that the charge ascribed the trust to a registered office, when the trust was not actually a registered corporation and the trustees were individuals.

Despite the flaws, the legal charge was successfully registered on the title to the property that was being secured at Land Registry.

However, as a result of the errors, the trustees sought a declaration that the charge was invalid and for the cancellation of the charge and rectification of the title register at Land Registry.

The trustees argued that the Bank had confirmed to them that they would not be personally liable for the debt and further that, because the charge had not been witnessed, it was void and could not be relied upon by the Bank.

The Bank argued that the trustees were estopped from denying the validity of the charge as it had relied upon representations from the trustees’ solicitor that the document had been duly executed when lending funds. In the alternative, the Bank sought confirmation that the charge would take effect as an equitable mortgage to preserve their interest in the property.

The court held that the individuals were liable as trustees, so their submission that assurances made by the Bank as to the trustees’ lack of personal liability would not render the charge invalid.

Secondly, the court held that in accordance with section 52 of the Law of Property Act 1925, any conveyance of land or interest therein must be made by a deed. To create an effective deed, the signature of each individual signatory must be witnessed [2].

The court held that in the absence of the formality specified in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989, the charge did not create a legal charge. However it did satisfy the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 so, although it failed as a legal charge, it could still take effect as an equitable mortgage and was capable of registration at Land Registry as such.

It was confirmed that the Bank may apply to court to enforce the equitable mortgage or for the trustees to be compelled to perfect the security by executing a legal charge which complies with the statutory necessities for creating a deed.

Estoppel was not relevant as the charge did not even appear to be correctly executed as a deed; it was clear on its face that it had not been witnessed as it did not even make provision for an attestation. There were public policy reasons why estoppel claims of this nature should fail. The Bank or its solicitor should have spotted the error that the signatures had not been witnessed, however as it was signed by the parties and contained all the terms that had been agreed it was successful in creating an equitable mortgage.

[1] [2014] EWHC 2117 (Ch)
[2] Section 1(3) Law of Property (Miscellaneous Provisions) Act 1989

Case update: a chattel or a fixture?

The degree and object of annexation were the key principles for the High Court to […]

The degree and object of annexation were the key principles for the High Court to consider in the recent case of Lictor Anstalt v Mir Steel UK Ltd and Libala Limited [1].

Lictor purchased the parts necessary to build a hot strip steel mill (the Mill) at a site in Newport, Wales (the Site) owned by Alphasteel Limited, a related company, and had shipped the parts to the Site for assembly.

Lictor and Alphasteel entered into a contract whereby both parties agreed that:

Alphasteel were permitted to assemble and use the Mill at the Site to manufacture steel and keep the profits;
the Mill would be a chattel (or a collection of chattels) to which Lictor retained legal title; and
Lictor had the right to enter the Site and remove the Mill after giving notice to do so.

Alphasteel subsequently entered administration and the administrators hived down Alphasteel’s assets, including the registered title of the Site, into its subsidiary Mir Steel UK Limited, before selling the shares in Mir Steel to Libala Limited, the Second Defendant.

Lictor brought proceedings claiming that the Mill remained a chattel and therefore did not form part of the land that was transferred to Libala on the sale of Mir Steel.

In the judgment the Court outlined that the key consideration in this case was not the fact that both parties had entered into a contract which stated that the Mill would remain a chattel (or collection of chattels). The judgment referred to the case of Melluish v BMI (No 3) Ltd [2] which held that “the terms expressly or implicitly agreed between the fixer of the chattel and the owner of the land cannot affect the determination of the question whether, in law, the chattel has become a fixture and therefore in law belongs to the owner of the soil”. Therefore the label given by the parties was irrelevant.

Instead the key issue was, as a question of fact, “whether the equipment which constituted the …Mill had become affixed to the land so as to become part of it”. The Court set out that this depended on the degree and object of the annexation.

In terms of the degree of annexation, the Court held that the Mill, by its very nature, was intended to be a permanent or at least semi-permanent structure that would have been expected to have an operable life of up to 50 years. Removal of the Mill would only be carried out in exceptional circumstances. The Court heard from building and engineering experts that the removal of the Mill from the Site would have been “complex…very expensive…. [and] time consuming” and would have required extensive remedial works to the Site.

Further, the proximity of the Mill to a river and lands suitable for activities which were essential to the milling process also lent favour to the purpose of the annexation having been to create an integrated whole.

The Court rejected Lictor’s primary claim that the Mill was a chattel or collection of chattels to which Lictor had retained title. The Mill had become part of the land of the Site and therefore was no longer owned by Lictor.

Although this decision went against Lictor, the same judgment also found that the contract in place between Lictor and Alphasteel remained in effect, but for the fact that the Mill had wrongly been labelled as a chattel. Lictor was successful in finding the defendants liable for procuring a breach of the contract and therefore liable for Lictor’s resulting loss.

[1] [2014] EWHC 3316 (Ch)
[2] [1996] AC 454

Guarantees and indemnities and the “conclusive evidence” clause

The issue of whether a document is a guarantee (where the liability is secondary and […]

The issue of whether a document is a guarantee (where the liability is secondary and contingent on the underlying obligation) or an indemnity (where the liability is primary and independent of the underlying obligation) regularly comes before the courts. The name given to the document will not be determinative; for example, in Van de Merwe v IIG Capital LLC [1] the Court of Appeal held that a director’s obligation under a document described as a “guarantee” was in fact a primary obligation. A key factor in the Van de Merwe case was the existence of a “conclusive evidence” clause, namely a clause which provides that any certificate presented to the obligor by the beneficiary certifying the amount due will be conclusive evidence of that amount in the absence of “manifest error”.

In ABN Amro Commercial Finance Plc v McGinn [2] the defendant directors argued that the document pursuant to which any liability to the beneficiary, Amro, arose was a guarantee rather than an indemnity and that, as there had been variations made to the underlying agreement, their secondary liability had been discharged under the rule in Holme v Brunskill. The High Court held that the document in question was an indemnity rather than a guarantee:

the use of words of indemnification (e.g. “agree to indemnify”), although not conclusive, was indicative of a primary liability
the words in the “conclusive evidence” clause, “I shall be bound by any acknowledgement or admission by the Company and by any judgment in your favour against the Company” indicated an acknowledgement or admission of liability by the principal debtor would have sufficed to establish liability even if, on detailed examination, there was in fact no liability
the fact that under the “conclusive evidence” clause, Amro was entitled to make a reasonable estimate of contingent liability demonstrated very clearly that the directors’ liability was not dependent upon any conclusive determination of the principal debtor’s liability to Amro.

The court also rejected the directors’ argument that there was a manifest error in the certificate. It held that to resolve the dispute as to the collectability of debts would require a full trial which would defeat the object of the conclusive evidence clause.

[1] [2007] EWCA Civ 542
[2] [2014] EWHC 1674 (Comm)

Liability for non-domestic rates on disclaimer of a lease

The issue in Schroder Exempt Property Unit Trust, British Overseas Bank Nominees Limited, WGTC Nominees […]

The issue in Schroder Exempt Property Unit Trust, British Overseas Bank Nominees Limited, WGTC Nominees Limited (As Trustees for Schroder UK Property Fund) v Birmingham City Council [1] was who should bear the cost of rates liabilities where a lease has been disclaimed and the landlord has not re-entered the property. The case also tackles the question of whether a guarantor is still liable to make good the defaults (e.g. rent) of a former tenant after a lease has been disclaimed.

Schroder (the Landlord) were the freeholders of a property which was leased to Woodward Foodservice Limited (Woodward). Woodward assigned the lease to WF Group Limited (WFG) and provided an Authorised Guarantee Agreement (AGA) to the Landlord in respect of WFG’s obligations under the lease.

WFG went into liquidation on 20 April 2011, and the liquidator disclaimed the lease under section 178 Insolvency Act 1986 (the Act). The Landlord recovered the rent due from WFG by calling on Woodward under the terms of the AGA, and did not exercise its right to go into physical possession of the property. Woodward did not call for an overriding lease [2] and the property was left vacant.

Birmingham City Council (the Council) made rate demands of the Landlord after the disclaimer for the period 20 April 2011 to 31 March 2013, but these were not fulfilled. At first instance, a liability order was made against the Landlord in favour of the Council for non-domestic rates. The Landlord appealed.

Dismissing the appeal, the Court considered section 45(1) of the Local Government Finance Act 1988 (the 1988 Act), in particular section 45(1)(b). This states that:

“A person (the ratepayer) shall as regards a hereditament be subject to a non-domestic rate of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year –

…

(b) on the day the ratepayer is the owner of the whole of the hereditament”

Under section 65(1) of the 1988 Act, the ‘owner of a hereditament’ is defined as “the person entitled to possession of it”. Previous case law suggested that a person was entitled to possession for the purposes of section 65(1) if they were “immediately entitled to possession”.

The present case therefore turned on whether the Landlord was entitled to immediate possession of the property after the disclaimer. On this point, the Court provided a useful summary of the position: after assignment of the lease and prior to disclaimer, the tenant (WFG) was the person entitled to immediate possession. Upon disclaimer, the lease terminates and the Landlord’s reversion accelerates. [3] The landlord, as the freehold owner, becomes entitled to immediate possession. Had Woodward requested an overriding lease, it would be they who were entitled to immediate possession.

The Court also tackled the effect of disclaimer on the obligations of guarantors; despite the disclaimer of a lease, a guarantor must still abide by the terms of the guarantee because of the operation of section 178(4) of the Act.

“Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined” [4]

The court also endorsed the approach taken in Hindcastle in relation to when a guarantor’s liability might end:

“If […] the landlord takes possession, the liabilities of other persons to pay the rent and perform the tenant’s covenants will come to an end as far as the future is concerned. […] [The landlord’s] conduct [in taking possession] is inconsistent with there being continuing liability on others to perform the tenant covenants under the lease” [5].

Consequently if a landlord takes physical possession of the property, the guarantor’s obligations under the lease covenants end.

Owing to the operation of sections 45(1) and 65 of the 1988 Act, it was the Landlord who was entitled to immediate possession on the disclaimer of the lease, and so it was they who were liable for the Council’s non-domestic rate demands. A disclaimer did not serve to extinguish the liabilities of Woodward to the Landlord under their AGA. The appeal was dismissed.

This case is primarily a consistent application of the established law; it provides further warning to landlords who have leases disclaimed that, in the absence of a guarantor calling for an overriding lease, it is they who are likely to be liable for non-domestic rates.

Practical points to consider
As to whether an administrator or liquidator would be liable for non-domestic rates where they were in occupation of the property, there is case law authority [6] to suggest that where administrators or receivers simply manage a business as agents of the company, this may not amount to rateable occupation of the relevant property. In these circumstances it would still be the company in administration who bears liability.

This means that if a tenant becomes insolvent and the re-letting of the property is likely to be problematic, landlords should strongly consider negotiating with the administrator or liquidator, in the hope of deferring any disclaimer, thereby maintaining the exemption from rates on insolvency. Only when the landlord is ready to re-let should disclaimer be effected.

[1] [2014] EWHC 2207 (Admin)
[2] An overriding lease allows a guarantor, where a tenant defaults on its obligations under a lease, to occupy the property on the same terms as the defaulting tenant and become the direct tenant of the landlord and the landlord of the defaulting tenant.
[3] Applying Hindcastle Limited v Barbara Attenborough Associates Limited [1997] AC 70
[4] Per Lord Nicholls in Hindcastle at paras 87E-88H of his judgment
[5] ibid.
[6] Re Beck Foods Ltd [2001] EWCA Civ 1934 per Jonathan Parker LJ at para 73 of his judgment; Ratford v Northavon DC [1987] QB 357 per Slade LJ; Brown v City of London Corporation (Re Solomon) [1996] 1 WLR 1070

What is the true value of a property?

What is the true value of a property? When considered practically, the logical approach would […]

What is the true value of a property? When considered practically, the logical approach would be that a property is worth however much people are prepared to pay for it. This was considered in the recent case of Ludsin Overseas Limited v Douglas John Maggs [1].

The case was heard in the High Court Chancery Division on appeal from the High Court Bankruptcy Division where Mr Maggs’ solvency had been considered. A person can only be in bankruptcy if at least some of their debt is unsecured and they cannot afford to pay their debts as they fall due. The issue that brought the case before the Court was a consideration as to whether debt owed by Mr Maggs to Ludsin of over £350,000 was wholly secured as it was registered as a final charging order on a property owned by Mr Maggs (the Property). The charging order in favour of Ludsin ranked third in priority behind a fixed legal charge and a prior final charging order on the title to the Property; therefore, in order for the debt to be fully secured, the Property needed to be worth in excess of £2.9 million.

The Court suggested that an independent valuer should be instructed to provide an open market valuation of the Property. RICS instructed a single joint expert who undertook the valuation in January 2014 and concluded that the Property was worth £3.35 million. On this basis, the Court concluded that the debt was fully secured.

The decision was appealed by Ludsin who argued that the Judge had mistakenly treated the open market valuation as the appropriate valuation for assessing whether or not the debt was adequately secured. Ludsin argued that a valuation of a sale on a forced basis would have been more appropriate than an open market valuation. Further, the Property had been reported as being 10,800 square feet in the valuation, yet when the Property was marketed it was revealed as covering only 5,166 square feet. Ludsin argued that the valuation therefore could not be accurate.

The valuer, however, refused to amend his valuation, insisting that the price stated was a true reflection of open market value. The Property was placed on the market for sale in April 2014 for £2.5million. Marketing generated very limited interest and by the end of July 2014 only one offer had been received for the Property which was in the sum of £1.5million and was subsequently increased to £1.615million. Due to the lack of interest in the Property the asking price was lowered to £1.95million in September 2014 and further in October 2014 to £1.7million.

After six months marketing at asking prices of between £2.5million and £1.7million no-one had come forward to purchase the Property at a price which provided any security for Ludsin’s debt.

In the appeal Ludsin questioned how the Property could possibly be worth £3.35 million when after a six-month period of marketing by a reputable agent no-one had offered even £2 million for the Property.

In considering the value of the Property the Judge concluded that “the best indication of the value of an asset at any particular time is what someone will pay for it after reasonable attempts have been made to sell it”.

This case is illustrative of the point that provided receivers and lenders carry out a sufficient period of marketing they are unlikely to be subject to criticism if a property is sold for a price which is considerably lower than the price at which it was valued as the true value of a property is only what people are willing to pay for it.

[1] [2014] EWHC 3566 (Ch)

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