Introduction
This case raised a very interesting issue as to whether there was an effective agreement to create a charge. It will be of interest to conveyancers and banking and finance litigators for the helpful resume of the law on security.
As will be noted by practitioners on 1 July 2013 the Land Registration division of the Property Chamber, First-tier Tribunal replaced the Office of the Adjudicator to HM Land Registry. See http://www.landregistry.gov.uk/professional/guides/practice-guide-37
In context it should be noted that whilst this case was before the newly constituted First-tier Tribunal Property Chamber. The Tribunal disapplied the new rules (Tribunal Procedure (First-tier tribunal) (Property Chamber) Rules 2013) on the basis that an application for summary judgment had been made pursuant to the previous rules (The Adjudicator to HM Land Registry (Practice and Procedure) Rules 2003) (“the 2003 Rules”).
Background
Mr and Mrs Pearson (the “Pearsons”) exchanged contracts with the registered proprietor of a property in August 2012. The property was transferred to them in late August 2012.
Prior to the exchange in mid-July 2012 the Lender of the registered proprietor was concerned about the borrower’s outstanding level of indebtedness and sought to protect its interests by registering a unilateral notice. The application was on the basis the Lender was entitled to register a Notice in their favour in accordance with an agreed contract for mortgage in an offer letter (condition Q) between, the registered proprietor (1) The Lender (2) dated 9th February 2009.”.
The Pearsons’ solicitors made an official search with priority which expired at midnight on 13th September. However, they had not applied to register the transfer before the priority period expired and the Lenders unilateral notice was registered.
The parties agreed matters so that the Pearsons were registered as proprietors on 20th September 2012, subject to the notice in favour of the Lender.
By Form UN4 made in October 2012 The Pearsons applied to cancel the Lender’s unilateral notice.
The Pearsons sought an application for summary judgment pursuant to Rule 32A of the 2003 Rules on the grounds that the Lender had no reasonable prospects of success and there was no other compelling reason why the proceedings should not be disposed of summarily.
The Pearsons position was that the loan agreement did not oblige the registered proprietor to grant a legal charge over the property to secure his obligations.
The issues
In order to give rise to an interest under section 32 of the Land Registration Act 2002 (“the 2002 Act”) the Lender had to demonstrate that a clause in the offer letter (see below) created an interest in the property in this case, an equitable mortgage.
By the Offer letter dated 9th February 2009 the registered proprietor signed a section headed “Acceptance by Borrower” which noted:
“I hereby accept the Offer of Loan as detailed above and the conditions overleaf, the terms of which I have read carefully and understand.”
The relevant clause (clause Q) provided:
“Once this agreement is signed by us you give us permission (which you cannot later withdraw) to register a legal charge or notice at HMLR or the Land Charges Department … and to make any search on any property you may have an interest in now or in the future. This term applies if the full amount you owe us (including any costs and payments) is not paid at the time that the property is sold or at any time when we think it necessary in order to protect our security and/or interests and/or position in relation to the amount which you owe us in respect of your Loan account.”
The parties made the following submissions:
1. The Lender sought to argue that clause Q created an equitable mortgage because it was a contract by the registered proprietor to grant a mortgage.
2. The Lender accepted there was no immediate obligation on the registered proprietor to grant a charge and that his obligation to create a charge was at all times subject to the contingency in clause Q, but submitted that that did not mean that it had no proprietary interest capable of protection by notice under s32 of the 2002 Act pending the contingency.
3. The Pearson’s denied the loan agreement created any such interest or that the Lender had any interest capable of protection by unilateral notice as required by s32 of the 2002 Act on the basis that the notice was not “an entry in the register in respect of an interest affecting a registered estate or charge”. Their defence was that the loan agreement did not oblige the registered proprietor to grant a legal charge over the property to secure his obligations.
4. In the alternative the Pearson’s argued that even if clause Q gave rise to a proprietary interest, it had not crystallised before 1st August 2012 so as to gain priority over their equitable interest under the contract of sale. That argument did not arise for determination on the application for summary judgment.
Construction of the Offer Letter.
As to the construction of clause Q in the offer letter the parties made a number of submissions which can be summarised as follows;
1. The Pearson’s primary submission was that clause Q did not create any specifically enforceable obligation to grant a charge over the property and did not create any interest capable of protection under s32 of the 2002 Act. It was a mere contract between the parties see United Bank of Kuwait PLC v Sahib [1997] Ch 107.
Where monies had already been advanced, the question is whether as a matter of construction the registered proprietor had agreed to grant a charge over other properties on the occurrence of the events set down in the second sentence of clause Q and whether that obligation is specifically enforceable and if so whether the Lender has the benefit of a proprietary interest.
2. The Pearson’s argued that on a literal construction clause Q contained no obligation on the registered proprietor to grant a charge over any property in the future. All that it sought to do was to provide for the lender to register a charge or notice.
3. The Lender submitted that the court had to look at the substance of clause Q. It relied upon In re Charge Card Services Ltd [1987] 1 Ch 150 at p175 E-176D. At p176C Millett J said “Thus the essence of an equitable charge is that, without any conveyances or assignment to the charge, specific property of the charger is expressly or constructively appropriate to, or made answerable for payment of a debt … The availability of equitable remedies has the effect of giving the charge a proprietary interest by way of security in the property charged.”
4. The Lender also sought to rely upon Buckley LJ in Swiss Bank v Lloyds Bank [1982] AC 584 at p595 C-G, to the effect that if there is a specifically enforceable contract to confer a proprietary interest on the lender, that obligation “will give rise to an equitable charge upon the subject matter by way of mortgage”.
5. The Lender submitted that clause Q came within recognised categories of equitable mortgages relying upon Fisher & Lightwood at 1.20 in particular (c) “a written agreement to create a security in consideration of a debt due or an advance made” and (i) “any written instrument showing the parties’ intention that it should create a security”.
The Decision
The Tribunal held that as a matter of construction clause Q did not create at the time the offer letter was signed any specifically enforceable obligation to grant a charge over the property. Further it did not create any specifically enforceable obligation by the borrower to grant a charge on the occurrence of a future contingency which may or may not have taken place.
Accordingly the Pearsons’ application to cancel the Lenders unilateral notice was successful.
The Tribunal noted:
1. In the context of an interest in land it was necessary that the agreement must be valid and enforceable i.e. comply with section 2 Law of Property (Miscellaneous Provisions) Act 1989.
2. In order to give rise to an interest under section 32 of the 2002 Act the Lender would have to demonstrate the clause Q created an interest in the property in this case, an equitable mortgage.
3. clause Q did not create a specifically enforceable contract within the 1989 Act to charge any property as the terms of such a charge were not identifiable
4. The tribunal agreed with counsel for the Pearson’s submission that the clause did not contain any intention that the clause should create an immediate security save over the properties described on the first page of the offer letter.
Conclusion
At first sight this appears to be a straight forward issue as to security. However the reader is referred to the judgment for the parties’ full and wide ranging submissions.
However what is clear are some basic propositions. The clause in this case did not show the parties intention to create security. More importantly it did not comply with section 2 Law of Property (Miscellaneous Provisions) Act 1989.
It could not be said by the Lender that the registered proprietor had expressly or constructively appropriated the property or made it “answerable” for payment of a debt as per Millett J in re Charge Card Services Ltd [1987] 1 Ch 150 at p175 E-176D.
Rather interestingly, it will also be observed that neither party referred to the definition of a mortgage contained in section 205 (xvi) Law of Property Act 1925.
Kind regards
