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It is well known that persons who are in actual occupation of a property at the date of lending can defeat the lender’s right to exercise its power of sale. That is why a prudent lender will make extensive enquiries as to occupation prior to lending, and where occupation is disclosed and discovered, will take appropriate steps to investigate the nature of the occupancy, and the interest, and thereafter take precaution to have any interest waived or postponed in their favour.
But where occupation is unknown or is concealed, significant issues arise, including certain situations where an occupant with beneficial interest may assert a superior proprietary interest.
For these reasons lenders will welcome the Court of Appeals’ decision in Credit & Mercantile v Kaymuu Ltd and others which was published last month.
In this case, the court has confirmed that there are certain circumstances where a lender will not be bound by the interest of an occupier who was in occupation prior to the date of mortgage, but whose interest was unknown to the lender, even though it was potentially apparent.
The Facts
Two friends, and business partners agreed to buy a substantial residential property in 2010. The property was funded by one of the partners, K, but the purchase was carried out in the name of a company wholly owned and controlled by M. M, via his company, dealt with all acquisitions aspects. K was to live in the property (which he did) from the date of the purchase in May 2010. Both friends and partners knew and understood that the beneficial interest in the property was to be K’s. Shortly after the purchase, and with the title to the property to be registered in the name of M’s company, M took it upon himself to raise finance on the property by way of mortgage. A surveyor for Credit & Mercantile inspected the property but failed to notice K’s occupation. K was present at the surveyors inspection, but asked no questions of the surveyor, and made no comment. Nor did K take any steps to enquire from the surveyor what the purpose of the surveyors visit was, nor in fact did he seek to protect his interest. The mortgage ran into default. Credit & Mercantile sought to exercise their power of sale and, asserted that they were entitled to the repayment of their debt from the sale proceeds in priority to any interest arising out of Mr K’s occupancy and/or beneficial ownership. The sum was not insignificant. The amount claimed by Credit & Mercantile was £694,072.75. K made claim to this sum and any surplus arising.
Most cases in this area focus on the nature of the occupation, but in this case, the nature of the occupation was not in issue. The Court accepted that K was in occupation prior to the date of charge. In most instances a pre-existing occupier binds the mortgagee.
The Law
On strict agency principles, where one party gives actual or ostensible authority to another to carry out activities in the name of the Principal (as in this case, K provided M with legal title which in the eyes of any third party, included the power to sell or mortgage) the Principal is bound by the agents activities.
The Decision
The Court of Appeal held that K had given M the means of representing himself as the beneficial owner. As a beneficial owner, to the outside world, M had full authority to deal with the property in any way he saw fit including mortgaging the property. K had taken no part in the purchase whatsoever, and failed to bring his interest to the notice of the lender when he had a chance to do so when the inspecting surveyor attended nor did he make enquiry of M when he had the opportunity to do so, or contact the lender directly.
Accordingly, the Court of Appeal held that the lender on these facts and circumstances would not be bound by K’s beneficial interest notwithstanding the fact that his occupation took place prior to the date of mortgage.
Points of Interest
There are two main points of interest in this case which lenders should take note of.
• The occupants claim is lost because he had given a third party, his agent, clear authority to act in the matter of a beneficial owner. He had done this willingly and openly.
• The lender succeeded even though the surveyor had failed to identify any occupation and even though the court concluded that a reasonably prudent surveyor would have discovered that the property was occupied and would most likely have been involved in an encounter with the occupier.