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A recent case in the High Court tackled two significant areas of risk to bridging lenders, and also provides sensible guidance and warning to inspecting valuers.
In Credit & Mercantile v Kaymuu Ltd, a mortgage lender had repossessed security property but faced a fight for the sale proceeds when competing claims arose from a beneficial owner, who was also the occupant of the property, who had not consented to the mortgage, had no knowledge of it, and who had moved into the property unbeknown to the lender at the date of mortgage advance. The beneficial owner and occupier vigorously argued that he should not be bound by the mortgage in these circumstances, and that his occupational interest should override the interests of the lender.
The Facts
Mr W and Mr S were business partners and friends. They agreed to enter into a property transaction together to purchase a property, in the name of a company controlled by S. W provided the funding. S dealt with the mechanics of the transaction. The parties agreed that legal title was to be vested in the company name, but both knew and understood that the beneficial interest in the property was to be W’s. No paperwork existed to document the arrangement. Mr S dealt with the transaction entirely and Mr W took no active role. The property was purchased in May 2010. Soon after completion, W moved into the property. In or around the same time, Mr S, without the knowledge of his partner W, commenced steps to mortgage the property in favour of the lender.
The lender carried out their usual due diligence, which included an inspection of the property by its valuer, who reported (wrongly) the property to be vacant. In fact, W and his partner had already commenced moving into the property. It was accepted by all sides that W’s occupancy had begun prior to the actual mortgage date, which was approximately one month after completion of the purchase.
Mr W sought to resist the claims of the lender for its mortgage monies following the realisation of the security, and have his rights to occupy the property prevail over the lender.
The Judgment
In a straightforward and, I think, common sense application of agency principles, the court decided that
• By abstaining from all involvement in the purchase, and in providing to S the means of representing himself to third parties as the beneficial owner with full authority to sell, mortgage or otherwise deal with the property, the beneficial owner is bound by the lender’s charge.
In arriving at that decision, the Court took into account that the lender had innocently entered into the mortgage transaction, and had neither actual nor constructive knowledge of the beneficial owner’s interests.
For the beneficial owner to establish priority of claim, he was required to have brought his interest to the knowledge of the lender. The court noted he had opportunity to do that when the valuer arrived to inspect the property. He could have made his interest clear to the valuer (but did not). He could have requested the contact details of the valuers’ lender principals and have contacted them directly (but again did not).
Comments
This case is of particular interest to lenders because it highlights how an occupier’s claim can be defeated when the occupier has given to others the means of representing themselves as the beneficial owner of the property, with full authority to deal with the property, as owner, with the lender. The occupier’s interest, predicated in land law, was defeated by ordinary agency principles.
In Kaymuu, the Court also took the view that the lender’s surveyor was not particularly careful when concluding that the property was unoccupied upon inspection. For this reason Kaymuu, also operates as a timely reminder of the significance of the valuer’s inspection in the mortgage transaction. Valuation, whilst the primary purpose, is not the sole purpose of inspection. A more careful and diligent enquiry by this set of valuers, together with more accurate reporting of the occupancy position, would have saved the lender from costly and contested court action.