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The Law and Practice of International Banking, 2nd Edition by Proctor, Charles (1st March 2015)

Part E Guarantees and Security, 32 Charges Over Real Estate

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 25 August 2019

Subject(s):
Regulation of banks — Mortgage — Security interest — Security issuer

(p. 607) 32  Charges Over Real Estate

Introduction

32.01  English law generally enjoys a positive reputation in the spheres of commercial and banking law, usually producing outcomes which are seen as appropriate by the business and financial communities.

32.02  Sadly, the same comment cannot be extended to land law in England, which can often appear opaque and is made even more complex by its somewhat tortuous historical development, often mired in the conflict between the common law and equity.1 This is not the place to attempt a detailed description of that subject.2

32.03  For centuries, the process of transferring and mortgaging land had necessarily to be undertaken through paper means. The investigation and verification of title to land was therefore not always a straightforward process. Thankfully, however, more modern developments have streamlined the process and most land—and transactions relating to it—is now registered on a central registry, known as the Land Registry.3 It is therefore proposed to concentrate on registered land for the purposes of the present discussion, which is intended to be of an illustrative and practical nature only and, hence, of relatively limited scope.4

(p. 608) 32.04  As is the case with any security interest, the lender is principally concerned with three questions, namely:

  1. (a)  What is the nature of the asset over which security is to be taken? This will frequently be obvious,5 but a certain amount of discussion is required in relation to real estate.

  2. (b)  What is the nature of the security to be given to the lender, and what rights and remedies does it confer?

  3. (c)  On what grounds may the validity of the security later be challenged?

Nature of the Asset

32.05  As with any asset proffered to it as security, the bank will need to ensure that the borrower (or ‘mortgagor’) owns the asset and is entitled to take security over it and that the asset creates or implies the monetary value which the borrower seeks to ascribe to it. This can be a complex process in relation to land in England because different interests in the same piece of real estate may have differing values. For example:

  1. (a)  a ‘freehold’ interest connotes a permanent and indefeasible interest in land. In principle, this should be the most valuable interest, but this can be diminished by the existence of leases or other third-party interests;

  2. (b)  a ‘long leasehold’ interest implies the right to occupy the property for a set term of years from the date of the lease.6 This type of lease will carry a very nominal annual rent (usually described as a ‘ground rent’) and the real value for the lease will have been paid by way of premium on the commencement date. Possession and occupation of the property reverts to the freeholder on the expiry of the stated lease term.7 Leases of 99 or even 999 years are commonly seen in the market, and will be freely transferable by the leaseholder. The result will be that the real value of such a property resides in the leasehold interest, rather than the freehold. The value of the underlying freehold interest in such a case will often be relatively small.8

32.06  As will be seen,9 both forms of title may be impaired by other forms of interest in property, some of which may not even appear on the title register. It follows that a degree of investigation may be required even in the apparently most straightforward of cases.

32.07  On the footing that the relevant interest—freehold or leasehold—is registered at the Land Registry and the intending mortgagor is shown as the owner of that interest, what are the factors which the prospective lender must take into account in determining the value of the security offered to it? These would appear to fall into three categories.

(p. 609) 32.08  First of all, the proprietary interest will be subject to any adverse rights or interests which appear on the register itself—for example, leases, sub-leases, and any pre-existing mortgages.

32.09  Secondly, the value of any property may be affected by extrinsic factors, such as planning permissions granted for the construction or development of other projects in the vicinity. These are not matters which go directly to the formal title to the property, and they will accordingly not be disclosed on the register. It will be necessary for the lender to make separate enquiries of the relevant local authority in order to ascertain matters of this kind.10

32.10  Finally, certain interests in the property may remain valid and binding as against a mortgagee even though they are not recorded on the register. These are known as ‘overriding interests’ and, most significantly for the intending lender, these include the interests of any person in actual occupation of the property.11 This has proved problematical for banks when taking a mortgage from a husband, and it subsequently transpires that the wife has contributed to the cost or maintenance of the property and has thereby acquired a beneficial interest in it. Since she will be in actual occupation of the property, her claim will be an ‘overriding interest’ for these purposes.12 Banks must therefore ensure that the spouse or partner of the registered owner agrees to postpone any beneficial interest to the security position of the bank. In principle, arrangements of this kind are valid and effective13 but, like any other contract entered into in this type of situation, it is vulnerable to attack on the basis that it was procured through duress or undue influence.14

Nature of the Security

32.11  The bank will usually require that it is granted a full legal mortgage over the property which is registered in the charges section of the register.15 This will ensure that the bank’s interest is protected and prioritized against parties to any subsequent transactions.16 Upon completion of the registration process in relation to the security, the lender has all the powers of enforcement and sale attributable to a legal mortgage.17 A charge which is registered in this way will take priority over any security registered at a later date, even though it may have been executed at an earlier date.18

(p. 610) 32.12  The detailed processes involved in the registration of mortgages and other interests in land are set out in the Land Registry Practice Guide. The application is made in a prescribed format (Form AP1) and must be accompanied by both the charge itself and the appropriate registration fee.

32.13  It should be appreciated that the registration of a mortgage at the Land Registry is not exclusive of any other statutory requirements. Thus, even if a mortgage is recorded at the Land Registry, it will nevertheless be void against the liquidator, administrator, and creditors of a company incorporated in the UK unless it has also been delivered for registration in accordance with Part 25 of the Companies Act 2006.19 Thus, the applicant for registration of a mortgage must produce the appropriate certificate of registration issued by the Registrar of Companies; if he fails to do so, then the title register must include a note to that effect.20

32.14  Finally, in the absence of any contrary intention of the parties, a mortgage over land will extend to items annexed to the land, whether as at the date of the mortgage or at any subsequent time (‘fixtures’). Whether or not a particular item has become a fixture may involve difficult factual questions. However, if the structure has been specifically designed and annexed for use at that particular site, then it is likely to be a fixture for these purposes.21 By the same token, if an item can readily be detached and is easily usable in other locations, then it will probably not be treated as a fixture. The point is obviously important in the sense that a fixture will form part of the lender’s security package, whilst an item which can be removed will be available to creditors generally.22

Extent of the Security

32.15  A lender needs to take some care over the precise extent of his security, especially where second or subsequent mortgages may come into the picture. In particular, precisely how much of his facility will enjoy priority if he advances funds after receiving notice of a second charge?

32.16  The position is that additional advances made by the first lender23 will continue to enjoy first priority provided that one of the following conditions is satisfied:24

  1. (a)  the lender had not received notice of the creation of the second mortgage;25

  2. (p. 611) (b)  the second mortgagee consents to the continuing priority of the first lender;26

  3. (c)  the lender is contractually obliged to make further advances and that fact is noted on the land register;27 or

  4. (d)  the first lender’s mortgage stated the maximum amount secured by the charge and that limit has not been exceeded.28 This provision may be helpful for overdrafts and revolving credits, where the facility can be repaid and redrawn at a later date, up to the stipulated limit.

It should be noted that, in the normal course, a decision by the first lender to restructure his original debt and to charge additional interest and fees for that purpose will not be treated as an amendment to the original indebtedness, and not as a repayment and re-advance. The result is that a lender in this situation will retain his priority over subsequent mortgagees.29

32.17  The lender should appreciate that—unless one of the provisions in paragraphs (a)–(d) above applies30—it is vulnerable to the postponement of its security as a result of the application of the rule derived from Claytons Case.31 Under this rule, payments into a current account are deemed to reduce the earliest debts incurred on the account. Thus, unless one of the above exceptions applies, payments into the account by the borrower will reduce the amounts entitled to priority under the mortgage. On the other hand, further drawings from the account—whilst still secured by the mortgage—will rank after the subsequent security. As a result, the normal utilization of an overdraft account or revolving credit facility will have the effect of progressively subordinating the lending bank’s mortgage to the security created in favour of the second charge.32

32.18  What action should a bank take if it receives notice of a second charge33 under circumstances in which none of the exceptions listed in paragraphs (a)–(d) above applies, with the result that the application of the rule in Claytons Case will subordinate its security in respect of further advances? The lender has the following options:

(p. 612)

  1. (a)  in the case of an overdraft, the bank should ‘rule off’ the account so that older debts—which would otherwise be discharged—are preserved, and a new account should be opened for subsequent debits and credits. This ensures that first priority is preserved for the existing indebtedness;

  2. (b)  this does, however, presuppose that the bank is prepared to accept a second ranking or subordinated security position in respect of further advances. It almost certainly will not have contracted to do so;

  3. (c)  where the underlying facility agreement is a detailed document, the creation of the second charge without the lender’s prior approval will almost certainly constitute a breach of the negative pledge undertaking.34 Since the breach of the negative pledge will amount to an event of default, the lender will be entitled to suspend further advances until the situation is remedied to its satisfaction; and

  4. (d)  where the facility is made available by way of overdraft, the facility letter is unlikely to contain a detailed negative pledge provision.35 However, it will almost certainly be an implied term of the contract that (i) all advances are to be secured by a first ranking mortgage over the property and (ii) the bank is entitled to suspend advances if this condition is not met.36 In practice, the bank will generally have the right to cancel the overdraft, and it may simply elect to take that route.

Registration of the Security

32.19  Security created over registered land will require registration:

  1. (a)  at the Land Registry;37 and

  2. (b)  if created by a UK-incorporated company, at Companies House.38

Remedies of the Mortgagee

32.20  As with any other security interest, the object of the arrangement is to insulate the lender against the consequences of the default or insolvency of his borrower. What is the nature of the remedies available to a mortgagee in this situation, and what are the constraints on the exercise of those remedies?

32.21  It should be noted at the outset that a mortgage which has been registered at the Land Registry takes effect as a charge by deed by way of legal mortgage.39 As a result, the powers available to the mortgagee are governed by the provisions of the Law of Property Act 1925 (‘the 1925 Act’). The mortgagee will be entitled to select his remedy and—at least where the transaction involves property acquired for investment purposes—the court will not (p. 613) normally prevent the mortgagee from exercising those powers where there is a history of default.40

Power of Sale

32.22  Apart from any specific powers which may be conferred by the mortgage deed itself,41 the mortgagee enjoys a statutory power of sale.42 In one of those curiosities which plagues English land law, there is a distinction between the point of time at which the power of sale arises and the time at which it becomes exercisable. The power of sale is said to arise if the mortgage is by deed, the secured monies are due and the mortgage does not suggest a contrary intention.43 However, that power will only become exercisable if (i) a part of the mortgage money has been outstanding for three months after notice of demand, (ii) interest is two months overdue, or (iii) there has been some other breach of an obligation of the mortgagor under the mortgage itself or under the terms of the Law of Property Act.44 The 1925 Act allows that the mortgage may vary the terms applicable to these powers45 and, unsurprisingly, mortgages usually take advantage of this power by eliminating or reducing the notice or grace periods. Accordingly, if the mortgage provides a list of events which will trigger the right to exercise the power of sale, it may be inferred that the list is intended to be exhaustive of the situations in which that power can be exercised.46

32.23  Depending on the nature of the property, it may be necessary to obtain possession of the property as a necessary precursor to the sale.47

Appointment of Receiver

32.24  The Law of Property Act 1925 also provides a statutory right for the mortgagee to appoint a receiver.48 As the name implies, this option will usually be of interest to the bank only where all or part of the mortgaged property is let and, hence, income-producing. This may be particularly advantageous if, for example, the income is likely to be sufficient to cover the interest but capital values are depressed in the prevailing market conditions.

32.25  The power to appoint a receiver is subject to the same terms and conditions as those applicable to the power of sale (see above).

32.26  The mortgage—reflecting the provisions of section 109(2) of the Law of Property Act 1925—will usually provide that any receiver is the agent of the mortgagor, so that the mortgagee will not be personally responsible for his actions.49 The lender will only become liable for the acts and omissions of the receiver if the lender seeks to give instructions to the (p. 614) receiver as to the exercise of his powers.50 For his own part, the receiver must preserve the property and is generally subject to the same obligations as the mortgagee itself in exercising the power of sale.51 The duties of a receiver include a duty to actively manage and preserve the property with due diligence, and to deal with it in a manner which is fair and equitable as between his appointor and the other parties interested in the equity of redemption.52 A party who claims that he has suffered losses in consequence of a receiver’s breach of these duties would have to demonstrate that those losses actually flow from that breach.53

Taking Possession

32.27  In theory, a mortgagee has the power to take possession of the land even if the borrower has not defaulted on its obligations.54

32.28  In practice, banks will only wish to seek possession of the mortgaged property as a prelude to exercising the power of sale following a default. At least in residential cases, this will usually be achieved by means of a court order, to avoid any later allegation that the bank or its agents have acted unlawfully in removing the mortgagor from his property.55 The court has a general power to adjourn or suspend possession proceedings if it appears likely that the debtor may be able to remedy his payment default or achieve a sale of the property.56

Restrictions on the Exercise of the Mortgagee’s Powers

32.29  What are the terms and conditions upon and subject to which the various powers just described may be exercised?

32.30  As a general rule, the mortgagee is allowed both to select the remedy which he wishes to adopt and to control the manner and timing of its exercise.57 Although the mortgagee must exercise his powers in good faith and for the purposes for which they were conferred,58 this does not imply any obligation on the mortgagee to select the remedy which is most likely to prove beneficial to the mortgagor,59 nor does he owe him any form of fiduciary duty in exercising those powers. The mortgagee is thus entitled to act in his own interests in this respect. The main obligation of the mortgagee is to obtain the best price reasonably (p. 615) obtainable in the circumstances.60 However, the proper price may depend upon the point of time at which the mortgagee elects to exercise his powers and, generally speaking, that has been seen as a matter within the mortgagee’s discretion, without reference to the interests of the mortgagor.61 However, in more recent cases, the courts have held that the bank does not have an unfettered discretion to delay the sale indefinitely and must have regard to the consequences of its conduct for the borrower (eg accrual of additional interest).62

32.31  Whether the best reasonably available price has been obtained will of course be a factual issue and expert valuation evidence would be needed for that purpose. Professional valuation standards63 will be a significant factor in the process, although it will not be the exclusive consideration. The need to dispose of the property dictates a certain flexibility and margin for error.64 It must also be recognized that the very fact that the property has been repossessed by a mortgagee will also tend to depress its value. Further discounts may also be necessary to reflect the cost of repairing or completing the property, the fact that local authority grants may become repayable as a result of the disposal and the collapse of previous transactions.65 It is important that property is given full exposure to the market at an appropriate price taking into account all relevant factors, including planning or development potential.66

Consolidation

32.32  A slightly different form of remedy for the mortgagee is the right of consolidation. In many senses, consolidation is more in the nature of a right to preserve security, rather than a remedy to enforce it.

32.33  The starting point for this discussion is offered by section 93(1) of the Law of Property Act 1925, which allows a mortgagor to redeem a mortgage without paying off other mortgages owing to the same lender. This provision accordingly excludes any right for the lender to consolidate two or more mortgages, but the section only applies subject to any contrary provision in the mortgage itself. Inevitably, given that the right of consolidation favours the lender, standard form mortgages will invariably contain a provision excluding the application of section 93, with the result that the bank will continue to enjoy its rights of consolidation.

32.34  The substance of the mortgagee’s right of consolidation is that the lender may effectively treat a series of outstanding mortgages from the same debtor as a single mortgage, and thus refuse redemption of one of them unless all are contemporaneously redeemed. This curious right apparently flows from the fact that (i) the right to redeem following a default is of an equitable nature and (ii) he who seeks equity must do equity.67 It is thus apparently regarded (p. 616) as inequitable for a mortgagor to be entitled to redeem a single mortgage from the series. The right for the mortgagee to insist on consolidation does, however, apparently only arise after the debtor has gone into default.68

32.35  It seems that the right to consolidate mortgages will in practice be of limited importance, at least in relation to corporate security. Usually, all properties charged by a company will each secure the entirety of the debt, with the result that the borrower has no right to redeem any of the properties until the whole of the indebtedness is repaid.

32.36  It is also suggested that the courts should readily infer an intention to exclude the right of consolidation where security is given over a portfolio of properties and—as is commonly the case—the borrower is required to maintain a particular security ration (that is, to ensure that outstanding amount of the loan does not exceed a set percentage of the value of the properties). This implies that the borrower should be entitled to withdraw individual properties from the security package so long as the resultant proceeds are paid to the lender in reduction of the overall debt and the loan to value ratio is still met.

Priorities

32.37  Some aspects of the rules governing the priority of successive mortgages over land have already been noted above.69

32.38  Subject to that discussion, mortgages over registered land will rank in the order in which they are shown on the register.70 The result is that a mortgagee who is tardy in registering his security may find himself postponed to another charge whose security in fact bears a later date. This rule is, however, subject to various exceptions:

  1. (a)  The applicable legislation provides for a system of priority notices, under which a person intending to take a charge over a property may apply for a notice to be entered on the register to that effect. If the intended mortgage is then in fact registered within the priority period, then its priority will relate back to the date on which the original notice was given, rather than the date of the mortgage document itself. This system is designed for the protection of pending transactions, so that there will be a clear period for the completion of the security and during which no competing transaction can obtain priority.

  2. (b)  Successive mortgagees may enter into a priorities or intercreditor agreement which alters the order of priority which would otherwise apply. The alteration is completed by an appropriate entry on the register.71 In practice, the borrower would itself be made a party to the necessary agreement, but this does not appear to be a necessary condition.72

  3. (c)  If a mortgagee makes an incorrect representation about the priority of his security to another lender and the latter relies on that statement to his detriment, then the first mortgagee may be estopped from pleading or relying upon his true statutory priority.73

(p. 617) Grounds of Challenge

32.39  The taking of security over residential property which is jointly owned by the sole borrower and his spouse/partner has given rise to particular difficulty over recent years.

32.40  There should be no special problem if the loan is made to finance or refinance the acquisition of a home in joint names, but issues may arise if the security is given in respect of the separate debts of one party only—for example, as is commonly the case, where the security is given to secure an overdraft facility provided to the husband’s business.

32.41  As a general rule, a bank which is requested to finance a transaction owes no duty to advise the borrower, any guarantor, or any other party on the viability or wisdom of that transaction.74 In the absence of special circumstances, the bank does not stand in a fiduciary or advisory relationship so far as borrowers or guarantors are concerned.

32.42  The difficulty is that, in a tripartite relationship, there may be a possibility that the borrower may mislead or otherwise take advantage of the surety, and the circumstances may mean that the bank should be aware of that danger. This, in turn, may mean that any guarantee or third-party security given by the surety may be vulnerable to attack on various grounds. For example, if the bank delegates to the borrower the task of procuring the execution of the guarantee, then (i) the borrower may be regarded as the agent of the bank for that purpose and (ii) as a result, any misrepresentation made by the borrower to the guarantor may be treated as that of the bank, and (iii) the guarantor may therefore be entitled to rescind the guarantee or security on that footing.75 Cases of this kind will, however, necessarily be out of the ordinary partly because the borrower will not normally have any authority to represent the bank and partly because of the processes put in place by banks to deal with the ‘undue influence’ decisions discussed below.

32.43  The circumstances of the case and the relationship between the borrower and the guarantor may be suggestive of other difficulties, such as the exercise of duress or undue influence over the surety. ‘Undue influence’ involves the exercise of influence over the surety in a manner which is unconscionable,76 and will generally entitle the victim of that influence to rescind the transaction. Alternatively, the borrower may have misrepresented the nature and substance of the transaction to the guarantor.77

32.44  These issues came to the fore in two House of Lords decisions namely Barclays Bank plc v O’Brien78 as more recently considered and refined in Royal Bank of Scotland plc v Etridge (No 2).79 Both cases involved a charge executed by a wife to support bank (p. 618) facilities provided to her husband’s business.80 In these situations, the House of Lords in Etridge held that a presumption of undue influence will arise if:

  1. (a)  the relationship between the parties was one of husband/wife or similar relationship in which the surety would repose significant trust and confidence in the borrower in the conduct of financial affairs;81 and

  2. (b)  the transaction calls for an explanation, in the sense that it is not obvious why the surety should have agreed to it in the absence of persuasion.82

32.45  It should be appreciated that both of these tests must be met if any presumption of undue influence is to arise. For example, if the transaction to be financed is clearly of benefit to both husband and wife, then no such presumption can arise.83 In such a situation, the transaction does not require explanation for the purposes of (b) above and no presumption of undue influence will arise.84

32.46  Nevertheless, situations of this kind pose significant practical difficulties for banks. It is true that the presumption that the husband has applied undue influence in relation to a transaction requiring explanation is a rebuttable one; it is perfectly conceivable that the wife fully understood the risks involved but elected to support her husband’s business venture in any event. But the problem for the bank is one of evidence; the husband is unlikely to provide evidence which will undermine the case which his wife seeks to establish. In any event, the bank does not wish to face defences of this kind at the point of enforcement. If at all possible, it needs to close off such potential challenges before it advances the facility in the first instance, because the necessary evidence will not be available at a later date. The question is: what can the bank do to acquire the necessary evidence at the point of arranging the facility?

32.47  In O’Brien, the House of Lords had suggested that the surety should receive independent legal advice and confirm to the bank that the surety understood the risks involved in the proposed transaction. Yet this does not really seem to address the issue. The surety may well fully understand the nature of the guarantee or security, but may still have been coerced into entering into it. This guidance was therefore considerably refined in Etridge, as follows:85

  1. (a)  the bank should communicate directly with the wife (i) to ascertain the identity of the solicitor whom she wishes to advise her on the arrangements,86 (ii) to explain that, (p. 619) for its own protection, the bank will require written confirmation from the solicitor that he has explained the nature and effect of the documents and their practical consequences,87 and (iii) to explain that the solicitor’s confirmation is required so that she cannot dispute the validity of the guarantee/security at a later date;

  2. (b)  the bank should disclose—either to the wife herself or to the solicitors instructed by her—details of the existing indebtedness of the husband and of any new facility;88

  3. (c)  if the bank suspects that the husband has misrepresented the nature of the transaction, believes that the wife is being pressurized to enter into it, then the bank should disclose the relevant circumstances to the wife’s solicitors; and

  4. (d)  the required confirmation should be obtained from the wife’s solicitor before the facility is drawn.

32.48  It remains to note a few general points in this area:

  1. (a)  whilst the preponderance of recent cases have involved assertions of undue influence made by wives, it should be appreciated that presumptions of undue influence may arise in the context of cohabitees or other family relationships—for example, where a child signs a guarantee for his parents89 or where aging parents give guarantees for the obligations of their grown up children;90

  2. (b)  where a bank refinances an earlier transaction and that transaction was effected under circumstances giving rise to a presumption of undue influence, the bank cannot simply assume that the first transaction was regular. It should apply the processes outlined in Etridge on the same basis;91 and

  3. (c)  the bank may be placed in a difficult position if the presumed ‘victim’ of undue influence refuses to seek the requested legal advice. The Banking Code and the Business Banking Code92 both suggested that the individual concerned should provide a written declaration to the bank to that effect. This is perhaps the best that can be done under such circumstances, yet it is difficult to see how such a declaration would rebut any presumption of undue influence which may have arisen. To the contrary, the refusal to seek advice may tend to suggest that actual undue influence is being applied by the borrower; and

  4. (d)  it may be noted that courts in Canada have allowed that the presumption of undue influence may be rebutted by other means, for example, by demonstrating the financial sophistication of the spouse and the probability that she did not rely on the husband.93 They have also held that it is sufficient to advise the spouse that legal advice should be taken, and that the bank should not be affected if that suggestion is rejected.94 It is (p. 620) fair to say that the Etridge decision has received a mixed reception in Canada, and the courts have declined to follow it on at least one occasion.95

Environmental Liability Issues

32.49  Given that it is an issue of concern for lenders from time to time, it is appropriate briefly to consider the extent of a lender’s liability for environmental costs relating to contaminated land where it has taken security over that land and/or reaches the point of enforcing that security.

32.50  The Environmental Protection Act 1990 provides for the identification of the ‘appropriate person’ to bear the costs of remediation in relation to contaminated land. The starting point is that the ‘polluter pays’—that is, primary responsibility rests on the ‘person…who knowingly caused or permitted’ the relevant substances to be present on the land.96 If the primary target cannot be identified (eg as a result of death or liquidation), then the owner or occupier of the land is responsible for these costs.97

32.51  The starting point must therefore be that a lender who takes security over land is not liable for contamination costs, for he has not caused or permitted the pollution, nor is he the owner or occupier of the land. This view is confirmed by official guidance on the issue which states that a secured lender does not incur liability solely as a result of making the loan, nor will it incur any such liability as a result of commissioning environmental reports or making similar inquiries.98 Neither the 1990 Act nor the Guidance issued pursuant to it deals with the position of a lender after he has enforced his mortgage and taken possession of the property. The proper inference must be that the lender does not incur liability in that case unless, having become aware of contamination, he unreasonably allows it to spread or worsen without any attempt at intervention. It would, otherwise, be pointless to exempt the lender in this situation, for there is no value in taking a security interest that cannot subsequently be enforced.

32.52  At least in the context of commercial property, however, it would be unusual for the lender to take possession following default. He would usually appoint a receiver99 or, if he has a full floating charge over the assets of the borrower company, he will seek the appointment of an administrator. Such officials act as agent for the company (and not for the lender), with the result that the lender is not formally responsible for costs, expenses, and losses suffered by the administrator. In practice, however, they will seek a contractual indemnity from the lender as a condition of accepting their appointment. It is thus important for the lender to understand the extent of the potential liability of the receiver or administrator that might fall within the scope of such an indemnity. In this context, reference must be made to section 78X(3) of the 1990 Act, which provides that an administrator or receiver100 ‘shall not thereby be liable…to bear the whole or any part of the cost of doing anything by way of remediation, unless that thing is to any extent referable to substances whose presence in, on or under the contaminated land in question is a result of any act done or omission made by him which it was unreasonable for a person acting in that capacity to do or make’.

(p. 621) 32.53  It should follow that, save in exceptional circumstances, no remediation liability in respect of contaminated land should be incurred by (i) a bank that provides finance on the security of such land or (ii) an administrator or receiver appointed to manage the land or to realize the security over it.

Security Over Foreign Land

32.54  Questions of title to foreign land are necessarily governed by the law of the country in which that land is situate. As a result, the validity of any mortgage or security interest over that land—and any remedies available for its enforcement—are likewise governed by that system of law.101 A lender taking security over such an asset should therefore ensure that all registration and other steps are taken under the local law in order to ensure the perfection, validity, and priority of the charge in accordance with that law.

32.55  Yet matters are not always so straightforward. If a bank takes a standard form of debenture102 from an English company, this will (at least so far as English law is concerned) extend to all land owned by the company, wherever situate. The bank may therefore seek to argue that it has a recognizable and effective security interest against that asset—even though local registration or other formalities have not been met. This may occur because the relevant asset only comes to the attention of the bank once insolvency proceedings have been started, or because the bank originally (and, in the events which happen, erroneously) believed that the security available to it in the United Kingdom would be sufficient to cover its facility in the event of a default.

32.56  As noted above, there are limited circumstances under which an English court can concern itself directly with issues touching the title to foreign land. But there may be limited cases in which the court can lend some assistance to the secured lender. In particular:

  1. (a)  if by chance the borrower remains solvent and otherwise able to manage its affairs at the point of time at which the bank becomes aware of the foreign asset, then the court might order the borrower to take such steps as may be necessary to perfect the security under the local law. There are two possible bases for such an order. First of all, since the debenture extends to foreign land, it may be an implied term of the contract that the borrower will perfect the security in accordance with the local law on request.103 Alternatively, the standard form debenture will usually contain a standard ‘further assurance’ clause under which the chargor undertakes to take any steps and execute any documents required in order to perfect the security intended to be created pursuant to the debenture. In such a case, the court is not making an order which directly affects the title to foreign land. Rather, it is simply exercising an equitable jurisdiction in personam, ordering the company to perform the obligation which it has expressly or impliedly undertaken.104 An English court has recently refused to order a chargor to execute a security document over Dutch assets pursuant to the further assurance clause (p. 622) in an English charge, although it accepted that such a remedy ought in principle to be available in this type of case.105 It may be objected that, in practice, any such further security document is likely to be requested and executed when the company is on the threshold of insolvency and that, since the loan will have been advanced long ago, the resultant security will be amenable to challenge as a preference or as a transaction at an undervalue.106 Although the point is eminently arguable, it is submitted that such challenges should not succeed, in part because the security created in the original debenture is valid as against the company, at least so far as English law is concerned;107

  2. (b)  although the security interest created by the debenture is not enforceable in the foreign jurisdiction concerned, it is submitted that it remains valid and effective as between the lender and the English company so far as English law is concerned. The English courts will treat the security document as a valid equitable charge over the foreign property, and the fact that such a form of security is unregistered in the foreign jurisdiction will be irrelevant.108 As a result, any proceeds of sale of the property received by the administrator or liquidator would be subject to the security interest created by the original debenture over that property, and should thus be paid to the lender in priority to the unsecured creditors.109 However, since the charge is not valid by the law of the country in which the land is situate, he will not be able to prevent other creditors from taking action against the property under the law of that country.110 The general point is nevertheless worth keeping in mind for a creditor in this situation, although it will only have substance if proceeds remain available to the liquidator or administrator following any local enforcement action taken by other creditors;111 and

  3. (c)  there may be a question mark as to the characterization of the charge as fixed or floating. The failure of the lender to perfect its security under the local law will probably mean that—so far as English law is concerned—the lender has not taken sufficient control over the asset to establish a fixed charge.112 The security would thus take effect as a floating charge.

Footnotes:

Although it should be said that many of the problems are being resolved, or at least contained, by the system of land registration.

See generally Megarry and Wade, The Law of Real Property (7th edn, Sweet & Maxwell, 2008).

It may be noted that the State, through the Chief Land Registrar, effectively guarantees title to registered land by providing indemnities to those who suffer loss as a result of relying on any inaccuracies in the register: see s 103, read together with Sch 8 to the Land Registration Act 2002.

For the definitive work in this area, see Fisher and Lightwood.

For example, as in the case of security taken over listed shares, bonds, or similar instruments.

A long leasehold interest of the type now under discussion must be distinguished from an ordinary commercial (or ‘rack rent’) lease, where the rent will be paid periodically throughout the term of the lease and no premium is paid for the grant of the lease at the outset.

In practice, there are a number of statutory exceptions to this principle, allowing the owner to require the grant of an extended lease or, in some cases, to purchase the freehold. The relevant provisions are detailed and beyond the scope of this work.

The exact value will often depend principally on the cash flow represented by the ground rents.

See paras 32.09 and 32.10 below.

10  Information of this kind will of course be relevant to the surveyor who is instructed to prepare a valuation of the property for mortgage purposes.

11  This provision, formerly s 70(1)(g) of the Land Registration Act 1925, is now to be found in ss 11 and 12, and Sch 1 to the Land Registration Act 2002.

12  The problem really came to notice as a result of the decision in Williams & Glyns Bank Ltd v Boland [1981] AC 487 (HL) but, inevitably, a series of similar cases have followed.

13  See, for example, Nationwide Anglia Building Society v Ahmed (1995) 70 P&CR 390; Le Foe v Woolwich plc [2001] 2 FLR 970.

14  Compare the situation which arose in Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 (HL), discussed at paras 32.39–32.48 below. The lender would be well advised to adopt the procedures there discussed (including the requirement for independent legal advice) in the present context.

15  See s 27 of the Land Registration Act 2002.

16  Section 30(2) of the Land Registration Act 2002.

17  See ss 51 and 52 of the Land Registration Act 2002.

18  Section 48 of the Land Registration Act 2002. It is possible to obtain a priority period, which means that the lender will obtain his priority by reference to the date of his priority search, rather than the later date of actual registration: see s 72 of the 2002 Act.

19  On these requirements, see paras 27.18–27.26 above.

20  Land Registration Rules 2003, r 111. As noted at para 27.26(g) above, it should be appreciated that such a security interest remains enforceable against the company itself. In theory, it may thus be advisable to register the mortgage at the Land Registry even if the lender has failed to register the security at Companies House and the situation cannot be remedied for some reason.

21  Elitestone Ltd v Morris [1997] 2 All ER 513 (HL).

22  For further details and case law, see Fisher and Lightwood, para 8.2.

23  The commentary does, of course, assume that the relevant advances are within the scope of the obligations secured by the mortgage. There will be no difficulty where the mortgage is expressed to secure all monies owing by the borrower to the lender.

24  On the points about to be made, see s 94 of the Land Registration Act 2002. Since these provisions are concerned with the ‘tacking’ of further advances, it will be appreciated that they will be of no real relevance where the facility is to be drawn down in a single amount at the outset (eg to assist in the purchase of the property in the first instance).

25  The notice must emanate from the second mortgagee, since registration of the second charge is not of itself notice to the first lender. The rules provide for ‘deemed receipt’ of such a notice, which means that the first lender may lose its priority even though it has no actual knowledge of the second security. For the details, see Fisher and Lightwood, para 38.19.

26  It is always open to multiple mortgagees to enter into agreements regulating their respective priorities and other matters (eg such as the circumstances under which the second mortgagee may enforce his security against the wishes of the first lender). There is no policy reason to strike down such an agreement since it does not operate in a manner detrimental to the unsecured creditors of the mortgagor.

27  Note however that the obligation to make further advances can be contained in the associated facility agreement. It does not need to be stated in the mortgage document itself. Nevertheless, it must be noted on the property register. An agreement that amends and restates an existing facility agreement but does not provide additional funding to the borrower is not a ‘further advance’ for these purposes: see Re Black Ant Co Ltd (in administration) [2014] All ER (D) 122 (Apr); [2014] EWHC 1161 (Ch).

28  The maximum amount so stated must include principal and interest and must be recorded on the register: Fisher and Lightwood, para 38.21.

29  See Re Black Ant Co Ltd (in administration) [2014] All ER (D) 122 (Apr); [2014] EWHC 1161 (Ch).

30  It should also be appreciated that, even where one of the exceptions does apply, they are only available to a mortgagee who has completed the registration of his mortgage at the Land Registry.

31  Devaynes v Noble, Claytons Case (1816) 1 Mer 572.

32  For applications of this rule, see Deeley v Lloyds Bank Ltd [1912] AC 756 (HL) and Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142.

33  A restriction entered on the register will frequently prohibit the registration of a second or subsequent charge. But this would not prevent a second charge from accepting an equitable security. An equitable charge does not require registration to be effective. Section 27(2)(f) of the Land Registration Act 2002 provides that only a legal charge is a registrable disposition, although an equitable charge should be protected by the entry of a notice: ss 32–39 of the 2002 Act.

34  On the negative pledge undertaking, see para 20.43(b) above.

35  Although the bank may have sent a set of standard terms and conditions which might include such a clause.

36  The second part of this formulation is necessary to make the implied term effective. It would be insufficient for the bank merely to have an action for damages in respect of the creation of the second security.

37  See para 32.11 above.

38  See the discussion of s 859A of the Companies Act 2006 at paras 27.18–27.26 above. Note that this particular registration requirement will also apply if the charge relates to land outside the UK.

39  Section 51 of the Land Registration Act 2002.

40  See Graves v Capital Home Loans Ltd [2014] All ER (D) 124 (Oct).

41  An express power of sale will normally include an obligation to give notice before the power of sale is exercised. On this subject, see Fisher & Lightwood, para 30.11.

42  Section 101(1)(i) of the Law of Property Act 1925.

43  Section 101(1) of the Law of Property Act 1925.

44  Section 103 of the Law of Property Act 1925; Fisher and Lightwood, para 30.12.

45  Section 103(3) of the Law of Property Act 1925.

46  West Bromwich Building Society v Wilkinson [2005] 1 WLR 2303.

47  On this process, see para 32.26 below.

48  Section 101(1)(iii) of the Law of Property Act 1925.

49  For a recent decision affirming this rule, see Bicester Properties Ltd v West Bromwich Commercial Ltd (Case No HC11C02585, May 2014).

50  For exceptional cases in which the lender has incurred liability in this fashion, see Medforth v Blake [1999] 2 EGLR 75; American International Banking Corp v Hurley [1986] BCLC 52 and Standard Chartered Bank v Walker [1982] 3 All ER 938. This does not, however, prevent the lender from receiving information about, or being involved in discussions with respect to, the mode of exercise of those powers: see Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 485; [2004] 1 WLR 997 and Tariq v Mortgage Express Ltd [2013] EWHC 1571 (Ch).

51  On this subject, see para 32.30 below.

52  For analysis, see Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295 (PC) and Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484.

53  Barclay Pharmaceuticals Ltd v Waypharm LP [2013] EWHC 503 (Comm).

54  Four-Maids Ltd v Dudley Marshall Properties Ltd [1957] Ch 317. Once again, this is something of a curiosity of English land law. The bank is in the business of lending money to customers so that they can acquire property; it will not usually wish to enter into possession itself.

55  For completeness, it should be noted that the mortgagee also has a right of foreclosure, which has the effect of vesting the property in the mortgagee, thus cancelling the mortgage debt. This remedy is now rarely used and is therefore not considered here. On the whole subject, see Fisher and Lightwood, ch 32.

56  Section 36 of the Administration of Justice Act 1970. For a more detailed discussion, see Halsbury’s Laws of England, Mortgages, paras 755–759.

57  Medforth v Blake [2000] Ch 86.

58  ie obtaining repayment of the mortgage debt.

59  Downsville Nominees Ltd v First City Corp Ltd [1993] AC 295.

60  Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 948; Downside Nominees Ltd v First City Corp Ltd [1993] AC 295 (PC).

61  See Saltri III Ltd v Mezzanine SA Sicar [2013] 1 All ER (Comm) 664; [2012] EWHC 3025; JL Homes Ltd v Mortgage Express Ltd [2014] All ER (D) 61 (Feb); [2014] EWHC 190 (Ch).

62  See Palk v Mortgage Services Funding plc [1993] Ch 330; [1993] 2 All ER 481.

63  In the case of real estate, the Valuation Professional Standards 2012 published by the Royal Institute of Chartered Surveyors.

64  Michael v Miller [2004] 2 EGLR 151; [2004] EWCA Civ 282.

65  On this process, see Aodhcon Ltd v Bridgeco Ltd [2014] 2 All ER (Comm) 928; [2014] EWHC 535 (Ch).

66  For a case that illustrates these points, see Meah v GE Home Finance Ltd [2013] All ER (D) 124 (Jun); [2013] EWHC 20 (Ch).

67  Chesworth v Hunt (1880) 5 CPD 266, noted by Halsbury, Mortgages, para 699.

68  See in particular Cummins v Fletcher (1880) 14 Ch D 699 (CA) and Jennings v Jordan (1881) 6 App Cas 698 (HL).

69  See ‘Extent of the Security’, at paras 32.15–32.18 above.

70  Section 48(1) of the Land Registration Act 2002.

71  Rule 102(3) of the Land Registration Rules 2003.

72  Cheah Theam Swee v Equiticorp Finance Group Ltd [1992] 1 AC 472 (PC).

73  Nationwide Anglia Building Society v Ahmed (1995) 70 P&CR 381. The decision is noted by Fisher and Lightwood, para 36.1.

74  National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51. This case has been noted at para 25.11 above.

75  See, for example, Kings North Trust Ltd v Bell [1986] 1 WLR 119 (CA).

76  On the subject of undue influence generally, see Chitty, ch 7.

77  This was the situation in the O’Brien case, discussed below.

78  [1994] 1 AC 180 (HL).

79  [2002] 2 AC 773 (HL).

80  This has tended to be the common situation although, as noted above, the issues now under discussion can arise in any non-commercial relationship, including sexual and family relationships.

81  Note that the ‘trust and confidence’ point is not itself a matter of presumption and the wife has to demonstrate that she did in fact entrust the running of finances to the husband. For a case in which the wife was unable to meet this test, see MacKenzie v Royal Bank of Canada [1934] AC 469 (PC), noted by Lingard at para 13.38. However, the mere fact that a group of business partners also happen to be close friends does not by itself give rise to any presumption of undue influence: Bank of Scotland plc v Makris and O’Sullivan Ch D (15 May 2009).

82  As the House of Lords noted in Etridge, the bank will in practice be placed on enquiry whenever a wife acts as surety for her husband’s debts.

83  This point was expressly recognized in Barclays Bank v O’Brien [1994] 1 AC 180 (HL).

84  See CIBC Mortgages Ltd v Pitt [1994] 1 AC 200 (HL) and contrast Northern Rock Building Society v Archer [1997] Lloyd’s Rep Bank 32 (CA).

85  See in particular the judgments of Lord Nicholls at 811–812 and Lord Scott at 849.

86  According to Etridge, this may be the solicitor who is already advising the borrower, provided that no conflict of interest arises.

87  The bank cannot reasonably rely on the solicitor’s certificate unless it expressly states that he has advised on the nature and effect of the transaction: see Yorkshire Bank plc v Tinsley [2004] EWCA 816 (Civ). However, it should be noted that this does not mean that the solicitor has to state that he has positively advised the surety to enter into the transaction.

88  The provision of this information would require the consent of the husband in order to avoid any breach of the duty of confidentiality owed to him.

89  Lancashire Loans Ltd v Black [1934] 1 KB 380 (CA).

90  Avon Finance Co Ltd v Bridger [1985] 2 All ER 281 (CA).

91  Yorkshire Bank plc v Tinsley [2004] EWHC 816 (Civ).

92  See para 13 of both Codes. These Codes are no longer in force: see the discussion of the BCOBS section of the FSA Handbook in Chapter 3 above.

93  Bank of Montreal v Duguid (2000) 185 DLR (4th) 458 (Ontario Court of Appeal).

94  CIBC Mortgage Corporation v Rowatt (2002) DLR (4th) 139 (Ontario Court of Appeal).

95  Bank of Montreal v Courtenay (2005) 261 DLR (4th) 665 (Nova Scotia Court of Appeal).

96  Section 78F(2) of the Environmental Protection Act 1990.

97  See s 78F(4) of the 1990 Act.

98  See Department for Environment, Food and Rural Affairs, ‘Contaminated Land Statutory Guidance’, paras 7.39(a)(ii) and 7.39(c). The guidance is issued pursuant to s 78Y of the 1990 Act.

99  On the appointment and role of receivers, see paras 32.25–32.27 above.

100  The references to an administrator or receiver are derived from the definition of ‘person acting in a relevant capacity’ in s 78X(4)—see in particular subparas (a) and (f) of that definition.

101  See Fisher and Lightwood, para 1.24.

102  The expression ‘debenture’ is used here to connote a document creating a fixed and floating charge over the entire assets and undertaking of the company.

103  Such an implied term would be necessary to give full effect to the intended security package, and could thus be justified on ‘business efficacy’ grounds.

104  On this principle as it applies to foreign land, see Penn v Lord Baltimore (1750) Ves Sen 444.

105  Ford v Polymer Vision Ltd [2009] EWHC 945 (Ch).

106  On preferences and transactions at an undervalue, see ss 238 and 239 of the Insolvency Act 1986, considered in Chapter 39 below.

107  The validity of the security under English law is developed in (b) below. Briefly, the execution of the foreign security document would not be a ‘transaction at an undervalue’ because the company is executing the charge in compliance with a pre-existing obligation. The company has thus not ‘entered into a transaction’ for the purposes of s 238 of the Insolvency Act 1986, since that expression connotes a voluntary action on the part of the company or (alternatively) it is executing the document pursuant to the earlier debenture, for which it has received full value. Likewise, the creation of the foreign charge is not a ‘preference’ because it does not have ‘the effect of putting [the lender] into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if the thing had not been done’ for the purposes of s 239(4)(b) of the 1986 Act. Again, this follows from the fact that English law should treat the security created by the original debenture as valid, with the result that the foreign security document does not operate to the detriment of the general body of creditors.

108  ie because equity acts in personam and does not act directly against the foreign property.

109  This does, of course, pre-suppose that the debenture was registered in accordance with the requirements of part 25 of the Companies Act 2006 and that the debenture is otherwise valid as a matter of English law.

110  Re Maudslay, Sons & Field [1900] 1 Ch 602.

111  ie as happened in the Maudslay case, n 110 above.

112  On the degree of control as an indicator of a fixed charge, see para 30.04 above.