Posted by: RM | November 25, 2009

Mortgage Lenders Still Exercise Insufficient Caution

The recent decision of the High Court in HSBC Bank plc v Dyche & Collelldevall [2009] EWHC 2954 (Ch) illustrates that mortgage lenders are, despite cases such as Williams & Glyn’s Bank Ltd v Boland [1981] AC 487 in which it was established that a failure by lenders to make proper enquiries of those in actual occupation rendered those lenders exposed to interests which might potentially override their own interests, still not always sufficiently careful so as to avoid the ramifications of overriding interests and issues of priority which arise out of such interests being established.

In HSBC v Dyche property was conveyed to Mr and Mrs Dyche in 1994. The property had belonged to Mrs Dyche’s parents, Mr and Mrs Collelldevall, who had lived there since 1976. In 1988 Mr Collelldevall was made bankrupt. At that time he and his wife owned the property as beneficial joint tenants. The bankruptcy had the effect of severing that beneficial joint tenancy. Following Mr Collelldevall’s bankruptcy his Trustee in Bankruptcy obtained, in 1992, an order for sale of the property which order was not enforced. The then mortgagee subsequently obtained a possession order in 1993. That order was also not enforced. Mr Collelldevall was discharged from his bankruptcy at some time in early 1994.

In January 1994 the property was transferred by Mr and Mrs Collelldevall to Mr and Mrs Dyche with the agreement of Mr Collelldevall’s Trustee in Bankruptcy (“the 1994 Transfer”). The mortgage outstanding at the time was discharged upon completion of the transfer. A sum was also paid the Mr Collelldevall’s Trustee in Bankruptcy, thereby increasing the dividend in the bankruptcy. The purchase price was set to meet the Collelldevall’s immediate financial needs and commitments and bore no relation to the actual value of the property which was, at that time, much more than the £25,000 apparently paid by Mr and Mrs Dyche.

At the time of the transaction Mr and Mrs Collelldevall were unable to secure a mortgage against the property in their own names as a result of his bankruptcy. Hence, it was argued, and accepted, that the Dyche’s acquired the property on their behalf. The Dyche’s obtained a mortgage of £17,000 from Lloyds Bank and Mr Dyche was said to have borrowed the balance of £8,000 from a friend. However, the judge accepted Mr Collelldevall’s evidence that it was he who had borrowed the £8,000 from a friend. There was an agreement that Mr and Mrs Collelldevall would pay Mr and Mrs Dyche in monthly installments amounts which corresponded with the amounts due under the Lloyds mortgage. The judge accepted that following the 1994 Transfer the property was held on constructive trust for the Collelldevalls.

Later in 1994 Mrs Collelldeval died and the judge accepted that her interest in the property passed to Mr Collelldeval under the right of survivorship. Whilst the bankruptcy had had the effect of severing the joint tenancy the judge concluded that the effect of the 1994 Transfer was to put the Collelldevalls, as far as possible, back into their pre-bankruptcy position. Thus it was concluded that the Dyches held the property on trust for the Collelldevalls as beneficial joint tenants.

In 1995 Lloyds Bank advanced more monies to the Dyches which sum was repaid with later borrowings from HSBC. Lloyds did not take a further charge against the property in respect of this advance. In 2002 the property was transferred into the sole name of Mrs Dyche by herself and her husband in connection with divorce proceedings (“the 2002 Transfer”). This was said to be pursuant to a court order under which Mrs Dyche had paid to her husband the sum of £5,000 (the only consideration which passed in relation to the 2002 Transfer). On the same date as the 2002 Transfer Mrs Dyche gave HSBC a first legal charge over the property in order to secure an advance against that property. In order to obtain the mortgage Mrs Dyche had provided HSBC with what purported to be an assured shorthold tenancy agreement naming herself as landlord and Mr Collelldevall as tenant. The judge accepted that Mr Collelldevall’s signature was a forgery. Mr Collelldevall knew nothing of this mortgage and had not authorised it. A further advance was acquired by Mrs Dyche under a second mortgage from HSBC in 2003.

Mr Collelldevall gave evidence that he knew the property was going to be transferred into Mrs Dyche’s sole name but that she had promised to transfer the property to him thereafter. The judge found that Mrs Dyche had clearly perpetrated a deception upon her father; she was unable to transfer the property so long as monies remained outstanding in respect of the HSBC mortgages. Mrs Dyche had, it was concluded, acted in breach of trust. Whilst it was not established that Mr Dyche had anything to do with the forgery of Mr Collelldevall’s signature on the tenancy agreement the judge concluded that he must have known that he too was acting in breach of trust in transferring the property to his wife in return for £5,000 given that the property was beneficially owned by Mr Collelldevall, pursuant to the agreement at the time of the 1994 transfer.

The question for the court, therefore, was whether Mr Collelldevall’s beneficial interest in the property was overreached by HSBC’s interest under the terms of the mortgage(s). The judge reviewed the relevant provisions of the Law of Property Act 1925 (section 2(1)(ii) regarding the effect of a conveyance of land by trustees; section 205(1)(xxi) regarding the definition of a purchaser in good faith; and sections 2(1)(ii), 2(2) and 27, which require the conveyance to be made by at least two trustees) and, applying the law to the facts of the case, determined that the doctrine of overreaching did not here apply (for detailed analysis and reasoning see the judgment, paras [37] – [46]). It was held that Mr Collelldevall had a beneficial interest which overrode the registration of the HSBC mortgages pursuant to Paragraph 2, Schedule 3 to the Land Registration Act 2002.

The judge concluded that “HSBC could have avoided the present position by making inquiries of Mr Collelldevall, but, though a Letter of Consent was considered, they chose not to proceed down that route, as the documents appeared to be in order … By not making inquiries of Mr Collelldevall direct, they assumed the risk of the tenancy agreement turning out to be a forgery. The risk may have seemed remote, but has now come to pass, and HSBC misses out because of it”.

Once again, this is a clear reminder of the consequences of mortgage companies not making sufficient inquiries of propsective mortgagors where there is evidence that there is someone else occupying the property concerned. However, there is nothing in the facts to suggest that HSBC was or could have been aware that Mr Collelldevall and Mrs Dyche were related. On the face of it he was no more than a tenant with the benefit of an assured shorthold tenancy. It would have been plain from the nature of the tenancy agreement what rights Mr Collelldevall would or would not have had as a consequence of his shorthold tenancy. Without any reason to suspect that there was a familial relationship between Mrs Dyche and Mr Collelldevall this decision seems to suggest that any potential lender should make inquiries of shorthold tenants in order for their lending to be secure. This does, on the face of it, seem to be a particularly onerous obligation to impose upon all lenders, particularly given the recent increase in the acquisition of  ‘buy to let’ properties together with a tendency for property owners to switch their mortgages much more frequently, reflecting an inclination to always be in pursuit of the best deals on offer.

Postscript: For another view on this decision see here.


  1. You pipped me to the post in blogging about this.

    Surely the investigation of title would have shown (quite clearly) that the Dyche’s held after a conveyance from the Collelldevalls? That in itself ought to raise eyebrows (former owner still in occupation should be worrying).

    I think you underestimate the dangers that exist for mortgage lenders in lending secured on properties in which there are already tenants. It is extremely common to see assured shorthold tenancy agreements when the underlying tenancy is anything but.

    The lender takes subject to the tenancy. If the tenancy is in fact an assured tenancy or one protected under the rent acts, they may find regaining possession difficult. Such a tenant, if they had been in occupation for a long time, may well have been given an AST to sign which signature would be entirely ineffective.

    Taking the landlord’s word for this sounds dangerous to me.

  2. Sorry to have beaten you to it!

    You are, of course, quite right – investigation of title would have shown that the “tenant” was, in fact, the previous owner. As you say, that ought to raise eyebrows. So, on these facts, the decision is, perhaps, entirely unsurprising.

    However, as a general proposition, where such a connection is not apparent and is undiscoverable without making more extensive enquiries, the starting point must be that the “tenancy agreement” (whatever kind of tenancy agreement it is) reflects the extent of the rights vested in the tenant. Therefore, those rights ought to be capable of ascertainment, even if further enquiries have to follow such as “how long has this particular tenant been in occupation?”, etc.

    What I am more unsure about is whether this decision effectively suggests that all mortgage lenders are to be expected, when presented with a tenancy agreement, to ask whether there is any familial or other close or undisclosed relationship between the parties concerned, what the implications of that are and so on. Of course, inquiries made of Mr Collelldevall in this case would have alerted him to the fact that his daughter was attempting to mortgage the property without any right to do so. However, where a tenancy agreement is genuine and not a disguise for some underlying agreement or arrangement, it seems that a mortgage lender will have to go to alot of extra trouble and expense to ascertain that the facts are as they have been presented to them (I accept that lenders ought to be astute to attempt to detect fraud, etc, anyway).

    It may indeed be that this approach is what is required in every case in order to avoid circumstances such as this arising, albeit, probably, in a very small minority of cases when having regard to the whole picture. I agree that mortgage companies should make sufficient enquiries (and be expected to do so) before they can exempt themselves from the consequences of not doing so (Boland type cases). It offers protection for both themselves and the party who might otherwise lose out by monies being advanced against the security of the property concerned without their knowledge and in contravention of their interests.

    It does seem, however, that if mortgage companies are expected to never accept the provision of copies of tenancies at face value the costs of the parties concerned are going to increase to cover the additional inquiries and the legal advice which should then be offered to those parties to explain the significance of those inquiries and any waivers or consents which they are then asked to sign. Moreover, this would mean that tenants would need to be availed of some information about the financing of the property in respect of which they hold a tenancy (even if only to the extent that it is mortgaged and to whom).

    I wonder where the line ought to be drawn…

  3. […] news by RM Advice On UK Mortgage Options […]

  4. The scheme of Schedule 2 para 3 does seem to suggest that what the legislature believe ought to happen is that the mortgagee inspect the property. If that inspection does not reveal anyone in occupation then para. 2(c) prevents the occupier from having overriding status unless of course the mortgagor has told them about a tenant etc.

    If the inspection reveals someone (and/or the mortgagee is told of someone) then the lender seems expected to ask that person of any interest. If they don’t disclose their right, then the lender is in the clear.

    This is much more than many lenders do (you are right there) but the scheme of the act suggests that they are intended to do so at their own risk.

    The key thing is that the inquiry to discover the interest does not appear to require any legal advice to be given to the occupier. Sure, if you want to defeat the interest (through a waiver for instance) then you would have to be quite careful about what you were doing, but that’s not unreasonable as you are asking someone to give up a legal right in your favour.

    It would alert tenants to the mortgaging of the property though. I’m not sure that’s all that bad a thing (after all you have to tell them you are selling, if you do).

    The first case we were made to read in Land Law was Kingsnorth v Tizard. Although it is an unregistered land case, it is a salutary warning to mortgage lenders.

  5. The comment that a proper investigation of title would have disclosed that the current occupier was the previous owner is not actually entirely correct. Especially if the property was registered land, which it clearly was in this case. The proprietorship register does not show who the current owner acquired the property from. The only indication of last owners, is if new covenants etc were imposed at the time of the transfer from the last owner to the current owner. In which case, the registrar will make a note of the covenants, and make reference to the transfer and possibly also the parties. Otherwise, If you wanted this information, you would have to make a special application to HMLR for a copy of the last transfer. This is not something that is a normal or standard part of the conveyancing process, as all that document would reveal is the parties and the price paid – and price paid is on the register now anyway. A conveyancer would only request a copy of the last conveyance/transfer if there was a special reason for doing so.

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