Leading Title Insurance

FIRST COMMENT01

IN THIS ISSUE:• BONA VACANTIA - A GREY AREA?• DUTIES TO LENDERS – A REMINDER• ARNOLD V BRITTON (2016) :

WHEN COMMON SENSE DOES NOT PREVAIL

SPRING 2016 ISSUE

Like any good spring clean, we have applied the “Out with the old, in with the new” mantra to our Quarterly newsletters. Our decision to move to this format was not only to refresh the look and feel of the newsletter itself but also, to provide a better user experience for an increasing number of our subscribers who read our newsletter when out of the office. Our new platform is fully optimised for both desktop and mobile devices and newsletters can also be downloaded as PDFs to enable viewing without an internet connection. We believe that the content is still as compelling as always with contributions from Professor Paul Butt and Hill Dickinson’s Kevin Lee as well as a regular inclusion from our underwriting team.

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Bona vacantia also known as ownerless goods is when in accordance with section 1012 Companies Act 2006 the assets of dissolved companies are passed to the Crown.

Section 1012 Companies Act 2006“1012 Property of dissolved company to be

bona vacantia

(1)When a company is dissolved, all property

and rights whatsoever vested in or held on

trust for the company immediately before its

dissolution (including leasehold property, but

not including property held by the company

on trust for another person) are deemed to

be bona vacantia and—

(a) accordingly belong to the Crown, or to

the Duchy of Lancaster or the Duke of

Cornwall for the time being (as the case

may be), and

(b) vest and may be dealt with in the same

manner as other bona vacantia accruing

to the Crown, to the Duchy of Lancaster

or the Duke of Cornwall.”

Assets can generally be split into two

different categories tangible assets and

intangible assets: Intangible assets are non-

physical-resources such as copyrights or

trademarks. Tangible assets are current and

fixed assets. Current assets include things

such as the company’s inventory and fixed

assets include land and equipment. For the

purpose of this article only land assets will be

discussed.

What happens to the bona vacantia assets?

The Treasury Solicitor, who collects the assets

from dissolved companies on behalf of the

Crown, can choose to disclaim any of this

property or to sell to a third party. Disclaiming

of property terminates the rights, interests

and liabilities of the dissolved company.

The existence of the disclaimer means the

freehold title is extinguished; the land is

therefore escheated to the Crown as the

immediate lord.

If the said dissolved company is subsequently

restored it in effect comes back to life and

bona vacantia no longer exists.

What happens to the land that was escheated

to the Crown?

This very scenario was the topic of the case

outlined below

Fivestar Properties Ltd [2015] EWHC 2782

(Ch), [2015] All ER (D) 76 (Oct)

Bona Vacantia - A grey area?

FIRST COMMENT

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Background Fivestar Properties Ltd (“the Company”) took out

loans secured against the freehold of their land with

West Bromwich Commercial Ltd (“the Mortgagee”).

The Company subsequently defaulted on these

loans and the Mortgagee appointed receivers.

The receivers pursued outstanding rents from

occupational tenants of the land. However, it

was determined that it would be best to appoint

administrators who have wider powers of recovery.

Once the payments of any claims and assets had

been received, the administrators took appropriate

actions to dissolve the Company, therefore, vesting

its remaining assets in the Crown as bona vacantia.

The issue During the period of which the Company was

dissolved, the occupational tenant of the land

wanted to negotiate terms for a new lease. As the

Company was dissolved, the tenant served notice on

the Treasury Solicitor who had chosen to disclaim

the Crown’s interest in the land resulting in it being

escheated to the Crown.

The issue this created for the Mortgagee was that they

required the Company to be restored to enable a new

lease to be granted to the occupational tenant allowing

the land to be sold with the benefit of this lease.

The Mortgagee had sufficient rights to restore the

Company being a person of interest to the land

under section 1029 of Companies Act 2006

2) An application under this section may be made

by—

(a) the Secretary of State,

(b) any former director of the company,

(c) any person having an interest in land in which the

company had a superior or derivative interest,

(d) any person having an interest in land or other

property—

(i) that was subject to rights vested in the company, or

(ii) that was benefited by obligations owed by the

company...

The Company was successfully restored however

this brings about the question whether the

restoration of the Company is sufficient to place the

freehold title of the Land back to them and whether

the disclaimer of the land by the Crown was a

disposition?

The decisionSection 1032 of Companies Act 2006 states:

(1) The general effect of an order by the court for

restoration to the register is that the company

is deemed to have continued in existence as if it

had not been dissolved or struck off the register.

Therefore, the Company would have remained as

owner as if they had never been dissolved. The

only caveat to this would have been if the Crown

had disposed of the land before the company had

been dissolved. As the Land Registry does not close

freehold titles when land is escheated there is no

subsequent need to re-register a title.

To determine whether the disclaimer of the land

was a disposition, the judge discussed the case of

Allied Dunbar Assurance plc v Fowle & others (1994)

BCC 422. This case involved a leasehold interest

rather than a freehold. The determination of this

case was that a disclaimer by the Crown was an

extinguishment of the interest disclaimed rather that

a transfer of the interest to the Crown and, therefore,

would not be a disposition.

The judge determined that there be no reason

that the disclaimer of the freehold interest should

differ to that of a leasehold interest and therefore,

there had been no disposition of the land and the

restoration of the Company places the freehold title

back to them allowing the Mortgagee to dispose it at

their will.

By Lauren KayCommercial Underwriter

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FIRST COMMENT

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IntroductionThe CML Lenders’ Handbook is a most important document – if you can call something that only exists online a ‘document’. However, whatever it is, we must always ensure that we comply with its terms. Quite simply, it comprises the instructions we receive from our most important clients – the lenders who fund most purchases. As the CML website states:

The CML Lenders’ Handbook provides

comprehensive instructions for

conveyancers acting on behalf of lenders in

residential conveyancing transactions.

If we are not on the major lenders’ panels, then this

is going to lose us a lot of work so we must continue

to strive to keep them happy – and comply with

their instructions in all respects - to avoid a possible

risk of panel removal. Indeed, when we send in our

Certificate of Title to a Lender this is precisely what

we are certifying to them – that we have complied

with the lender’s instructions in all respects

In 2014, we had the case of E.Surv Ltd v Goldsmith

Williams Solicitors [2014] EWHC 1104, which

considered our obligations under the CML

Handbook in a rather unusual context. This decision

has now been successfully appealed by Goldsmith

Williams so we now have the Court of Appeal’s views

on a conveyancer’s duties to lenders.

Duties to Lenders – a ReminderBy Paul Butt LLBSolicitor and a consultant with Rowlinsons Solicitors, Frodsham.

In the Goldsmith Williams case the particular CML

Handbook requirement was as follows:

5.1 Surrounding Circumstances

5.1.1, Please report to us (See Part 2.) if the owner

or registered proprietor has been registered

for less than six months or the person

selling to the borrower is not the owner or

registered proprietor unless the seller is:

5.1.1.1 a personal representative of the registered

proprietor, or

5.1.1.2 an institutional mortgagee exercising its

power of sale; or

5.1.1.3 a receiver, trustee-In-bankruptcy or

liquidator; or

5.1.1.4 developer or builder selling a property

acquired under a part-exchange scheme.

5.1.2 If any matter comes to the attention of the

fee earner dealing with the transaction which

you should reasonably expect us to consider

important in deciding whether or not to

lend to the borrower (such as whether the

borrower has given misleading information

to us or the information which you might

reasonably expect to have been given to

us is no longer true) and you are unable to

disclose that information to us because of a

conflict of interest, you must cease to act for

us and return our Instructions stating that

you consider a conflict of interest has arisen.

The case itself arose out of a property being over-

valued by valuers and the lender recovering its loss

on a repossession sale from them. The valuers then

sued the conveyancers seeking a contribution to

the damages payable by them. The facts of the case

were set out by the trial judge as follows:

The surveyors’ case is that the solicitors failed,

in breach of the express and implied terms

of its contract with the lender, to advise the

lender that the would-be borrower, a Mr David

Gayler (“the borrower”), had been registered as

proprietor of the property for less than 6 months

and that the price he had paid for it as disclosed

on the office copy entries, £390,000, was

significantly less than the surveyors’ valuation

as stated in the mortgage offer, £725,000. The

surveyors’ case is that had the solicitors done

so then the lender would have requested the

surveyors to reconsider their valuation in the

light of that information, that at that point the

surveyors would have realised that the borrower

had misinformed them about the purchase price,

and would have: (a) produced a significantly

reduced valuation; and / or (b) informed the

lenders about this misinformation, with the

result, in either case, being that the lender would

have declined to lend to the borrower and, thus,

avoided the loss which it in fact incurred.

At trial the judge (His Honour Judge Stephen Davies

sitting as a judge of the High Court) held both

that the conveyancers were in breach of duty in

not reporting to the lender and that they should

contribute £100,000 to the loss suffered by the

lender on the basis set out in the above extract from

the judgement.

The court of appeal decision Goldsmith Williams Solicitors v E. Surv Ltd [2015] EWCA Civ 1147

Goldsmith Williams appealed both parts of the

judgement. They claimed they were not under a

duty to report the discrepancy in the price and that

even if they were in breach, no loss was suffered as a

result of this.

Most importantly for conveyancers, the Court of

Appeal unanimously held that they were in breach

of duty. However, most importantly for Goldsmith

Williams, it also held that, on the facts, no loss had

been suffered as a result of that breach.

The facts of this case are unusual in that the lender

was already in possession of information strongly

suggesting that the valuation of the property was

excessive. The borrower had stated in his application

that he had bought the property a few months

previously at the price of £450,000. It was highly

unlikely that at the date of his application its value

had increased by almost £300,000. Why then did

the Lender approve the loan, even in principle? That

information was not materially different from that

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which the solicitors should have reported to the

Lender. Had they reported, would this have really

made any difference to the decision to lend? As a

result of this, Sir Stanley Burnton held:

49. In my judgement, the Surveyors did not prove

that the Lender would have reacted to the

information that the Solicitors should have

provided on the purchase price and date

of purchase of the property, which was not

materially different from the information given

to them by the borrower. I would allow the

appeal on this ground.

Lord Justice Patten agreed.

However, the important part was the clear statement

by the Court that the conveyancers were under a

duty to report both the recent acquisition AND the

discrepancy in value, even though the discrepancy

in value point was not expressly mentioned in the

CML Handbook. The Court of Appeal had held this to

be the case as long ago as 1996 in Mortgage Express

v Bowerman [1996] 2 All ER 836 on very similar

facts to the present case. In that case, as Sir Thomas

Bingham MR put it at 842:

“… if, in the course of investigating title, a

solicitor discovers facts which a reasonably

competent solicitor would realise might

have a material bearing on the valuation

of the lender’s security or some other

ingredient of the lending decision, then it is

his duty to point this out.”

So there is nothing new here.

However, Goldsmith Williams had argued that the

Bowerman duty, as it was called had somehow been

superseded by the CML Handbook. It was claimed

that CML 5.1.2 only required disclosure in cases of

suspected fraud because of the example of when

disclosure was required given in brackets - (such

as whether the borrower has given misleading

information to us or the information which you

might reasonably expect to have been given to us is

no longer true). The Court of Appeal disagreed:

But they are not in terms exhaustive and I

see no reason to construe them as limiting

the preceding part of clause 5.1.2 to cases

of fraud….. The duty to draw the differences

between the price and the valuation to the

lender’s attention was, therefore, a necessary

incident of the Solicitors’ instructions to

investigate and report on title I, therefore,

agree with Sir Stanley Burnton that clause 5.1.2

properly and fairly read is not an exclusion

of the general Bowerman duty and that the Solicitors were in breach of duty in this case. (Patten LJ).

However, Sir Stanley Burnton did add:

This does not mean that a solicitor instructed

to act for both lender and borrower must act

as a detective or bloodhound. The solicitor

instructed on the terms of the CML Handbook

was not required to carry out any work that was

outside the scope of his instructions. It was only

if, while carrying out that work, he came into

possession of non-confidential information that

a reasonably competent solicitor would realise

adversely affected the title to the mortgaged

property or the value of the security that he was

under a duty to report it to the lender.

Conclusion

Note that the decision reminds us of TWO

obligations: to notify the lender of the short period

of ownership AND also to notify of the disparity

between the price paid and the present purchase

price. However, these are hardly onerous – and may

well be something that the buyer in a conveyancing

transaction might well also be interested in!

Of course, there will frequently be such a

discrepancy between the present sale price and

the price paid by the seller when he or she bought.

House prices do go up! However, it is large increases

over short periods of time that we are looking for

here. These are unusual and suspicious. The sale to

the seller might have been at an undervalue – with

insolvency implications. Or, worse still, it might

have been part of a criminal scheme to launder the

FIRST COMMENT

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proceeds of crime. It must be sensible, though before

reporting such a problem, to seek an explanation from

the seller as to why there has been such an increase

or why he or she is selling within six months. It might

well be, for example, that the seller bought a run-down

property and is now selling after giving it a complete

renovation. This will still need reporting if the seller

has not been registered for six months, but the

explanation should reassure the lender and the loan

will not be affected.

Moreover, note that there is no obligation to

make enquiries into matters that might affect the

lender’s decision whether or not to lend – we just

must report anything that comes to our attention.

Occasionally, of course, clients will tell us things that

we subsequently wish they had not. Like the client

who was buying a house on a standard mortgage

who let it slip in conversation that he was going to let

it out immediately on completion. Alternatively, the

client who, after exchange, told his conveyancer that

he had just lost his job – but not to worry because

mum and dad would help him out with the mortgage

repayments. Both these were situations that required

disclosure to the lender – but only with the buyer’s

consent – client confidentiality, remember.

The message we must take from this case is that we

must ensure that our fee earners comply with the

requirements of the CML Handbook (and the Building

Societies Association mortgage instructions for those

lenders who use them). They are not optional. They

have been in use now for over 15 years and should be

as well known to fee earners as the basic procedure in a

conveyancing transaction.

Amendments to Part 1 of the Handbook are generally

publicised, but individual lenders Part 2s are liable to

change without notice and should always be checked in

addition to Part 1. Do not rely on a printed version of the

Handbook that you used perhaps only a few days ago –

it might have recently changed.

Insurance

One aspect of the CML Handbook that caused

much angst in the past was the provisions with

regard to property insurance. Basically, many

lenders’ Part 2s required us to check the terms of

the buildings insurance policy to ensure that it met

Lenders’ requirements. This has now gone with

regard to Certificates of Title issued on or after 30

November 2015. There is no longer an additional list

of requirements from lenders relating to buildings

insurance in part 2 of the Handbook.

The Part 1 provision now provides that we have to make

reasonable enquiries of the borrower that buildings

insurance cover has been arranged for the property no

later than completion.

We must also remind the borrowers that they must:

• Have buildings insurance in place in accordance

with their mortgage conditions no later than

completion

• Maintain that cover for the whole of the

mortgage term.

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Mortgage Credit Directive changes to CML Handbook

A more recent change to Part 1 is an amendment

that was made to clause 10 of the Handbook on 1

February 2016.

The amendment has been made to accommodate

the requirement under EU law for prospective

borrowers to be given a reflection period of at least

seven days before they accept a mortgage offer.

The borrower can, however, bring that reflection

period to an end prematurely by accepting the

mortgage offer.

The amendment adds the wording in bold below into

clause 10.2:

10.2 We shall treat the submission by you of

the certificate of title as confirmation that the borrower has chosen to proceed with our mortgage offer and as a request for

us to release the mortgage advance to you.

Check Part 2 to see if the mortgage advance

will be paid electronically or by cheque and

the minimum number of days’ notice we

require.

Lenders will explain the concept of the reflection

period to prospective borrowers, for example in the

mortgage offer and mortgage terms and conditions.

One does wonder, though, what is the point of a

‘reflection period’ that can be contracted out of in

this way.

It is expected that lenders, say the CML, will either

give a ten day reflection period or align the reflection

period with the existing offer expiry date (which can

be up to 6 months).

Apparently the CML have consulted the ‘legal sector’

and the FCA on this Handbook provision, but we will

need to think carefully about the implications of this

on ourselves. Ignoring the interesting contract law

question as to how we have authority to accept the

offer on behalf of our client, we don’t want to risk any

come-back from the mortgage lender because of

this or from a client who has not formally accepted

a mortgage offer and then finds himself / herself

bound by the terms of the offer because we have

submitted the Certificate of Title. Indeed, one has to

ask why do the lenders see the need to put this into

the Handbook, rather than just in the mortgage offer

documentation sent to the client.

It would seem sensible, however, for ourselves to

get the client’s agreement that our submitting the

Certificate of Title to request the mortgage funds

will, whether or not the client has actually formally

accepted the offer themselves, be treated by the

lender as acceptance of the mortgage offer and bind

them to the terms of the mortgage and that we can

accept no personal liability in respect of this. Or am I

just being paranoid?

FIRST COMMENT

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FIRST COMMENT

The decision of the Supreme Court in ARNOLD V BRITTON ([2015] 2 W.L.R. 1593) has highlighted an important gap in the way the law governs the calculation and recovery of service charges in residential leases. It also provides important guidance about how the concept of “commercial common sense” fits into the task of interpreting contracts generally.

Background

Sections 18 and 19 of the Landlord and

Tenant Act 1985 states that service

charges which are variable, (i.e. which

vary according to the relevant costs of

providing the services) are only be payable

if they are “reasonable”. As such, tenants

can apply to the First-tier Tribunal for a

determination of whether the amount

of such a variable service charge is

reasonable or not.

These applications are widespread and

of particular attractiveness to tenants

because they can usually be brought

without exposing the tenants to any

risk as to costs. However, there is no such

right for tenants whose leases provided

for payment of a fixed sum by way of

service charge.

Now, normally long leases of flats contain

variable service charge clauses, so no

problem. But ARNOLD V BRITTON didn’t

concern a flat; it concerned a chalet on

a holiday park. It also concerned a fixed

service charge, rather than a variable one.

The leases

In the 1970s and 80s (when the court noted

inflation was quite high) 99-year leases of

chalets on the Oxwich Leisure Park on the

Gower peninsular (a beautiful part of South

Wales) were granted, usually at a premium

of around £20,000. They all contained a

clause requiring the lessee to pay a fixed

service charge. Most of the leases provided

as follows:

“To pay to the Lessor without any

deduction in addition to the said rent,

Arnold V Britton (2016) : When Common Sense Does Not Prevail

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By Kevin LeeHill Dickinson LLP

FIRST COMMENT

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FIRST COMMENT

a proportionate part of the expenses and outgoings

incurred by the Lessor in the repair maintenance

renewal and the provision of services hereinafter

set out the yearly sum of Ninety Pounds and Value

Added Tax (if any) for the first three years of the term

hereby granted increasing thereafter by Ten Pounds

per Hundred for every subsequent three year period

or part thereof.”

But some of the other leases provided:

“for the yearly sum of Ninety Pounds and Value

Added Tax (if any) for the first Year of the term

hereby granted increasing thereafter by Ten

Pounds per hundred for every subsequent year or

part thereof.”

So, this meant that the service charge started at £90

and would then increase at a compound rate of 10%

every three years or, in some cases, every year.

The consequences

As Lord Neuberger observed “ the consequences of

the annual sum of £90 being increased annually by

10% on a compound basis are plainly unattractive,

indeed alarming” . …”If one assumes a lease granted

in 1980, the service charge would be over £2,500

this year, 2015, and over £550,000 by 2072.”

The result was particularly unattractive because

annual inflation in over the last 15 years has hardly

ever been above 4%. Indeed it has been under 3%

for ten of those years, and has been falling recently

almost to the point of turning negative, whereas

under the leases the service charge over that period

has increased, and will continue to increase, by 10%

per annum.

This result, the lessees, argued was absurd, contrary

to all common sense and could not be right and that

the clause should be read as requiring them to pay

a variable sum being a fair cost of the services with

the specified sum being no more than a cap.

The findings

Lord Neuberger gave the lead judgement. He found

that:

1. When interpreting a written contract, the court

is concerned to identify the intention of the

parties by reference to “what a reasonable

person having all the background knowledge

which would have been available to the parties

would have understood them to be using the

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language in the contract to mean”, to quote

Lord Hoffman in Chartbrook Ltd v Persimmon

Homest Ltd (2009), focussing on the meaning

of relevant words in their documentary, factual

and commercial context. However, subjective

evidence of any party’s intentions must be

disregarded.

2. While reliance must be placed on commercial

common sense, this should not undervalue the

importance of the language of the provision.

Commercial common sense cannot be invoked

by reference to facts which arose after the

contract was made; it is only relevant to

ascertaining how matters would or could have

been perceived as at the date of the contract.

3. The fact that an arrangement has worked out

badly or even disastrously is not a reason for

departing from the natural meaning of the

language; neither is the fact that a certain term

appears to be very imprudent. It is not the

function of the court interpreting a contract

to relieve a party from the consequences of

imprudence or poor advice.

4. There exists no special principle of interpretation

that service charge clauses are to be construed

restrictively.

5. As a matter of interpretation The natural

meaning of the clause was clear. The first half

of the clause provides that the lessee is to pay

an annual charge to reimburse the lessor for

the costs of providing the services which he

covenants to provide, and the second half of the

clause identifies how that service charge is to be

calculated, namely as a fixed sum, with a fixed

annual increase.

All of the above was readily explicable. The parties

had assumed that the cost of providing the services

would increase and they wished to avoid arguments

as to the cost of the service and the apportionment

between the tenants. The reasonable reader of

the clause would see the first half of the clause as

descriptive of its purpose, namely to provide for

an annual service charge, and the second half as a

quantification of that service charge.

The lessons

The practitioner can draw the following from this

very interesting case:

1. You start with the language used in the

document. If it is clear and not ambiguous,

then the parties are taken to have agreed on

the bargain they made.

2. Commercial common sense only comes into

play if there is an identifiable problem with

the drafting, not if there is a problem with the

outcome.

3. Don’t buy a chalet on a holiday park without

closely scrutinising the service charge

provisions.

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