Below is a guest blog post regarding understanding payday loans and remedies for irresponible use.

On the face of it, payday loans seem like a basic service for fee arrangement. A lender provides an advance on income in exchange for a check in the advance amount plus a standard fee based on the borrowed amount. The only requirement in most cases is proof of income and basic information.

The fee is actually interest on the loan. A $15 fee for a $100, 2-week loan may not seem like much, but it constitutes an interest rate of 15 percent. Converting the fee into interest reveals it is actually an annual percentage rate of 460 percent. In comparison, new car financing typically yields a 4-7 percent APR. When you need a payday loan, this may seem reasonable. People often seek these loans to cover emergencies, such as the threat of utility cut-off or auto repairs. Payday loans can pose a serious threat to your finances, especially considering that most who seek them already have poor or damaged credit.

Payday Loan Trouble

The type of emergencies that bring many into payday loan offices are not one-time affairs. When the next paycheck disappears due to repayment of the loan, it leaves the individual unable to pay another bill or buy groceries. By the time the person learns the necessity of budgeting monthly expenses to avoid those payday loan fees, they are already trapped into in the cycle.

An even worse scenario occurs when the loan cannot be repaid for some reason. It could be a lost job or some other reason funds are not available to cover the check. The loan plus original fee is rolled over into a new loan plus additional fee, and the borrower can quickly learn about the 460 percent APR the hard way. Unless the lender is approached before the due date, the borrower will suffer extra fees from a bounced check.

Legal Protection

States have passed legislation to minimize the damage payday lenders can do to their customers. California has limited maximum borrowing amounts, capped the interest rate, restricted lenders from issuing a new loan to pay off an old one, and allowed only one fee related to a bounced check. All states address at least one of these areas in legislation, but few have comprehensive legislation. Even with it, there are reports of abuses. Lenders have threatened their customers with criminal charges, exceeded maximum limits, and rolled over loans more times than allowed by law. In these cases, the remedy is to report the lender to the state’s corporate licensing department or banking regulatory agency.

You can easily get into trouble with payday loans at no fault of the lender. If negotiation is not your strong suit, you can seek help from debt settlement agency. As with other types of debt, they will negotiate better terms with the lender and lump payments into one monthly minimum. With payday loans, they can get a much lower APR on the loan, stop harassment, and often get rid of extraneous fees.

The best solution will be a long-term one. Learn the habits of monthly budgeting and emergency planning to prevent the need for a payday loan. Many non-profit organizations, including debt settlement companies, offer free classes to teach these skills. Payday loans are extremely convenient, and proponents say they can be used responsibly. Responsible use has to include knowledge of finances and knowledge of state laws before entering a loan center.

Guest author Tim Flores is a freelance blogger and is writing on behalf of Parrot Loans.

As editor-in-chief of a popular blog about credit cards (CreditCardForum), in this article Michael Dolen shares his expert perspective on how the U.S. banks have handled the recently enacted credit card reform.

The Credit CARD Act of 2009 was the biggest change for the U.S. credit card industry in decades. With it came a wave of tighter reforms and new regulations which addressed common complaints such as:

• Payment Terms: Previously, banks could allocate and apply payments however they wished. This typically involved applying payments to lower rate balances first (i.e. 0% balance transfers), having payment due dates on weekends/holidays, and other dubious practices.
• Interest Rate Changes: Prior to the reform, a credit card company could use virtually any reason they wanted to hike a customer’s interest rate. For example, a customer may apply for a balance transfer offer promising 0% for 12 months, only to have the rate changed on them 3 or 4 months into the deal.
• Student Credit Cards: Banks were frequently criticized for their aggressive marketing on college campuses and lax requirements for student card approval.

These issues – as well as many others – were addressed in the extensive legislation of the CARD Act. The measures went into effect February 22, 2010 (and many even earlier). Now that we are over two years out, let’s take a look at how the banks are complying (as well as circumventing) these new laws.

1. Creative Fee Structuring

Excessive fees were one of the issues tackled in the CARD Act. While it’s true that late fees and a few others were addressed, some banks have found creative ways to circumvent the law.

Take First Premier Bancorp as an example. They are notorious for issuing bottom-feeder cards with APRs of nearly 80% and a list of fees a mile long. The new law stipulates that the first-year fee on a credit card cannot be more than 25% of the credit limit.

In order to comply, First Premier lowered the annual fee to “only” $75 (for a $300 credit limit) on one of their most popular cards. Since the law doesn’t address annual fees beyond the first year, they jack the costs up beginning on the 13th month; $45 annual fee + $6.50 monthly fees = $123 for the second year (that’s nearly 40% of the credit limit).

Conclusion? Banks like First Premier are following the law, but they’re certainly not following the spirit of it with this 2nd year loophole they’re milking. It’s interesting to note that on April 17th, 2012 the Federal Reserve proposed new rules which, if enacted, will relax these first-year fee restrictions (apparently the Fed realized those laws just led to higher second-year fees).

2. The Promotion of Credit Card Offers

In this post-reform era, the advertising of credit cards is extremely strict.

For starters, you will no longer see banks advertising on college campuses. This is a start contrast to the past, whereas school orientation always involved a row of tents or tables where banks would offer kids free pizza, T-shirts, and other trivial gifts if they applied for a credit card. Not anymore.

Online promotion is tightly regulated. On CreditCardForum we advertise card offers for American Express, Chase, Citi, HSBC, and a number of other major issuers. Now there is strict compliance regarding the wording we can use. For example, the Southwest Airlines credit card gives enough points at signup to get a roundtrip ticket. Previously, I would label that offer as being a “Southwest credit card with free flight.” However now, that wording is not allowed unless I have an asterisk next to the phrase “free flight” with a footnote that says: *September 11th Security Fee Applies. In other words, I need to make clear it’s technically not a “free” flight on Southwest, since there is a small government fee that must be paid on the award ticket.

When it comes to the actual applications, they are much wordier than in the past since the new law requires various pieces of information to be clarified. Furthermore, most of the information can no longer be in the fine prince, since there is now a requirement that stipulates a minimum font size to improve readability.

3. New fees and higher rates

Not surprisingly, card issuers have came up with new ways to offset the losses from CARD Act compliance.

• Significantly Higher APRs: Back in 2008 I had an American Express card with an interest rate equal to the Prime Rate plus 0% (totaling 3.24%). This was not a promotion, but rather the standard rate – it was the lowest tier for their most creditworthy accounts. Now that same account charges the Prime Rate plus 8.99% (totaling 12.23%). I am still in the lowest tier, but that is the new “low” rate. You see this trend across the board, as the bottom tier rates are often 7-10% higher than in the past.
• New Fees: Prior to the reform, only some credit cards charged a balance transfer fee. Now almost all of them do (usually 3-5% upfront). Presumably, this is done because they are now required to honor the 0% promotional rates for the full duration promised (so they have to make money somewhere). Annual fees have also become much common; existing cards which charged them have increased the fees, while other cards have just started charging them for the first time.

The Lesson?

There’s no denying the fact that credit card reform was needed. The banks were running the industry like the Wild West, so something had to be done. However like many regulatory laws, when all is said and done, the end benefit for the consumer is minimal. It’s the age old “give with one hand, take with the other” technique. While banks have given in on some fronts, they have largely offset the lost revenue streams by creating new ones.

Introduction:

We are pleased to welcome again Solicitor Mr Anis Waiz who recently joined forces with Simon Mckay  of  Mckay law. They are soon to launch a new firm Mckay Law LLP.

In another in depth case review as published on CaseCheck, Anis consider this important decision on Limitation. This surrounded a number of technical issues on Limitation and the reader is referred to the Judgment of Central Bank of Nigeria v Williams [2012] EWCA Civ 415 (03 April 2012) in full.

At its heart lay some very fine distinctions.  However at the outset it will be noted the court was not asked to consider whether the Trustee Act 1888 was intended to abolish the distinction between express and constructive trustees, introducing a single regime of limitation that would apply to constructive trustees of both categories. Neither was it invited   to consider the approach the Privy Council took in Taylor v Davies [1920] AC 636. 

Background

In essence this was a claim by the claimant to recover monies as a result of a fraud by his solicitor.  He alleged that in May 1986 the solicitor fraudulently paid away $6,020,190 of monies held by him for the claimant to an account of the central Bank ofNigeria(“CBN”) inEnglandand that  CBN was a party to the fraud.

CBN sought to Appeal an order  dismissing their application  that service of the claim form and amended particulars of claim be set aside.

Crucially for these proceedings and the issue of limitation the claim against CBN was:

1          CBN received and/or retained $6,020,190 paid by the solicitor into its account knowing that they were paid in breach of trust and/or in circumstances where it would be unconscionable to retain this sum.

2          By reason of its dishonest assistance in the breach of trust CBN is liable to account to him as a constructive trustee of $6,520,190 paid away by the solicitor in fraudulent breach of trust.

The Limitation issue

It was not disputed that the Claimant’s claim was

1    an action by a beneficiary under a trust

2    in respect of a fraudulent breach of trust

3     to which the trustee the Solicitor was a party.

In other words as against the solicitor the claim fell within section 21 of the Limitation Act 1980 (“the Act”) and therefore there was no period of Limitation.

The key issue was whether the claim against CBN fell within section.21 (1) (a) of the Act  ”to which the trustee was a party or privy” and thus  triggered an exception to the time bar prescribed by s.21(3) to actions brought against that trustee.

CBN’s argument was  that to come within section 21(1)(a), the action has to be against the trustee.  Thus CBN sought to argue that  s.21(1)(a) did  not extend to actions brought against anyone other than the trustee who was party or privy to the relevant breach of trust.

Section 21 of the Act provides:

“(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action-

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

Derivation

The Court of Appeal went on to consider the derivation of section 21 of the Act. The reader is referred to the Judgment. However of note are the following points:

1                     The first statute to provide for a period of limitation in respect of actions for a breach of trust was Trustee Act 1888. S.8(1) “In any action or other proceeding against a trustee or any person claiming through him except where the claim is founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy, or is to recover trust property, or the proceeds thereof still retained by the trustee, or previously received by the trustee and converted to his use, the following provisions shall apply…

2                     The  expression ‘trustee’ was defined by s.1(3) as including “a trustee whose trust arises by construction or implication of law as well as an express trustee.” S.1(4) provided that the provisions of the Act relating to a trustee should apply as well to several joint trustees as to a sole trustee. Each of those persons is entitled to rely on the time bar for which sub-section (1)(b) provides but subject to exceptions comparable to those for which s.21(1) now provides. Ss. 1 and 8 Trustee Act 1888 remained unaltered until 1939.

3                     The Limitation Act 1939 was both an amending and consolidating measure. Its enactment was preceded by the Law Revision Committee’s Fifth Interim Report… At paragraph 11 it considered “Limitations of Actions against Trustees”. Having referred to the terms of s.8 Trustee Act 1888 it noted that those provisions were considered to be satisfactory when Trustee Act 1925 was enacted.

4                     The committee noted “It is difficult to find any real justification for the rule that an executor or other person holding property as a trustee, but not on an “express” trust, can plead the statute, though he still retains the trust property or has converted it to his own use.

5                     The Limitation Act 1939 incorporated the definition of trustee contained in s.68 (17) Trustee Act 1925. “The expressions “trust” and “trustee” extend to implied and constructive trusts”.

6                     Section .21 of the 1980 Act reproduces without any relevant change the provisions of s.19 of the Limitation Act 1939. That subsection provides that subject to an immaterial exception “the expressions “trust” and “trustee” extend to implied and constructive trusts”.

7                      Section 19 provided:

(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action –

(a) In respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) To recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

The parties submissions

CBN argued that  section .21(1)(a) did  not extend to actions brought against anyone other than the trustee who was party or privy to the relevant breach of trust .Counsel for CBN  contended  that just as s.21(1)(b) is limited to claims against the trustee s.21(1)(a) should be similarly regarded because  there was no  justification for treating that paragraph as including an action against anyone else.

CBN also sought to argue that  if s.21(1)(a) was  not restricted in its application to claims against the trustee then the time bar for which the section provides is inconsistent with the substantive law and would  give rise to undesirable consequences. This submission was based on the decision of the Privy Council in Royal Brunei Airlines v Tan [1995] 2 AC 378 and of the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 450.

It was said there would be an anomaly  if dishonesty on the part of the trustee was not a necessary ingredient of the cause of action against the dishonest assistant but was required if the dishonest assister is to remain liable after the expiration of the limitation period. Thus the extension of the application of s.21(1)(a) for which the claimant  contended  would lead to an increase in the number of stale claims requiring determination and the complexity of the defences of laches and acquiescence compared to the relative simplicity of a time bar.

For the claimant Counsel disputed both these propositions. First, there was nothing anomalous in allowing the beneficiary to sue outside the limitation period only if the trustee was dishonest. Second, the relative merits of a time bar and the defences of laches and acquiescence were either irrelevant or a matter for Parliament, not a court.

The claimant relied upon a number of authorities including  G.L.Baker Ltd v Medway Building and Supplies Ltd [1958] 1 WLR 1216. In that case  the plaintiff sought to recover from the defendant money of the plaintiff the defendant had received from the auditor of the plaintiff who had dishonestly misappropriated it more than six years previously. The question arose whether the defendant was entitled to rely on the time bar.

Danckwerts J concluded that the claim was not time barred, in part because of the terms of s.19(1)(a). At p.1221 the judge observed:

… “The point is taken by counsel on behalf of the defendant that the defendant does not claim through the fraudulent trustee. He also said with regard to s 19(1) that the action was not in respect of any fraud or fraudulent breach of trust, because the action against the defendant in the present case is based on the receipt by it without any fraud of moneys which were part of the trust fund belonging to the plaintiff. I think that the words “in respect of any fraud or fraudulent breach of trust” are wide enough to cover the present case, because it is the fraudulent payment by Titley to the defendant which is the origin of the proceedings against the defendant. It is because the defendant received that payment by virtue of Titley’s fraudulent breach of trust that the plaintiff is able to bring this action against it. Consequently, so far as those words are concerned the provision seems to me wide enough”

 The Decision

The Court of Appeal noted:

1    The Limitation Act 1939 was an amending act. It could not be assumed that s.19 of the 1939 Act was intended exactly to reproduce the effect of s.8 Trustee Act 1888.

2    It did not follow that the distinction between category 1 and category 2 constructive trusts in Taylor v Davies [1920] AC 636 when considering the Canadian equivalent to s.8 Trustee Act 1888 has been imported into the definition of trust and trustee contained in s.68(17) Trustee Act 1925 and applied to Limitation Act 1939 by s.50 .

3    The time bar imposed by s.19(2) was intended to cover all claims by a beneficiary to recover trust property or in respect of any breach of trust, other than those excepted by s.19(1), against whomsoever the claim was made, not only the trustee and others claiming through him.

4    The expressions ‘trust’ and ‘trustee’ used in s.19 extend to implied and constructive trusts generally without reference to any particular category of constructive trust.

5 CBN submissions that the claimant construction would produce an anomaly or inconsistency with the substantive law was rejected.  The requirement in paragraph (a) of fraud or fraudulent breach of trust on the part or with the privity of the trustee was  a restriction on the range of claims available against a dishonest assistant because the decision of the Privy Council in Royal Brunei Airlines v Tan [1995] 2 AC 378 only requires dishonesty on the part of the assistant. Thus the  addition of this requirement does not involve any extension of the range of cases for which no limitation period is prescribed.

6    Section 19 was re-enacted in s.21 Limitation Act 1980. It is in the latter context that the proper construction of the relevant provision must be ascertained. That context includes the decision of Danckwerts J in G.L.Baker Ltd v Medway Building and Supplies Ltd.

7    The  principle of Farrell v Alexander [1977] AC 59 applied  namely that the legislative history of an unambiguous provision in a consolidating act is irrelevant.

8    The Court of Appeal was not prepared to assume that section 19 of the Limitation Act 1939 was merely section 8 of the Trustee Act 1888 clothed in slightly different clothing.

Conclusion

In essence the Court of Appeal rejected a technical argument by a defendant  and held that there was  no explicit requirement that to be within section 21  (1)(a) the action must be against the trustee.

As noted above some fine distinctions were made by the Defendant in order to rely upon a technical Limitation defence. However clearly the Court of Appeal would not allow historical legislative ambiguity to defeat  what on the face was a claim to recover monies paid away as a result of a fraud.

Perhaps an application of the maxim  Equity will not allow a statute to be used as a cloak for fraud rings true.

Kind regards

Central Bank of Nigeria v Williams [2012] EWCA Civ 415 (03 April 2012)

http://www.casecheck.co.uk/CaseLaw/tabid/1184/EntryID/18473/Default.aspx

Garguilo v  Jon Howard Gershinson (2) Louisa Brooks Joint Fixed Charge Receivers of Desmond Daniel Charles Moore in respect of 140 High Street, Godalming ( Deeds) [2012] EWLandRA 2011_0377 (06 January 2012)

Introduction

Solicitor and partner Mr Anis Waiz of Mohindra Maini LLP continues his critical review of current case law.  Here we examine a very important and perhaps unnoticed   decision of the Adjudicator to HM Land Registry which raised two substantive legal issues. The  execution of a lease  and who has the right to seek rectification.

As a result of this case the Land Registry replaced its earlier guide to Rectification and indemnity in January 2012 . http://www.landreg.gov.uk/upload/documents/pg39.html

Background

Mr and Mrs Garguilo  applied to the land registry to  rectify the register of a title to property in surrey.  They and another party were the registered owners.  They sought to cancel  a  lease purportedly granted to a third party and a  charge  in favour of a Bank . Both the Lease and the Charge were registered in September 2008. The background facts are  somewhat complicated and the reader is referred to the judgment.

The third party a borrower of the bank  failed to make payment to the Bank and accordingly the Bank appointed LPA receivers over the property. The LPA receivers were  respondents to the application.

The  application was made on the basis  the Lease was a nullity because a third party did not knowingly sign the Lease.

Between the parties it was common ground that if the Lease was  void then the registration of the Lease constituted a ‘mistake’ for the purposes of paragraph 5(a) of Schedule 4 to the Land Registration Act  2002 (the 2002 Act)

In addition under  paragraph 6(2) of Schedule 4  of the 2002 Act there was an  important issue as to who could apply  to remove both the Lease and the Charge.

Issues

Mr and Mrs Garguilo  submitted  that the Lease was invalid as it was not validly executed as a deed because it did not comply with section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act).  The Respondents’ position  was to put Mr and Mrs Garguilo  to strict proof of their case.

The adjudicator set out the key facts as to the execution of the lease and again the reader is referred to the Judgment.  Of note is the adjudicator’s conclusions on the evidence and the legal  analysis.

Findings

The adjudicator  found that:

1          The central factual issue in this case is whether a third party executed the Lease that is to say whether he signed the execution page and the plan knowing that they related to the Lease.  It is not in dispute that he did not do so at the meeting where the other leases were executed.

2          However she found that the pages signed by him (the final execution page, and the plan) were, at the time of signature, separate from the remainder of the Lease.   This conclusion was  inescapable in the light of certain correspondence. There was also  a hand written, undated, note which appears to have been written by a solicitor during the course of a meeting (or phone call)  ”Me to send you lease for 4.Pages”

3          No evidence was given to counter the evidence of the third party . However she was satisfied he did sign the relevant pages knowingly and willingly. There were a number of reasons. First, the entire deal between the parties  and the Bank, depended on the execution of leases. Without the execution of the Lease the third party would not have become the joint freeholder . It was clearly in his financial interest to make sure the deal went through.

Secondly  the third party’s  evidence was  that he expected another party  to make arrangements to satisfy the Bank and may  have convinced himself, or have been convinced, that those arrangements could be made once the deal was done, and that another  would, in due course, transfer the Lease to Mr and Mrs Garguilo (free of the Bank’s Charge).

More importantly the third party  did not have any satisfactory explanation as to how his signature came to be on the relevant pages.  It was not accepted  he was signing so many documents, or so many plans, that he did not know what he was doing.

Execution of the lease

The Adjudicator found:

1          the signature page and the plan were signed by the third party and that he did so knowingly and willingly.  The Lease was therefore not a forged document.

2              As to  section 1 (3) of the 1989 Act Mr and Mrs Garguilo  submitted that  even if the  signatory pages of the Lease were, as  found, executed separately and inserted into the Lease  this invalidates the instrument  as a matter of law.

Section 1 (3) provides

An instrument is validly executed as a deed by an individual if, and only if,

(a)   it is signed -

(i)    by him in the presence of a witness who attests his signature’

It was submitted that the word it in the section must refer back to the deed in other words the  entire document, and not merely the execution pages or any other page. The point was considered by Underhill J in R v Her Majesty’s Commissioners of Revenue and Customs [2008] EWHC 2721.  The  claimants sought judicial review of the decision of HMRC to seek warrants to search their offices and the decision of the Crown Court to grant the warrants.  HMRC’s case was that the scheme (trust deed)  in question was flawed and that the claimants sought dishonestly to conceal the flaws. The judge therefore had to consider whether the scheme was flawed. There were differences between the drafts and the final versions.

The court in that case  considered  as an  additional factor that each of the three key documents was intended to be a deed. Noting  section 1(3) Underhill J  said: ‘Mr Bird submitted, and I agree, that that language necessarily involves that the signature and attestation must form part of the same physical document (the ‘it’) referred to at (a) which constitutes the deed.’ [40]. He also stated: ‘ I accept that the flaws on which HMRC rely are essentially formal. But I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. The entire raison d’etre is to create – and demonstrably to create – a series of formal legal relationships: if they do not do that, they do nothing.

3          Here the Adjudicator found that  section 1(3) clearly provides that the signature and attestation must form part of the physical instrument at the moment of signing.  The policy argument is that the signature should reflect the proper agreement. If the signature is obtained separately the maker cannot be sure of the terms of the deed and the risk of fraud or mistake remains.

The question must always be whether the signature page and other relevant pages formed part of the same physical document.  That will be a question of fact in each case.

In this case, the relevant pages were clearly separate from the remainder of the Lease: they were signed separately and returned separately (and not by the third party) at some unspecified time after the other leases were executed (and after the third party had stated, initially, that he did not intend to execute the Lease) and were accordingly not in any sense part of the ‘it’ referred to in the statute.

4          By   Section 52(1)  Law of Property Act 1925 all conveyances of land are void for the purpose of creating a legal estate in land unless made by deed. Accordingly, in the adjudicators judgment, the Lease was  void as it was not made by deed.

The issue of estoppel was raised by the respondents. However  it was held that the lack of a (valid) signature could not  be cured by estoppel.

Who could apply for rectification ?

Schedule 4 para 6 (2) (a) (b) makes provision as to alteration of the register .  It provides

“No alteration affecting the title of the proprietor of a registered estate in land may be made under paragraph 5 without the proprietor’s consent in relation to land in his possession unless—

(a)he has by fraud or lack of proper care caused or substantially contributed to the mistake, or

(b)it would for any other reason be unjust for the alteration not to be made”

In this case

1          The Respondents, as  LPA receivers (and as agents for the borrower)  were not in possession of the property. Neither was the borrower.

2          However  the question was whether the borrower was  deemed to be in possession  by virtue of section 131(2) of the  2002Act. This section provided that the possession of a tenant is deemed to be that of the landlord; of the Lender that of the borrower of the licensee that of the licensor

There was no  direct relationship of landlord or tenant or licensor and licensee between the borrower and another . However on the evidence, the borrower  consented to another going into occupation, and knew of the arrangement made between them.

On these facts, and for the purpose of this section, the Adjudicator found that  occupation of another  could be said to be that of the borrowers  licensee.

Alternatively pursuant to schedule 4 para 6 (2) (a)    the question becomes whether the borrower  caused or contributed to the mistake (the invalidity of the lease) by fraud or lack of proper care.

It was held  there was lack of proper care either by the borrower or by his solicitor in allowing the Lease to be executed as it was.  In any event, even if this were not the case, there were a  number of factors which, make it unjust for the alteration of the register not to be made.

Conclusion

The register was rectified by cancelling the lease and the charge. That no doubt has very serious consequences  for the lender and ultimately may lead to various claims .

Whilst the factual background is rather complex this case serves a timely reminder to conveyancers  and lenders as to basic principles . Ignore  proper execution of deeds  at your peril.

Of  significant interest is the adjudicator’s  use of section 131 (2) of the 2002 Act and the key as to who is in possession   and thus  who was entitled to apply for alteration.  Indeed the land registry have now altered its practice note.

Solicitor and partner Mr Anis Waiz of Mohindra Maini LLP continues his critical review of current case law, as first published on leading case law website CaseCheck.  This important case arose from a mortgage fraud and  facts which are all too familiar to lenders and solicitors.

There are a number of key issues as to completion and breach of trust  in the judgment which are essential to grasp and of keen interest  to conveyancers  and Lenders .

Part  of the claim against the defendant was that they were in breach of trust in paying away the advance. The defendant sought to rely on  section 61 of the Trustee Act 1925 (“the 1925 Act”).  Lord Justice Rimer  noted

“The careful, conscientious and thorough solicitor, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan money to a fraudster. He is, however, likely to be treated mercifully by the court on his section 61 application”

Background

In 2007 Cheltenham & Gloucester PLC (C&G) now a wholly owned subsidiary of Lloyds instructed  the defendant solicitors  to act for it on a proposed mortgage loan of £742,500 to a purported borrower.

The loan was to buy a property. The repayment was to be secured by a first legal charge over certain  property. In fact the genuine owners of the property had not  agreed to sell it to the purported borrower or to anyone, and were ignorant of the fraud that was being carried on.

Upon what they claimed was the completion of the  purchase and charge, the defendant  remitted the loan money to (so they believed) a firm of solicitors acting for the vendors.  The bogus firm had contacted M&U to inform them that they were acting for the owners of the property, on the proposed sale to the borrower.

However this was a fictitious branch office. One or more individuals pretended to be carrying on practice of a  branch office for which they printed some bogus notepaper. The fraudsters duped the defendant  into paying the loan money to them.

As a result C&G received no legal charge over the property . The only potential  recovery was from the defendant.

The reader is referred to the Judgment for the full facts including a number of anomalies  in the application for the mortgage and startling facts.

The defendants Retainer

C&G’s letter of instruction to the Defendant noted

‘C&G has adopted the CML [Council of Mortgage Lenders] Lenders’ Handbook for England and Wales (the “Handbook”) and we therefore require you to act in accordance with the instructions contained in it.”

There were some key provisions in the handbook  which the court considered. Again the reader is referred to the judgment:

1          Clause 5.8 On completion, we require a fully enforceable first charge by way of legal mortgage over the property..

2          Clause 10.3.1 You are only authorised to release the loan when you hold sufficient funds to complete the purchase of the property and pay all stamp duty land tax and registration fees to perfect the security as a first legal mortgage or, if you do not have them, you accept responsibility to pay them yourself.

3          Clause  10.3.4 You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you (see part 2)….

As was standard the defendant signed a  certificate of title for the property and sent it to C&G. The certificate was  in the terms of the Appendix to Rule 6(3) of the Solicitors’ Practice Rules 1990.

Completion

Completion was to be by post. The then applicable Law Society’s code for completion by post applied.  Under that code, the defendant should  have received from the Vendor’ solicitors  the signed part of the vendors’ contract, the executed transfer, the DS1 certificate of discharge in respect a prior  charge and the charge certificate. In fact they received nothing.

From the Judgment the reader will note some unusual facts surrounding payment of  the purchase price and the TR1

At a later date the defendants remitted from their client account  £702,613.25 to another account  of the supposed Vendors solicitors.  No transfer was ever produced by the Purported vendors.

Matters then came to light. when the  real owners of the property  re mortgaged . The claimant had thus  parted with the loan and had no security.

The Claims

C&G issued  proceedings against the defendant  under three alternative heads.

1          In  parting with the loan money, they  acted in breach of trust and were liable      to reconstitute the trust fund (the loan money) and restore it to C&G.

2          They had parted with the money in breach of its undertakings to C&G.

3          They  were liable in  negligence and breach of contract.

The Issues

The defendants  admitted in their Defence that they had held the loan money ‘on bare trust for C&G with C&G’s authority to pay it away in connection with the purchase of the property. Accordingly the court  directed a  trial of certain preliminary issues:

1           had there been a breach of trust by the defendant?

2          If ‘yes’, could the defendant rely on the 1925 Act to relieve them from liability?

3          was  any loss or damage suffered by C&G caused or contributed to by C&G’s own fault?

Those issues were  tried in 2010  before Mr Roger Wyand QC,. He held there had been a breach and the defendant could not rely on the 1925 Act.  As to question  3 he entered judgment against the defendant  for £742,500, with interest.

As to  the 1925 Act , the court noted that section empowered the court to relieve a defendant  wholly or partly from personal liability if they had ‘acted honestly and reasonably, and ought fairly to be excused for the breach of trust.

There was no question as to the defendant’s  honesty. However  there was a challenge to the reasonableness of their actions. In his judgment, the judge gave his reasons for concluding that their conduct had not been reasonable.  There was  no appeal on that point.

The defendant appeal was   on the basis they had not committed  a breach of trust and  as a matter of causation even if there was a breach that had not caused any loss to C&G.

The Appeal

There  was no dispute that  upon  C&G’s payment of the loan money to the defendant, the defendant , held it upon trust for C&G until ‘completion’. Clause 10.3.4 of the CML Handbook expressly  provided for that.

Importantly the Court of Appeal noted even if this was not provided for  the money would anyway have been held on such a trust.  Money held by a solicitor on client account is trust money (see Target Holdings Ltd v. Redferns (a Firm) and Another [1996] 1 AC 421, at 436A to C, per Lord Browne-Wilkinson).

A number of issue arose on the Appeal:

1          Was there completion?

The instructions  provided that the defendant  were authorised to release the money for the purpose of completing the purchase (clause 10.3.1 of the Handbook); and upon such release, the trust would come to an end.

The key was the meaning of completion in clause 10.3.4 of the handbook.  Lord Justice Rimer  noting:

In my view, therefore, the judge was right to hold that ‘completion’ in clause 10.3.4 did not refer to the successive moments when the transfer and charge were respectively registered. It referred to the prior date when conventional completion occurred. M&U were authorised by C&G to release the loan money to enable such completion to take place. The trust was only destined to subsist until such time as it did.

The defendant sought to argue that completion had taken place.  To enable it to take place, the defendant had  remitted the required moneys to the vendors solicitors  and expected those solicitors  to honour their undertakings to send them by first class post the documents listed in paragraph 3.2 of  replies to requisitions on title.

However there was no  solicitors for the vendors. There were no vendors, in fact selling the property; they had no intention of paying any of the loan money in the redemption of a prior  charge; and they had no genuine documents to send to the defendants.

The Court  of Appeal agreed with the judge at first instance who held there was no completion. The defendant parted with the advance money without receiving either (i) ‘the requisite documents’ or (ii) a solicitor’s undertaking to provide such documents. A number of reasons were given.

1.1       The purported contract was a nullity, since the vendor had not agreed to sell their property, nor had they authorised anyone to sell it to him in their name;

1.2       The  purported completion of that nullity by way of the exchange of purchase money for forged documents could not have amounted to completion.

1.3       Completion must mean the completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title to the property that he has agreed to buy and to charge.

1.4       An exchange of real money for worthless forgeries in purported performance of a purported contract was a nullity and  not completion at all.

2          The trust point.

For the defendant it was argued that it was unfair that they were liable  having  become innocently mixed up in the fraud and  be held accountable as trustees for parting with the loan money in the belief that they were doing so for the purposes of completing a genuine transaction.

However as noted by the Court of Appeal they failed to obtain relief under the 1925 Act , although they had acted honestly because  they had not acted reasonably and so were not deserving of the merciful exercise by the court of its exculpatory discretion.

Their material failings were numerous and include failing to check the vendors solicitors  which constituted a breach of clause A3.2 of Section 3 (Safeguards) of the Handbook; and to part for a second time with the money when they knew that the purported solicitors  had breached their earlier undertakings.

The defendant Appealed was dismissed.

Conclusion

This may appear to be a harsh decision. However there were clear failings by the solicitors to conduct the transaction properly and in accordance with accepted practice and their professional duties.

A warning for lawyers  and a  useful reminder as to the courts exercise of  discretion under  the 1925 Act. The final word goes to Lord Justice Rimer

“Whilst it is impossible not to have sympathy for M&U in becoming enmeshed in the fraud, the judge’s conclusion was that, by these two shortcomings, they brought their misfortune upon themselves. If they had instead performed their role as solicitors with exemplary professional care and efficiency, but had still parted with the loan money in circumstances that were objectively reasonable, the decision on the section 61 application might have been different“

http://www.bailii.org/ew/cases/EWCA/Civ/2012/65.html

Samarenko v Dawn Hill House Ltd [2011] EWCA civ 1445 (01 December 2011)

WardblawG is pleased to welcome secured lending litigation solicitor and partner Mr Anis Waiz of Mohindra Maini LLP as he continues his critical review of current case law. This article regarding the Samarenko case was first published on leading case law resource, CaseCheck.

This case raised an important yet common issue . If a purchaser failures to pay a deposit on time under a contract for the sale of land does that lead to a repudiatory breach of contract entitling the seller to terminate the contract?

In law if the answer is no but the contract makes time of the essence, is the seller entitled to terminate the contract?

This case provides an excellent review of key elements at common law and equity of contractual terms.

The court noted that the basis upon which it is said that time is made of the essence of a contractual time limit is that (a) the time limit is regarded at common law as a condition of the contract (b) in the event of delay in performance equity will intervene to prevent the injured party from treating the delay as a breach of condition but (c) equity will cease to intervene once notice of a reasonable length has been served. Once the notice has expired the position reverts to that at common law, namely that time limits are regarded as conditions of the contract.

Background

The Claimant Mr Samarenko was the vendor. The defendant Dawn Hill House Ltd was the purchaser. The purchase price was £5 million with a deposit of £500,000 to be paid in accordance with the contract.

The contract incorporated the Standard Conditions of Sale (4th edition). Clause 15 of the special conditions noted the contract was conditional on the buyer obtaining planning permission and obtaining the consent of a third party.

The contract included a provision that the deposit would be paid to the Seller’s solicitors to be held as stakeholders in accordance with 2.2 of the Standard Conditions of Sale.

The defendant obtained planning permission . However it was not the permission envisaged by the contract . The parties renegotiated the same and entered into a supplemental agreement. The purchase price was reduced to £4.5 million.

The supplemental agreement went on to provide:

“2 For the purposes of clause 16 of the Contract, the Deposit to be paid shall be reduced to £450,000 and is now due to be paid to the Seller’s solicitors on 3rd March 2011 (being 60 working days after the grant of the Original Permission). 

3 For the purposes of clause 17 of the Contract, the sum of £4,050,000 shall be substituted for the sum of £4,500,000 and shall be paid to the Seller’s Solicitors on 13th April 2011 … 

4 In all other respects the Contract is confirmed and is now to be deemed to be unconditional.”

The claimant’s then solicitors sent an e mail to the defendant’s solicitors requesting them to ensure they were in funds. They sent a further e mail re the deposit . No deposit was paid by the defendant.

A letter was then sent to the defendant’s solicitor alleging breach of contract and stating:

“Our client is prepared to allow you 5 working days from today within which the pay the deposit, failing which our client will treat the contract with you as repudiated.

On behalf of our client we therefore demand payment of £450,000 to us in cleared funds by no later than 5 pm on Wednesday 16 March, 2011, as to which deadline time shall be of the essence.” (the Letter)

No payment was made and the claimant sought to terminate the contract. The defendant alleged they had been waiting for the results of the soil survey, of which the claimant was aware.

The defendant noted an inspection was needed both for its bank and also for their own purposes. The defendant appointed new solicitors, who wrote to the claimant solicitor recording a conversation between the lawyers. The letter asked for confirmation that the valuer would be allowed access.

The defendant’s solicitors wrote a second letter noting the Claimant had refused access. It was alleged there was an implied term of the contract for the purposes of business efficacy that the claimant would facilitate any reasonable requirements of the defendant towards achieving completion.

The Proceedings

At first instance the court granted summary judgment to the claimant. The defendant appealed on three grounds

1 Time was not of the essence of the contractual timetable for payment of the deposit 

2 Although the Claimant was entitled to serve notice making time of the essence of the revised deadline for payment of the deposit a failure to comply with that deadline did not necessarily amount to a repudiatory breach of contract; 

3 The time given by the Letter purporting to make time of the essence was too short in all the circumstances of the case.

The Issues

1 As to whether a time limit is of the essence in a contractual provision is a question of interpretation. In Bunge Corp v Tradax Export SA [1981] 1 WLR 711 Lord Wilberforce said:

“As to such a clause there is only one kind of breach possible, namely to be late, and the questions to be asked are: first what importance have the parties expressly ascribed to this consequence? And, second, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole?”

The court noted that Equity had a tendency to regard time stipulations as not being of the essence of the contract. However it is clear that even in equity any presumption that time was not of the essence could be rebutted, either by express words or by necessary implication see United Scientific Holdings Ltd v Burnley BC [1978] AC 904, 930.

The maxim that time is not of the essence “never had any application to cases in which the stipulation as to time could not be disregarded without injustice to the parties, when, for example, the parties, for reasons best known to themselves, had stipulated that the time fixed should be essential, or where there was something in the nature of the property or the surrounding circumstances which would render it inequitable to treat it as a non-essential term of the contract” see Stickney v Keeble [1915] AC 386, 416.

2 The Court of Appeal considered the nature of a deposit. The classic definition was noted in Howe v Smith (1884) LR 27 Ch D 89. Cotton LJ said (p. 95) that the deposit was “a guarantee that the contract shall be performed.”

The court noted that In the vast majority of conveyancing transactions the seller will simply refuse to exchange contracts until the deposit monies are safely in his own hands or the hands of a stakeholder.

in Myton Ltd v Schwab-Morris [1974] 1 WLR 331 Goulding J held that even though contracts had in fact been exchanged the contract was not binding when the cheque tendered for the deposit was dishonoured.

Goulding J went on to consider whether a failure to pay the deposit on or before signing the contract was a repudiation of that contract. He held that it was; and that there was no need for the seller to give notice to the buyer calling upon her to remedy the default. He said:

“If payment of a deposit was not a condition precedent to the obligation to grant the lease, it was at any rate, in my judgment, a term of so radical a nature that the defendant’s failure to comply with it would entitle the plaintiff company to renounce further performance. The same argument on the character and importance of a deposit, which persuaded me on the first point that the clause was a condition precedent, goes far to show that if it is not such a condition, then it is at any rate a fundamental term in the sense that I have indicated.”

Thus Goulding J in effect characterised the payment of the deposit (including the time of payment) as a condition of the contract, any breach of which would amount to a repudiation.

The Court of Appeal considered a number of authorities including Portaria Shipping Co v Gulf Pacific Navigation Co Ltd [1981] 2 Lloyd’s Rep 180 and Millichamp v Jones [1982] 1 WLR 1422 to which the reader is referred to.

Lord Justice Lewison held in this case that failure to make payment on time of a deposit amounted to a repudiatory breach of contract.

Any presumption that time was not of the essence was rebutted. He held that in the ordinary case the requirement to pay a deposit, including the time of payment, is a condition of the contract or, to use the phrase used in courts of equity, that time is of the essence of the date for payment.

Lord Justice Etherton agreed and noted that given the importance of a deposit it is difficult to imagine that a contractual obligation to pay a deposit will ever be anything other than a term of fundamental importance in the contract. In other words a term which would be regarded at common law as a fundamental term or condition, rather than a warranty, and any breach of it would entitle the innocent party to treat the contract as at an end: comp. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.

On the First issue by failing to pay the deposit the defendant had committed a repudiatory breach of contract.

The court also considered the effect of making time of the essence of payment of the deposit. The reader is referred to the judgment which set out the classic contractual position re breach namely a contractual stipulation was either a condition (sometimes called a condition precedent) or a warranty. The difference is encapsulated in the well-known judgment of Bowen LJ in Bentsen v Taylor, Sons & Co [1893] 2 QB 274, 281

At common law the time for completion of a contract for the sale of land was a condition of the contract. In Howe v Smith, Fry LJ said (p. 103):

“In my opinion, the time fixed by a contract for the payment of the balance of the purchase money and the completion of the contract was, according to the law as it stood before the Judicature Act, 1873, of the essence of the contract, so that non-payment on that day, provided it was not caused by the default of the vendor, authorised the vendor at law to treat the contract as rescinded.”

Conclusion

The defendant was unsuccessful in its appeal The court noted that in the present case the contract was a contract to buy a property for £4.5 million. The price was payable in two parts: the deposit and the balance.

The buyer either refused to pay the full price; or refused to pay it in two parts. The issue in law was whether that demonstrate a refusal to perform the contract? The Court of Appeal held it did. It demonstrates a willingness to proceed with a contract but not with the contract that the parties entered into.

Counsel for the defendant concede that five days’ notice was sufficient to make time of the essence. Given that lawyers for the claimant had sent two reminders to the defendant’s before the due date for payment of the deposit, the court held that there was nothing in the complaint that five days’ notice was too little.

This case is a valuable reiteration of the law and practice. A contractual obligation to pay a deposit is as most lawyers have always considered a term of such fundamental importance in the contract. In law it is in pure parlance treated as a fundamental term or condition.

Mr Anis Waiz of Mohindra Maini LLP is a secured lending litigation solicitor. He contributes to CaseCheck, publishes his own blog and can be followed on Twitter at @oldlawyer1

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