A lien encounter
A seller benefits from a security interest in a property which entitles it to apply for an order for sale if its purchaser fails to pay the price.
A recent case (Menelaou v Bank of Cyprus) reminds us that a seller of a property benefits from a security interest in the property (known as a “lien”) which entitles it to apply for an order for sale if its purchaser fails to pay the price. This right survives completion of the transaction and the purchaser going into possession. If a person other than the purchaser provides funding for the purchase, it may inherit this lien from the seller.
If you are proposing to lend to a house purchaser, or if you are selling a house on terms that some of the price will be deferred, whilst it is reassuring to know that a lien may arise, it is however preferable to take a an express charge for the debt to provide greater certainty and control should you need to enforce.
Whatever the nature of your security, the availability of cash to repay the debt owed to you may ultimately depend on a sale of the property. Whilst your security will determine your right to compel a sale, you should also have due regard to issues that may inhibit your ability to enforce your security, such as those considered by the court in Menelaou.
The claimant’s parents owned a property, Rush Green Hall (RGH), which was charged in favour of Bank of Cyprus (the Bank) for their personal and business debts.
The parents instructed solicitors, Boulters, to sell RGH for £1.9 million. Boulters received the proceeds and applied these in part to reduce the parents’ Bank debt and in part to meet the £875,000 purchase price of a new family home, Great Oak Court (GOC). GOC was transferred into the claimant’s name by way of gift from her parents, to be held on trust for herself and her younger siblings.
To facilitate the sale of RGH, the Bank released its charges over RGH, in return for a payment of £750,000 from the proceeds of sale and a new charge over GOC, by way of “third party” security for the parents’ remaining debt. Unfortunately, this new charge was signed on behalf of the claimant without her knowledge, and she succeeded subsequently in having it set aside. She had assumed no personal liability to the Bank, and her parents’ debts to the Bank had been discharged upon their bankruptcies.
The Bank, accordingly, was owed the balance outstanding on the parents’ accounts, with no security and no right of recourse to the Claimant or her parents.
Having initiated a claim against Boulters for breach of duty, the Bank had the benefit of an indemnity for its losses. It sought also a declaration that, having allowed funds from the sale of RGH to be paid to the owner of GOC upon its purchase by the claimant, it was entitled to “step into the shoes” of the owner of GOC and assert a security interest over GOC to the value of £875,000 with interest.
The Supreme Court declared that the Bank had an effective security interest over the property. Armed with this judgment, the Bank returned to the High Court to seek an order for sale of the property.
In deciding to grant the Bank’s request for an order for sale, the court considered (and in this case discounted) a number of factors, such as:
- the need to provide a home for a minor child, and the disruption that would result if the sale proceeded;
- whether any occupier had any (mental or physical) health issues; and
- the availability to the occupiers of suitable alternative accommodation.
Had the Bank taken an effective legal mortgage of the property, and thereby had a right to sell without court order, the occupiers may still have challenged the sale on these grounds.
There are risks associated with any credit transaction, and the creditor must take particular care if someone’s residence is volunteered as security for the credit offered.
Assuming that you are satisfied that the purchaser will have disposable income sufficient to service the debt and that the terms of your security document will be watertight, you should also consider other factors, including:
- whether the giving of credit or taking of security is likely to constitute a regulated activity for the purposes of financial services legislation, such that you need to be authorised by the Financial Conduct Authority;
- does anyone else have security over the property, which may rank ahead of your own?;
- do you require a valuation of the property to assess whether your stake, after payment of prior creditors, will be enough to clear the debt owed to you?;
- if you are lending against the property, rather than selling it, are there any title issues which may inhibit a sale should you need to enforce?;
- is the debt owing to prior creditors likely to grow, thereby reducing your stake over time?;
- the professional costs of a receiver, and the costs of insuring, securing and maintaining the property pending sale, will reduce the amount available to reduce the debt owed; and
- who will occupy the property, and are their circumstances likely to give the court reason to postpone a sale of the property, if you enforce your security?
If you are interested in finding out more about this or any other lending or security issue, please contact Patricia Grinyer, a partner in the corporate department on 0151 243 9527 or email firstname.lastname@example.org.