Tenancies created before a mortgage, or created by a borrower after the grant of a mortgage under an express or statutory power, bind a lender. Consequently, most mortgages exclude the borrower’s statutory powers of leasing or prohibit the grant of a lease without the lender’s written consent. This is because a borrower should have no express or statutory powers of leasing, leases granted in breach of a mortgage will bind the borrower but not the lender.
In Hardy v Fowle [2007] EWHC 2423 Ch; [2007] PLSCS 224, a borrower purchased a portfolio of properties with a loan from a bank and granted a residential lease of the most valuable property immediately after completion of the purchase. It is impossible to have a “dead heat” between two mutually inconsistent and competing interests over a legal estate in land. One must take priority over the other, so the question arose as to which interest took priority: the mortgage or the lease, which had been granted in accordance with the contract for the sale of the property to the borrower.
The defendants, who had orchestrated the transactions via a company incorporated specifically for that purpose, and who were now in occupation of the property, asserted that the lease had priority over the mortgage. They argued that the bank had known that the company was purchasing the property to provide family members (who were being threatened with eviction from the property so that it could be sold) with a home for the rest of their natural lives. They contended that the bank had appointed their solicitor to act on its behalf, and that the bank was bound by the lease completed by that solicitor.
The High Court found in favour of the bank. The judge ruled that the acquisition of the legal estate was dependent upon the mortgage and that this took priority over the lease. The solicitor had undertaken that the mortgage advance would be applied solely for acquiring a good marketable title to the property. Title to land that was subject to a 30-year lease at a nominal rent was not a “good marketable title” for the purposes of a lender. The bank had not authorised the solicitor to do anything other than to perfect its security. It had not been asked for consent and had certainly not agreed to the grant of a lease creating new rights of occupation, let alone a lease with priority over its legal charge.
This case concerned a residential lease, but there are obvious parallels with commercial sales and leasebacks. The priority of legal interests in land depends not upon the actual and subjective intention of the parties to a conveyancing transaction, but upon complex legal rules and the factual matrix of each case. A seller taht is in actual occupation before and after completion of a sale and leaseback may have an overriding interest that binds the lender. This case is a reminder of the importance of documenting the parties’ intentions and of obtaining the lender’s consent to the grant of a lease.
Allyson Colby is a property law consultant
