In an environment where loan recovery is becoming more complex, it’s important that lenders have the courage of their convictions. In many cases, lenders shy away from trial when families claim discreet arrangements which seek to alter the ownership/ entitlement status quo. That thinking is based around the costs and risks of trial, and the evidential difficulties often involved.
With the right legal advice and support, having the confidence to test the law and evidence at trial can make a significant difference to returns.
This was the situation in a recent case, where a claim of a beneficial interest was sought to defeat and block a trustee in bankruptcy looking to realise a debtors interest on behalf of creditors.
Background
Underwriting and pre-completion legal processes have developed significantly over the years, with lenders relying upon the Land Register and enquiries to establish both legal and beneficial ownership prior to loan advance. These are crucial to establishing the adequacy of security taken.
However, I have seen a steadily increasing trend of persons claiming beneficial interests of which the lender had no notice or knowledge at the date of releasing funds. These claims can, if proven, block the realisation of securities held, and in some cases, present as prior overriding interests.
A recent case heard in the High Court has shed light on the circumstances in which such claims may succeed or fail, and lenders should take note.
The case of Nilsson v Iqbal
The case of Iqbal concerned a trustee in bankruptcy, not a lender. The Trustee sought to recover an asset in the estate of the bankrupt, a matrimonial home The principles equally apply to any mortgage holder action.
The husband purchased the property in his sole name in 1998. Five years later, he, together with his wife, signed a transfer into their joint names, with an express declaration, that the property be held equally in joint names. The property was the matrimonial home where they lived together with the children of the marriage. The pair went through a religious, but not civil divorce, and agreed settlement terms between themselves.
Mrs Iqbal claimed that her husband had agreed to give her 100% of the property, on “divorce” as part of the financial settlement. This was not recorded in writing and was not the position as recorded at the Land Registry.
Mr Iqbal was subsequently made bankrupt, and his Trustee sought a sale of the property and recovery of 50% of the equity in the property. Mrs Iqbal claimed there was no longer any such interest due to her husband, given the discreet arrangement made between them.
The Trustee was faced with the wife’s evidence, and doubtless her husband’s who had nothing to lose.
In law, the starting presumption is that an express declaration is conclusive unless there are absent exceptional circumstances such as fraud, coercion or mistake; and there must be a subsequent written agreement in proper form. In these circumstances, the trust will succeed unless it is unconscionable for one party to enforce against the other.
The burden of proof is on those claiming that the declaration should not stand.
The Court found there was no concluded agreement for Mrs Iqbal to become a 100% owner, despite her claim to the contrary. Her case was that she had given up claims on other assets in consideration of her acquiring the remaining 50%. However, even if there had been such an agreement, she had not been prejudiced because she was not precluded from pursuing those other assets.
Mrs. Iqbal’s attempt at preventing the Trustee from enforcement by proprietary estoppel therefore failed.
There was a declaration that the property remained held in joint equal shares as the documents so provided.
Lessons learned.
In many cases, lenders will shy away from testing the law and evidence at trial. Deals are struck.
This Trustee in Bankruptcy did not. It is not uncommon for husbands, wives, family members to seek to prevent enforcement by proffering claims of side and discreet arrangements in relation to ownership, contrary to what the Land Register shows.
- Such claims are very much fact sensitive. Documentation, and in proper form, in these cases are key. But details around how, when and why such arrangements are said to have come into place also help the court to a considered determination.
- Typically, the factual matrix will be complicated, and can be hard to unpick. Husbands will support wives, and vice versa. This, every lender will understand, will result in a highly contested trial with multiple witnesses. That is expensive. Iqbal should provide some much-needed comfort as to how a court will consider facts, documents whatever the sensitivities.
This claimant did not shy away, as many can do when facing such claims, and that determination proved the correct strategy.
Jonathan Newman is senior partner at Brightstone Law
