Buying Repossessed Property

Conveyancing Manchester Highlights…..

Traps for the Unwary: Purchasing from an LPA Receiver

Conveyancing ManchesterConveyancing Manchester has previously warned about the dangers of purchasing from an LPA Receiver (that is, a receiver acting under the power of sale granted by section 101 of the Law of Property Act 1925) where a residential home is being sold without a court order for repossession.  There is a real risk that such a sale violates the original owner’s right to property and due process under the Human Rights Act.  While this issue has been litigated at the trial level, the appellate courts have not yet weighed in, and who would want to be a test case for such a politically charged, complicated issue?!

Conveyancing Manchester refers to…..

The recent case of Cherry Tree Investments Limited v Landmain Limited [2012] EWCA Civ 736 which highlights another danger of purchasing from an LPA Receiver: establishing whether the power of sale has validly arisen.

When buying from an LPA Receiver, the lawyers at Conveyancing Manchester are frequently asked to assume that the power of sale has arisen.  LPA Receivers provide basic documentation regarding the loan: often only the mortgage deed.  Until the Cherry Tree Investments case, purchasers had the comfort of section 104(2) of the Law of Property Act which relieves the buyer of the obligation of determining whether the power of sale has been properly exercised.  The Cherry Tree Investments case highlights the danger of failing to determine whether the power of sale has arisen in the first place.

In Cherry Tree Investments, a London property was owned by Landmain Limited (“Landmain”) and sold by an LPA Receiver to Cherry Tree Investments Limited (“Cherry Tree”).  After completing its purchase, Cherry Tree applied to the Land Registry to be registered as the new owner.  Landmain blocked the application and the lawsuit followed.  The trial court gave Cherry Tree summary judgment, which would have allowed Cherry Tree to complete its application with the Land Registry.  Landmain appealed on the grounds that the power of sale had never arisen under the legal charge filed with the Land Registry.

The legal charge in the Cherry Tree Investments case was a CH1 form.  A CH1 form is a standard Land Registry form.  It is very basic and flexible and is often favoured by borrowers and lenders alike because it allows for a great deal of privacy:  the parties do not have to set out the amounts or terms and conditions of the borrowing if they would prefer to keep these details private.  A CH1 form is also flexible in that the parties can incorporate other documents by reference if they chose.  The CH1 form in the Cherry Tree Investments case did not set forth the terms of the borrowing, nor the amounts and dates of repayment.  On appeal, Landmain argued that the CH1 form was, in essence, defective.  As the CH1 form did not set out the amounts and dates of repayment, no default could occur under the CH1 form and it was only by reference to the underlying facility agreement that the power of sale could arise.  Landmain further argued that since the facility agreement was not filed with the Land Registry, the CH1 form could not be interpreted by reference to the facility agreement and Cherry Tree could not rely on it as the basis for the power of sale.

In a surprising decision, the Court of Appeals found for Landmain.  The Court held that the CH1 form “meant what it meant” and could not be interpreted by reference to the facility agreement.  The power of sale had not clearly arisen under the CH1 form and Cherry Tree could not be granted summary judgment on this basis.  Although Conveyancing Manchester believes that Cherry Tree still has some hope of registering its purchase if it can prove a claim for rectification at the trial level, the Court of Appeals decision means that purchasers can no longer rely on a bare assertion by an LPA Receiver that the power of sale has arisen.  When buying repossessed property the purchaser must obtain and examine the loan and charge documentation and satisfy themselves that the LPA Receiver has the power of sale before proceeding with the purchase or risk being unable to register their purchase.  Conveyancers preparing and registering charges for lenders must ensure that the legal charge itself contains (or incorporates by reference to a filed document) all the powers the lender would ever need.

Advice From Conveyancing Manchester

The Cherry Tree Investments case is a powerful cautionary tale and highlights the need for careful consideration of contractual documentation.  Conveyancing Manchester continues to be wary of purchasing from LPA Receivers and this case highlights the need for such caution!

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