knowledge 17 July 2020 |

Loan Sales: Purchaser’s Proofs Fail to Pass High Court Scrutiny

In Promontoria (Oyster) DAC v McKenna,¹ the defendant had entered a loan agreement with Ulster Bank in 2005. The security for the loan was by way of an equitable mortgage, namely, the deposit of a land certificate.  

Prior to the Registration of Deeds and Title Act 2006 (“2006 Act”), it was possible to create an equitable mortgage over registered land in this way. The procedure for enforcing this security was to apply for a well charging order and an order for sale. It was a necessary proof for such an application to establish that the land certificate had been deposited as security for the relevant debt.

Following the enactment of the 2006 Act, land certificates were no longer issued so that this procedure was abolished. However, the holders of existing security were given a three-year period to register the security as a lien.  In the absence of registration, the deposit of a land certificate cannot now be relied upon as security over the lands concerned. In this case, a lien was registered in time as a burden against the defendant’s interest in the lands.

Ultimately, the benefit of the loan agreement and the lien were transferred to the plaintiff as part of a loan sale. The details of the lien were updated to reflect the plaintiff’s interest. The court accepted that the plaintiff had this interest but the issue for the court was whether the plaintiff still had to provide evidence as to the creation of the equitable mortgage in the first place. Simons J held that it did.

Decision of the court

Simons J pointed out that the 2006 Act does not provide an express statutory remedy for enforcing these registered liens. This means that the holder of such a registered lien who wishes to enforce their security, must do so by way of an application for a well charging order and an order for sale pursuant to the inherent jurisdiction of the court.

He then went on to consider the essential proofs here. He said that it is a necessary precondition to the making of such an application that the principal monies be due and owing. He explained that this is one of the proofs for an application to enforce a legal charge under the Registration of Title Act 1964. The mortgagee under an equitable mortgage could not be in a better position than the holder of a legal charge, so at a minimum, they too must establish that the principal monies secured by the lien were due and owing.

This meant that a plaintiff must not only establish that the lien had been registered as a burden, but must also establish the existence of a contractual arrangement whereby a debt had been secured on the lands and demonstrate that the principal monies were now due for repayment.

This meant that a plaintiff must lead evidence in respect of the deposit of the land certificate. This was the event relied upon as creating the equitable mortgage which was later registered as a lien.

In this case, the necessary evidence was not provided. The only reference to a deposit of the land certificate was in the letter of offer, but this was documentary hearsay. The registration of a lien by the Property Registration Authority (“PRA”) was, on its own, insufficient to give the plaintiff an entitlement to the reliefs sought.  The lien was merely a statutory registration of the earlier event. The registration of the lien by the PRA was merely an administrative function and the PRA had not adjudicated on whether monies were well charged against the lands.  This was a function reserved to the court. 

Comment

While the decision in this case does not negate the validity of an equitable mortgage created by a deposit of land certificate (assuming it was registered as a lien within the relevant time-period), it does erect an additional barrier to its enforcement.  Where information on the date of the creation of the mortgage (by deposit of the land certificate) is available from files this should be straight-forward to overcome.  Where that information is not available, however, it may be difficult to obtain the required court assistance to allow enforcement of the mortgage. 

For lenders who have taken security in this manner, it will be important to ensure that their systems have captured all relevant information.  For prospective loan purchasers, it will be important to identify whether any loans offered for sale were secured by deposit of land certificate and, if so, to ensure that all relevant information will be transferred when the loan is sold.

While Simons J gave a similar decision in Promontoria (Oyster) DAC v Greene,² it will be interesting to see how case-law on this issue develops and whether the courts may offer any flexibility on the level of information required.