Property Auction Purchase - Issues With Charges & Restrictions.

[Ant84]

Hi guys,

Looking to potentially purchase a property at auction next week but I'm having real issues after reading over the legal pack. The property is being sold by the mortgagee in possession with a tenant in situ on a holding over rolling contract.

Everything seems pretty standard from what I can see and the searches appear satisfactory, however there's something on the title that I spotted and no one seems to be able to give me an answer. The title tells me the following under the Proprietorship Register:

1. 
   (10.11.2008) RESTRICTION: No disposition of the registered estate by the proprietor of the registered estate is to be registered without a written consent signed by the proprietor for the time being of the Charge dated 18 January 2008 in favour of Hanley Economic Building Society referred to in the Charges Register.
2. 
   4 (01.10.2010) RESTRICTION: No disposition of the registered estate, other than a disposition by the proprietor of any registered charge registered before the entry of this restriction, is to be registered without a certificate signed by the applicant for registration or their conveyancer that written notice of the disposition was given to The Governor & Company of the Bank of Ireland at c/o Hill Dickinson LLP, No. 1 St Paul's Square, Liverpool L3 9SJ (Ref: ********), being the person with the benefit of an interim charging order on the beneficial interest of <proprietor> made by the St Helens County Court on 22 September 2010 (Court reference ********).

There is no entry on the actual Charges Register related to this Bank of Ireland interim charging order. Only the Hanley Economic Building Society (who is the mortgagee in possession.) So far I've tried the following:

• Called up St Helens County Court to see if the case details were public information, they told me any records from 2010 wouldn't be accessible now as they don't go that far back. They then told me to contact the Land Registry for more information.

• Land Registry told me they couldn't divulge any specific information but that the charging order was for a 'large sum of money'. They advised I should speak to Hill Dickinson LLP

• Hill Dickinson LLP confirmed that they did act for the Bank of Ireland in obtaining a charging order on the property but couldn't advise further. They then told me to contact the seller's solicitor listed in the legal pack.

• Seller's solicitor told me they couldn't give any information due to a conflict of interest but to contact the auction house for more information on this.

• Auction house sent me the following email:

I understand in repossession sales charges/restrictions that postdate the mortgagee in possession charge fall away when the new buyer registers.

I attach the relevant Land Registry practice guide, which outlines how the Land Registry approaches applications for registrations of properties sold by mortgage lenders.

You will need to rely on your own advice here, I believe if you have a solicitor look at the pack for you they will verify that this charge which post dates the mortgagee charge will fall away when you register the purchase.

I then forwarded this email to my solicitor to have a look at, along with the legal pack. They replied with the following email:

With regards to the email from auctioneers, their repsonse is not correct, as the restriction is not Hanley Economic Building Society, it will not be automatically removed.

I have spoken to HMLR who advised they will need a certifacte from Bank of Ireland of the written notice as per wording of the restriction of the title.

It is tied to the property, however no certainty you will not get hidden surprises. Once completed it will become the buyers responsibility to pay.

It is usually the sellers responsibility to cover all costs, however as it auctions there maybe certain clauses which means they do not clear any debts on the property, I would ensure you are satisfied with the auction contract before committed to anything.

I'm totally confused by all this, as clearly someone is giving me incorrect information and I don't know which one. Is there any way I could get this query confirmed with certainty as I feel like I'm banging my head against a wall trying to ascertain what should be simple and straightforward information? The auction is in the next few days so I really need to find out one way or the other ASAP.

My huge concern is that I don't want any outstanding debt to become my responsibility if I buy the property or for this to cause any issues when I sell the property later on. I have no idea how it all works though as it's my first time at auction.

Can anyone here advise on this?

Many thanks.

[R0b]

I think you need to take the advice of your solicitor over the auction house.

The way I read the restriction in favour of the Bank of Ireland, means that you are not strictly prohibited from registering the sale of title in your name but there needs to be a certificate signed by either yourself or your conveyancer confirming that notice of the sale has been given to Bank of Ireland i.e. their legal representatives Hill Dicks. I'm not sure why HMLR are saying they need a certificate from Bank of Ireland because the wording of the restriction doesn't say that at all and perhaps your solicitor should have picked up on that.

However, I think that is the least important thing you should be worrying about because there are two restrictions relating to charging orders and although the language here doesn't explicitly state it, the amount(s) tied to the charging order would normally need to be paid out from the proceeds of sale, usually by the seller. However, as this is an auction sale, the terms of the sale need to be considered very carefully because as your solicitor has suggested, you may be on the hook to pay those debts personally either on completion or if the terms of sale are silent, you may be liable to pay those debts off when you come to selling the house at a later date.

It seems to me there are further investigations and inquiries required before you could satisfy yourself fully that those debts relating to the charging orders would not be your responsibility. It also sounds like you don't even know how much these debts are, which may very well be larger than the value of the house. It would be quite dangerous to rush into bidding for this house without knowing the financial consequences of doing so and then discovering those hidden surprises after the fact.

In short, if you don't have all of the answers you need, it may be sensible for you walk away from this property altogether and take a small hit in solicitor fees than taking on someone else's (much bigger) debt

[Ant84]

Thanks. I'm definitely not going to go ahead with a bid unless this query is satisfied with absolute certainty before the auction.

I do intend to make further enquiries though. Who would have the final say on whether this interim charging order from Bank of Ireland would pass on to me as the buyer or remain the seller's responsibility after completion? I'm assuming only Bank of Ireland themselves could make that call with any authority but would they even speak to me about it if I contacted them?

At the moment I'm not concerned about the charging order from Hanley Economic Building Society as they're the mortgagee in possession and I'd fully expect them to have a charge on the property anyway. The terms of sale stipulate that:

Specified Incumbrances : All those matters contained mentioned or referred to in the above title with the exception of the charge dated 18^th January 2008 in favour of Hanley Economic Building Society

And that relates to the following entry on the Charges Register from the title:

C: Charges Register
This register contains any charges and other matters that affect the land.

1. 
   1 (10.11.2008) REGISTERED CHARGE dated 18 January 2008 affecting also other titles.
   NOTE: Charge reference ********.
2. 
   2 (10.11.2008) Proprietor: HANLEY ECONOMIC BUILDING SOCIETY of Granville House, Festival Park, Hanley, Stoke-on-Trent ST1 5TB.
3. 
   3 (10.11.2008) The proprietor of the Charge dated 18 January 2008 referred to above is under an obligation to make further advances. These advances will have priority to the extent afforded by section 49(3) Land Registration Act 2002.

From my extremely limited legal understanding, the Bank of Ireland thing is merely a restriction and isn't even mentioned on the Charges Register. Not sure whether that means there's no actual financial interest on the property itself from their side - otherwise would it be listed on the Charges Register?

[R0b]

Sorry, I did not notice the mortgagee in possession point, that's my mistake. However (and I am not a property lawyer), I am not that all familiar with charging orders and the process but I did a little digging and I think what I have said above could be entirely wrong, and in fact HMLR may be right with what they said about restrictions falling away.

For a bit of background, when a creditor applies for a charging order there are two stages, an interim charging order is applied for which the court grants pending a hearing for a final charging order. The creditor would apply to HMLR using Form K which is a form with standardised wording that is the same as the wording you have in the restriction section (seems to be commonly referred to as a 'Form K restriction'). At the final charging order hearing, the judge can make an order to keep the charging order as final with or without conditions or dismiss it.

Now with that in mind, I am going to say that you ignore what I said previously and I would revise my view of things:

1. On the assumption the court granted the final charging order, it looks like Bank of Ireland did not ask the court to use non-standardised wording that would have added further conditions to regulate the future sale of the property. What I mean by non-standardised wording is, BOI could have requested the wording say something like there should be no disposition without the written consent of the BOI or that any disposition is conditional upon the buyer or seller paying X amount to BOI to discharge the charging order.

2. Therefore, the standard Form K wording is rather weak (creditors might say open to abuse) because first of all, it does not obligate you to actually discharge the debt but instead merely inform BOI prior to your application to HMLR to register your interest. Put simply, you could complete the sale, transfer the proceeds and then just before that application to HMLR, write to BOI and inform them of the sale - your obligation of the restriction is rendered complete and you/conveyancer sign the certificate.

3. The effect of following the steps in point 2 above is all about priority of interests under the Land Registration Act 2002.

The general rule is laid down in section 28 of the LRA:

(1) Except as provided by sections 29 and 30, the priority of an interest affecting a registered estate or charge is not affected by a disposition of the estate or charge.

(2) It makes no difference for the purposes of this section whether the interest or disposition is registered.

Section 29 says:

(1) If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration.

(2) For the purposes of subsection (1), the priority of an interest is protected—

(a) in any case, if the interest—

(i) is a registered charge or the subject of a notice in the register,

(ii) falls within any of the paragraphs of Schedule 3, or

(iii) appears from the register to be excepted from the effect of registration ...

What section 29 means in plain English is that a purchaser who buys a registered estate (provided it is not a nominal amount or marriage consideration i.e. a gift) and section 29(2) does not apply, then the purchaser's interest takes priority over any pre-existing priority. In your case, if BOI only registered the charging order as a restriction using the Form K standard wording, and failed to register a notice per s29(2)(a)(i), then the restriction falls away completely and HMLR will (or should) remove it. That seems to be the position in that HMLR email when they say the restriction falls away when the purchaser registers their interest.

Section 30 is all about registered charges i.e. legal charges in the Charges Register and has almost exact wording to section 28. Regarding your question about why the charging order is not in the Charges Register, it's because charging orders are not legal charges, they are equitable charges and are registered as a notice. I don't believe section 30 is applicable here but the same principles apply as section 28 with regards to legal charges.

So to summarise, BOI's charging order is not protected if they have not made an application to HMLR for a notice because a notice puts the reader on notice of an interest whereas a restriction simply regulates the way a disposition is handled. I suspect someone in BOI or Hill Dickinson has made a boo-boo by not seeking to amend the standardised restriction wording. Assuming you are the successful bidder and you follow those steps outlined in point 2 or something close to it, then short of BOI obtaining some kind of emergency application to register a notice before you submit your application to register your interest, that charging order simply falls away when your interest is registered by HMLR.

To back up what I am saying, the HMLR Practice Guide 76: Charging Orders says at Section 4 (Application for Entry of a Form K Restriction):

We will automatically cancel the Form K restriction once it has been complied with on registering a transfer of the registered estate for valuable consideration (except where the transfer is to one, or more, of the existing proprietors). We will assume that if the debt secured by the charging order has not been paid, your client’s interest will have come to an end with the postponement of the charged beneficial interest under section 29 of the Land Registration Act 2002.

As you have a solicitor instructed, you may wish to verify the above.