In this article Ian Jamieson, Head of Property and Banking at Solomon Harris, examines the case of CIBC Cayman Limited v R. Christiansen and E. Christiansen [2008 CILR 103] and provides advice to lenders on the ramifications thereof.
The plaintiff in the case was a bank which applied for orders to assist it in enforcing its security over land owned by the first defendant ("Mr A").
Mr A was the registered owner of four parcels of land, which he had used as security for a significant personal loan from the bank. Soon after, in December 1995, he married the second defendant ("Mrs A"). Although she was not made a registered co-owner of the land, before marrying him she agreed that, in exchange for relinquishing her job and undertaking domestic responsibility for the matrimonial home, she would acquire a half interest in it.
Mr A subsequently extended the first loan and more loans were subsequently secured against the land, although Mrs A was unaware of any except the first. At no time did he reveal to the bank that he had granted Mrs A a half interest in the land, and he even made misrepresentations as to the true state of ownership. In turn, Mrs A made no effort to conceal her beneficial interest in, or occupation of, the matrimonial home, which was situated on the largest of the four parcels of land in contention.
In May 2004, due to Mr A's default on the loans, the bank commenced the steps which would lead to foreclosure, which were challenged by Mrs A, who claimed an overriding equitable interest in the land, taking priority over any interest of the bank.
The bank applied to the Grand Court that orders should be made assisting it in enforcing its security over the land because (a) Mr A had defaulted on loans secured against that land; (b) he was the only registered owner of that land and he had not brought to its attention any interest that Mrs A had in the land, misrepresenting the true state of ownership; and (c) any beneficial interest that Mrs A did have in the land could not take priority over its own, as it was aware of her occupation and no further inquiry was necessary.
Mr and Mrs A submitted in reply that (a) Mrs A had acquired a beneficial half interest in their home and the land upon their marriage, as they had made a bargain to that effect, which had led her to alter her position significantly, relinquishing her job and undertaking responsibility for all of the domestic arrangements in the home; (b) the bank was aware that the Mr A was married and living with Mrs A in the home and her occupation was entirely discoverable upon formal inquiry; and (c) because the bank failed to make such formal inquiry, the wife's interest in the land was overriding, by virtue of s.28 of the Registered Land Law (2004 Revision), taking priority over that of the bank.
Decision of the Grand Court
The court dismissed the bank's application on the following grounds:-
(1) Mrs A had an equitable half interest in all the land on which those loans were secured, which was overriding, and took priority over the interest of the bank, in accordance with s.28 of the Registered Land Law (2004 Revision). Mrs A had acquired the interest upon her marriage to the Mr A, making an agreement that had led her to alter her position significantly, by relinquishing her job and undertaking responsibility for all of the domestic arrangements in the home, giving rise to a constructive trust in her favour, even though she had made no financial contribution. Although Mr A had misrepresented to the bank the true state of equitable ownership and Mrs A had herself failed to take any steps to disclose her interest, the bank bore the onus of making formal inquiry as to the status of her occupation of the land, which required more than simply being aware of it. By its failure to make such inquiry, Mrs A's interest was elevated to the status of an overriding interest. The bank's charges could not, therefore, be enforced in such a way as to diminish that equitable interest, and Mrs A was entitled to a declaration to that effect; and
(2) Although the matrimonial home, the subject of the agreement between the defendants, only stood on one of the four parcels of land in contention, it was probable that the terms of the bargain, which were repeated many times over the course of the marriage, included an equitable half interest in those adjoining parcels of land also.
What this means for Lenders
Obviously, the terms of this case are very worrying for lenders as it means their interest can be postponed in favour of a person in the property who is not on the title, has not contributed to the purchase price or mortgage payments and who has not declared their interest to the bank.
What should Lenders do in order to ensure they are protected
In every application for lending (including further loans) lenders should raise a query with the borrower as to whether there is any person of 17 years or over living in the property. If so, then the lender should not disburse funds until each such person has executed a valid postponement of claim form. Indeed, I would consider going a step further and suggest that lenders refuse to even send the mortgage offer to their respective counsel for processing until such a form has been signed off. That way lenders can be sure that this document will be signed promptly. I am aware that most commercial lenders currently do arrange for their borrowers to sign these postponement forms, but the significant factor here is that the question about occupancy must be asked each time a borrower comes in for a new loan or further advance. It is no good to rely on a postponement form already on file. Lenders should have a new one signed each time by each person 17 years or over resident in the property.
Please note that this note is a general guide only. It is not intended to be exhaustive and specific advice should always be sought. It may not be forwarded on to any third party without the express written permission of Solomon Harris.