When a lender takes security over property, it seeks to ensure that it can realise its security, including the ability to be able to ultimately sell the property. As part of this, a lender will want to ensure that no one has a prior interest ahead of the lender.

Lenders have become increasingly cautious about non-owning occupiers (for example, a spouse who does not co-own the property, but is in actual occupation) and the potential for them to have beneficial interests, which will bind a lender. This article considers the case law in this area and the need for non-owning occupiers to execute documentation which will have the effect of waiving their interests to ensure that the lender's interest will rank in priority to that of any interest held by a non-owning occupier.

Interests Which Bind

Williams & Glyn's Bank Limited v Boland [1981] AC 487 demonstrated the problems caused by non-owning occupiers. In this case Mr Boland was the registered proprietor of the property, but Mrs Boland (who was not a registered proprietor of the legal estate) also occupied the property with Mr Boland. Mrs Boland was held to have an equitable interest in the property as she had contributed to the purchase price. Consequently, when Mr Boland defaulted on his mortgage, the lending bank who had secured its interest on the property, was not allowed to assert its interest in priority to Mrs Boland's interest. The court held that Mrs Boland had an overriding interest which ranked in priority to the interest of the lender.

In Boland, title to the property was registered, however, case law has held that the situation will be similar for unregistered land, as long as the lender has notice of the non-owning occupiers' interest in the property (Kingsnorth Finance Limited v Tizard [1986] 1 WLR 119). As a result, a lender should always make enquiries as to who will occupy the property on completion, in order to ascertain whether there will be any potential prior interest, which might affect its security.

Protecting The Lender

Subsequent to both Boland and Tizard, Bristol and West Building Society v Henning [1985] 1 WLR 778 considered the position where a non-owning occupier had notice of the fact that a mortgage was being obtained. In this case, Mr Henning purchased a property by obtaining a mortgage from the claimant lender. However, Mrs Henning was in actual occupation and had contributed to the purchase price, and therefore had an overriding interest.

Despite this interest, the court held that because Mrs Henning had knowledge of the mortgage (and the fact that the property could not have been purchased without the assistance of the mortgage), Mrs Henning's interest would not rank in priority to the lender's interest.

Usually a non-owning occupier will have knowledge that a mortgage is being obtained, and therefore many sources agree that the decision in Boland "will not unduly trouble banks" (Cousins, E. F., (ed.), Law of Mortgages (2nd ed.) London: Sweet & Maxwell, 2001). Despite this observation, it is a much safer option for a lender to protect itself against any potential interest of a non-owning occupier by requiring that all adult occupiers, who are not registered proprietors, execute documentation which will have the effect of postponing any interest they may have in relation to the property.

Waiver Documentation

As explained, it is clearly possible for a non-owning occupier to have an interest prior to that of a lender, and therefore despite authorities such as Henning, which look to the knowledge of the non-owning occupier, a lender will want to ensure that its interests retain priority. As a consequence, a lender should require that any non-owning adults who will be in actual occupation of the property postpone their potential interests.

The lender must however, ensure that a non-owning occupier executes any documentation without undue influence, as if there is any chance of undue influence, the documentation could be set aside.

Protecting Against Undue Influence

Much of the case law concerning undue influence concerns the situation where there are two legal owners. For example, where a wife is asked by her husband to mortgage their matrimonial home in order to secure his indebtedness. However, analogies can be drawn between this situation, and a situation where the postponing party is not a registered proprietor, and is instead, a non-owning occupier with a beneficial interest. What follows is a very brief account of the law in this area.

The most significant case in this area is Royal Bank of Scotland v Etridge (No.2) [2000] 4 All ER 449. This case summarises the law, and in particular, the court held that "proof that the [wife] placed trust and confidence in [her husband]...coupled with a transaction which calls for explanation, will normally be sufficient" to require that the lender presume that there has been some undue influence. This presumption is rebuttable (contrast the position where "one party acquires influence over another who is vulnerable and dependent", i.e. parent/child, doctor/patient, as these latter cases will always give rise to an irrebuttable presumption of undue influence).

When a lender is on enquiry, in order to rebut the presumption of undue influence the lender must ensure that the transaction has been explained to the wife sufficiently. Etridge laid down a number of guidelines, most of which are beyond the scope of this article. However, in practical context and in short, a lender should require that a solicitor advises the wife (or more generally, the non-owning occupier) on "the legal and practical implications of the proposed transaction...[together with] the seriousness of the risks involved". The solicitor's discussion with the wife should be "face to face" and "in the absence of her husband". She should also be told that the "purpose of this requirement is that thereafter she should not be able to dispute she is legally bound by the documents once she has signed them".

Practical Points And Conclusion

  • A lender, or the solicitor acting for the lender, should always make enquiries as to who will be in actual occupation of a property;

  • If a non-owning occupier will be in occupation, then despite the decision in Henning, a lender, or the solicitor acting for the lender, should seek to obtain documentation which postpones any interest of a non-owning occupier to the interest of the lender;

  • In a situation where such documentation is obtained, a lender, or the solicitor acting for the lender, should ensure that the non-owning occupier seeks legal advice from a solicitor in order to rebut any possible presumptions of undue influence, in accordance with the decision given in Etridge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.