Mortgage Voided As Lender Fails To Make Inquiries Of Persons In Possession; Unrecorded Rights Of Occupants Take Priority Over Lender's Recorded Lien

In the United Kingdom, Lexology.com reports on a British court case involving the application of the bona fide purchaser doctrine in which a mortgage lender found itself left holding the bag due to its failure to inquire into the rights and equities of persons in possession of a home who were not the record owners/borrowers before making a secured loan to the latter:

• A lender that does not make enquiries of persons known to be in occupation of a property runs the risk that such persons' interests in the property, if any, may override that of the lender.

• This was the position in HSBC Bank Plc v Dyche & Anor. The Dyches bought Mrs Dyche's parents' property for £25,000 (which was less than its market value) with the benefit of a loan from Lloyds Bank for £17,000. The reason for the transaction was to avoid the property being sold by Mrs Dyche's father's trustee in bankruptcy. The parents continued to reside in the property as their home and paid the loan sum, plus interest to the Dyches so that the Lloyds' mortgage was redeemed.

• Contrary to the agreement between the parties, the property was not transferred back to the parents following payment but, following her divorce, was transferred into Mrs Dyche's sole name. She took out a loan with HSBC providing HSBC with a forged assured shorthold tenancy agreement showing her father as tenant. Mrs Dyche became bankrupt and HSBC sought possession of the property.

• The court dismissed HSBC's claim holding that the Dyches had held the property on constructive trust for the parents and that Mrs Dyche's father (the surviving parent) was solely beneficially entitled to the property. His interest overrode HSBC's interest as he was in actual occupation throughout. He was entitled to a transfer of the property to him free of the mortgage.

• Things to Consider: Lender's solicitors [ie. attorneys] should make enquiry of any one known to be in occupation of a property. As per the CML Handbook, a signed deed or form of consent to the lender's interest taking priority should be obtained from any occupier aged 17 or over who is not a party to the mortgage. Failure to make such enquiry here meant HSBC assumed the risk of the tenancy agreement turning out to be forged, so losing their security.

Source: Make enquiries of occupiers (requires subscription; if no subscription, go here - then click link for the story).

For some of the U.S. case law on this issue, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

For some of the basics on the bona fide purchaser doctrine, see The Bona Fide Purchaser for Value of a Legal Estate Without Notice.