Monday, 25 April 2016

Are conveyancers over charging on ‘mum and dad’ assisted property transactions?

Introduction

The principle behind the insurance is that it protects the mortgagee’s (i.e. bank lending the money) title in the property if the donor of a gift or informal family loan goes bankrupt and  the donor’s creditors make a claim to the money as part of the donor’s assets.

But is it necessary?  Do all conveyancers actually understand the applicable law?


Background

The conveyancer is under a duty to both client and the client’s lender to ensure they obtain “a good and marketable title to the property and free from prior mortgages or charges and from onerous encumbrances which title will be registered with absolute title” (Solicitors’ Regulation Authority Handbook).

If there is a gift from a family member ( or a discounted purchase price when purchasing from a family member) or an informal loan the donor on the face of it will acquire an interest in the property. Gifted deposit insurance provides protection if the donor becomes insolvent and creditors of the donor make a claim putting the property at risk as well as the lender’s security.

The Law

The law behinds this is S339 of the Insolvency Act 1986 provides that if a bankrupt has within the previous five years “entered into a transaction with any person at an undervalue,” then “the trustee of the bankrupt’s estate may apply to the court for an order” to restore  the gift to the donor for the benefit of the creditors.

However S342(2)(a) offers the lender with protection stating that if an order is made under S339  this will not …. prejudice any interest in property which was acquired from a person other than that individual and was acquired in good faith and for value, or prejudice any interest deriving from such an interest”. Essentially the bank is protected from a Section 339 order by S.342 as long as it acts honestly and doesn't knowingly aid dishonesty. Its title in the property is therefore protected and in no way placed at risk .

The only time a  lender may not avail itself of this protection if the lender knew both that there was a gift/transaction at an undervalue and that the donor was already insolvent or a petition of bankruptcy had been presented when the gift was made. Hence the need for the conveyancer to carry our ID and bankruptcy checks against the donor.

Interestingly if this situation was allowed to arise then gifted deposit insurance would not assist in any event.

If the gift was specially made to put it beyond the reach of creditors, an order could be made under  Sections 423–425 of the Insolvency Act to restore the position to that before the transaction at an undervalue. Section 425 however would protect the lender if its interest was “acquired in good faith, for value and without notice of the relevant circumstances”.  Again unless the lender was aware of what was going on the lender would not be affected by the insolvency.

Council for Mortgage Lenders Handbook

This states:

‘If you are aware that the title to the property is subject to a deed of gift or a transaction at an apparent undervalue completed within five years of the proposed mortgage then you must be satisfied that we will acquire our interest in good faith and will be protected under the provisions of the Insolvency (No 2) Act 1994 against our security being set aside. If you are unable to give an unqualified certificate of title, you must arrange indemnity insurance (see section 9)

‘You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion’.


Practical Implications


Providing the checks on identification and bankruptcy come back all clear,  it would seem from this analysis that an unqualified certificate of title could be given to the lender where there is a gifted deposit.

Is there a need to obtain a letter of postponement from the donor, that is a ‘gift letter’.  Probably yes in terms of good practice though the Land Registration Act 2002 does provide that a mortgagee has priority over any claim that the donor may have for the return of the gift,


Conclusion


By blindly insisting on indemnity insurance which appears on the above analysis of the law to be wholly unnecessary it seems conveyancers are not acting in their clients best interests.   

At the time the Insolvency ( No2) Act 1994 ( which made amendments to S342 (2) (a)  was passing through the then House of Lords Lord Coleraine said:

“the saving in that section [of the Insolvency Act] for a third party purchaser for value and in good faith will no longer be negatived merely by the purchaser’s knowledge of an earlier transaction at an undervalue or preference … the effect of the clause should be to speed conveyancing and greatly reduce the need for insurance in the cases where problems arise” (Hansard 1994 vol 554 at para 348).

Clearly the insurance industry is also very much guilty in terms of selling and promoting an insurance which seems to offer no purpose other than as a comforter to conveyancers.

There should also be a call made on the Council for Mortgage Lenders to review and to amend the Handbook to make the requirements  for seeking indemnity insurance on a gifted deposit clear and more in line with the Insolvency legislation.

Source :   *Gifted deposits and indemnity insurance: a risk assessment, Nick Piška, Conv. 2015, 2, 133-147  (Subscription required)

 MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

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