What happens when a property that is charged to a bank is transferred to a third party without the bank’s consent? Specifically, what happens to the bank’s ability to exercise its power of sale over that property?
Where a Borrower, the sole registered owner of a property enters into a mortgage with a lending institution, can that Borrower later frustrate the sale of that Property by the Lender, acting as mortgagee, by transferring away from him or herself all or part of their interest in the Property?
Initially, it may be thought of as an effective way of stopping the sale by the Lender or its appointed receiver, the logic being that the mortgage between Borrower and Lender secures the Borrower’s interest in the Property only. Should the Borrower divest himself or herself of this interest, then the Lender would no longer have recourse to the Property.
To give an example; say a borrower, the sole registered owner of a Property over which he has, alone, taken out a mortgage later transfers that Property into the joint names of himself and his wife (who is not a borrower). Would the effect of this transfer mean that the Lender can no longer sell the Property as it would not have recourse to the wife’s acquired interest? After all, to sell the Property would be to sell the non-borrower's interest, which is not captured in the original Mortgage between the Borrower and the Lender. In these circumstances, does the lender need a court order reversing the transfer?
No. The transfer described above would not adversely impact on the Lender’s ability to realise its security and the basis for this is set out in the Registration of Title Act, 1964
, and more specifically by operation of Sections 62 (6), (9) and (10) of this act.
Section 62 (6) of the 1964 Act sets out the Lender’s statutory power of sale as follows:
“…the registered owner of the charge shall, for the purpose of enforcing his charge, have all the rights and powers of a mortgagee under a mortgage by deed, including the power to sell the estate or interest which is subject to the charge”.
The mechanics of such a sale are set out in Section 62 (9):
“If the registered owner of a charge on land sells the land in pursuance of the powers referred to in subsection (6), his transferee shall be registered as owner of the land, and thereupon the registration shall have the same effect as registration on a transfer for valuable consideration by a registered owner
Note the words “shall be registered
” which mandates the Land Registry (on lodgement of the transfer in the strictly prescribed Form 24 of the 2012 Rules) to effect the registration of the transferee as set out therein.
Of most relevance is the operation of Section 62 (10) which sets out:
“When a transferee from the registered owner of the charge is registered, under subsection (9), as owner of the land, the charge and all estates, interests, burdens and entries puisne to the charge shall be discharged”.
To take the above example, as the Borrower’s wife would have obtained an interest “puisne” to the earlier (prior ranking) registered charge in favour of the Lender, the transfer of the Property by that Lender pursuant to the charge would ‘overreach’ the subsequent interest and cancel it on registration of the Form 24 in favour of the transferee.
It is also worth noting that notice of the overreaching of the puisne charge will be served by the Property Registration Authority ("PRA") on the relevant parties after the registration of the transferee as owner and therefore no issue of objection can arise prior to completion of the registration.