Mortgage portfolio transfers: how a stitch in time saves nine

Inadvertently failing to transfer the legal title to even a handful of mortgages following a portfolio acquisition can be a costly mistake. 

The secondary market in residential mortgage books is thriving, and purchasers are increasingly being caught out by this apparently simple issue. In the majority of cases, a suitably-worded power of attorney from the seller will remove any practical implications. However, difficulties can arise when the power of attorney is limited in scope or duration or when the seller has been dissolved by the time the wayward mortgages are discovered.

Why do mortgages get left behind?

Mortgages are usually left behind because of errors in the seller's data tape. These can include incorrect title numbers and borrower names. The errors are then transposed to the transfer deed and application submitted to HM Land Registry.  

There are two natural points in any transaction when such errors can be corrected:

1. During pre-completion due diligence; and 
2. Following post-completion correspondence from HM Land Registry.

The level of due diligence on a portfolio will vary from transaction to transaction, depending on the nature of the portfolio, the time available to the parties and the risk appetite of the purchaser. Clearly, the more time spent cleansing the data pre-completion the less likely it is that errors in the data tape will be allowed to migrate to the transfer documents.  

If any errors do remain once the transfer application has been made, HM Land Registry should notify the purchaser that it is unable to process one or more of the titles. This gives the purchaser another opportunity to resolve anomalies and correct errors. Perhaps understandably, focus has often moved elsewhere by this stage and post-completion correspondence may be viewed as an administrative task. As such, the opportunity to correct errors in the transfer process may be missed.

Occasionally, mortgages are omitted from the transfer process for other reasons. For example, there may be additional titles charged by the mortgage that cannot be discovered by the purchaser's due diligence. This situation may only come to light when the borrower seeks to redeem the mortgage. In some cases, the legal title to a group of mortgages may be held by a third party who is not party to the current transaction, due to the history of the portfolio. The purchaser will need to ensure that any such anomalies are covered by the provisions of the sale agreement and, where known about, followed up post-completion. 

Why does this matter?

If the failure to transfer any mortgages to the purchaser is not picked up immediately after completion, it is likely that the error will not come to light until either:

1. A borrower wishes to redeem their mortgage; or
2. An onward sale or securitisation of the portfolio is contemplated and due diligence is carried out for the new transaction.

This may be some years after the original acquisition.

While the issue is being resolved, any redemption of these mortgages will be blocked. If an onward sale is contemplated, then this matter is a defect in the portfolio which, if not resolved quickly and depending on its materiality, may need to be priced into the transaction.

Surely the usual power of attorney in a mortgage sale agreement deals with this situation?

The power of attorney granted to the purchaser under the mortgage sale agreement should enable the purchaser to deal with any errors in the transfer process. However, sellers are increasingly seeking to limit this power of attorney to a fixed time period. Although this may seem reasonable at the time, the parties need to consider the potential impact for both seller and buyer, as well as borrowers. 

The standard position is that the power of attorney should continue until all purchased mortgages are transferred into the purchaser's name at HM Land Registry. Otherwise, if anomalies or errors in the transfer application are not picked up in a timely manner, there is a real risk that a more limited power of attorney will have expired by the time the problems come to light.  

The purchaser will be reliant on the seller's assistance if the power of attorney fails to operate as expected. While the seller will almost always be obliged to assist under the further assurance provisions of the sale documentation, there will inevitably be delays. This leaves the resolution of the issue outside of the purchaser's control and incurs costs. Borrowers are also left in limbo, unable to proceed with their property sale or redemption – which may have reputational implications for both seller and purchaser.

What if the seller is dissolved?

The purchaser also needs to consider the possibility that a corporate seller may be dissolved in the future. If the power of attorney was made by way of security then the seller's dissolution has no impact on its validity and effectiveness. The purchaser should be able to continue exercising any powers under the power of attorney including the power to sign releases or additional transfer deeds, and to collect in redemption monies.

However, in practice, HM Land Registry is not always prepared to accept this position. It has been known to reject documents signed under a power of attorney where the donor company has been dissolved, even where the power of attorney has been correctly drafted and was made by way of security.  

What can the buyer do if the power of attorney is defective or rejected by HM Land Registry and the seller has been dissolved?

If the power of attorney is defective or rejected by HM Land Registry and the seller has been dissolved, the purchaser will have limited options if it discovers that some mortgages have been left behind with the seller. None of the options available to a purchaser in these circumstances are quick or cheap or have complete certainty of outcome.

It is likely that any further assurance obligations in the sale documentation will have been extinguished on dissolution if the seller was a company registered in England or Wales. As the legal title to the charges will have been held on trust by the dissolved company, the charges would not pass by law to the Crown as ownerless property (bona vacantia). This means that the Government Legal Department, which deals with ownerless property, would not be able to assist. It is likely that the court's assistance will be needed in order to register the legal title to the charges in the name of the purchaser at HM Land Registry. 

There will be significant cost and timing implications if the purchaser decides to apply to restore the seller. The position will be further complicated if the power of attorney was time limited and has expired. In these circumstances, the purchaser will need to find individuals prepared to take up the position of director and to act on behalf of the seller in signing the relevant documents once the seller has been restored. The new board would also need to consider how and when the seller would be wound up again or struck off.

The seller is often an overseas entity. If that is the case, local advice would need to be taken as to the status of the mortgages held by a foreign seller on dissolution. Restoration of the seller may well be required in order to resolve the situation and this will often require an application in the local courts.

How can these issues be prevented?

The purchaser should ensure that the power of attorney in the sale documentation is given by way of security and includes the ability to rectify transfer issues. The power of attorney should also continue in effect until all mortgages have been transferred to the purchaser and, where data provided by the seller is limited, the purchaser should consider whether additional protections may be needed in the sale documentation.

The safest course of action for a purchaser, however, is to ensure that, where possible, all titles are transferred at the time of the planned migration between the parties, and while the seller is still in the picture and able to assist.

A little bit of additional due diligence at the outset and care at these mechanical, but important, stages of the transaction may well end up being money well spent.

This article was first published in the October issue of Mortgage Finance Gazette. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.