Richard Anyamene answers some common questions that arise in disputes where property is owned and mortgaged by joint owners
I entered into an arrangement with a business partner a few years ago for the purchase of a mixed use investment property. We took out a joint mortgage and are registered as joint owners of the property with the Land Registry, but did not enter into any formal business agreement. For some time, my associate has failed to pay his share of the mortgage interest payments, and the mortgagee is now threatening to take action to enforce repayment of the mortgage by selling the property if mortgage arrears are not paid. I have paid my share of the mortgage interest payments to date . What are my rights and liabilities?
There are 3 issues to look at here. Firstly your rights in the property; second your position re your business partner and lastly your liabilities to the mortgagee. If you are joint owners (known as ‘joint tenants’ in terms of registration) then you own equal shares in the property, and equal shares of any equity in it. Given this, and the fact that you have taken out a joint mortgage, there will be basic implied terms of an agreement between you and your associate, even though there is no written agreement. In addition, you will be bound jointly by the terms and conditions of your mortgage, and will be taken to have agreed as between yourselves to comply with these. In terms of the mortgagee, however, you will be jointly and severally liable to comply with the mortgage terms, including payment of interest. This means that the mortgagee can force you to pay your partner’s share of any interest payments in full, and/or take action for non-payment, including selling the property to redeem the mortgage.
OK, so if I pay the full mortgage interest arrears, can I recover these from my associate under the implied terms that you have mentioned?
Yes – in the circumstances, there will be an implied term that you will pay equal shares of any mortgage interest, giving you the right to seek an indemnity from your business partner if you make the payment necessary to avoid enforcement action by the mortgagee. If this payment is significant it may be worthwhile taking immediate action to recover the sums you have ‘overpaid’, as you can then seek to obtain a charging order giving you the right to recover any debt found by the Court to be due to you against your partner’s share in the property.
As an alternative to paying more than my share, and given that our business arrangement has broken down, can I sell the property myself, and discharge the mortgage?
As a joint tenant of the property, if you wish to sell but your business partner does not, you can apply to Court at any time for an order requiring the property to be sold, and setting out the practical steps necessary for this to happen. You will need to obtain the mortgagee’s consent to this sale taking place. Under normal circumstances, provided that the mortgage is discharged in full on any sale, the mortgagee should be amenable to this happening, and agree to remove the registered charge that it will inevitably hold over the property. It is important to act quickly, and to keep the mortgagee on side, however, because there will be little prospect of you preventing a mortgagee sale (even if you do seek your own sale order) if the mortgagee is committed to taking this action. A mortgagee sale will usually be via Law of Property Act 1925 Receivers, and could result in a lower sale price being achieved than in a private sale. In addition, the receivers’ costs will be significant, and deducted prior to the release of any equity to you.
Well if the worst happens, and I lose money on my investment on a mortgagee sale because of my partner’s default, surely I can recover these losses from him?
Surprisingly, the answer is likely to be no. If you have no agreement with your associate that governs what happens in the event of a dispute between you and/or the mortgagee, it is unlikely that a Court will consider him to be liable to you for investment losses incurred if the mortgage interest payments are not made (over and above other than his obligation to repay to you any overpayment above 50% of the sums that you jointly agreed to pay in mortgage interest). Remember that you are liable to the mortgagee ‘jointly and severally’ for keeping the interest payments up to date, and a Court is likely to take the view that it is within your power (1) to maintain these, and/or (2) to take swift action to sell the property in order to avoid the mortgagee stepping in.
When considering an investment in property with a third party, it is important that proper consideration is given not only to the terms of any joint mortgage arrangement, but to what happens between you if things go wrong. Property ownership can give rise to a myriad of legal issues; ranging from maintenance and occupation of the property; insurance and other management issues to the parties’ relationship with a mortgagee and what happens if the business arrangement breaks down. Particularly in today’s economic climate, mortgagees tend to be very wary about disputes arising between co-mortgagees, and will have little appetite for intervening in these – choosing instead to enforce their power of sale to discharge the mortgage. This can lead to significant losses being incurred by the owners – not to mention an adverse credit rating if mortgage interest payments are not made and enforcement action is taken.
A well-drafted agreement between co-owners will significantly reduce the scope for a damaging dispute arising, and losses being incurred as a result. If there is no such agreement in place already, it may be possible to reach agreement with a co-owner to do so, even if an investment has already been made.
At WH Lawrence Solicitors, we can assist in identifying any issues that may arise, and taking measures to ensure that your investment is protected against a breakdown of a business arrangement. If a dispute has arisen already, we can guide you through the steps that you should be taking to ensure that matters are resolved quickly without you being exposed to a mortgagee sale.