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Can primary lender charge for second mortgage

Can primary lender charge for second mortgage

Borrower has current account and loan with Bank1 who have charge over the property. Plenty of equity. Borrwer is moving his overdraft to Bank2. Borrower is not moving the loan because Bank2 can't match Bank1's deal (Bank2 are offering much better deals with the overdraft etc - thus the move). So borrower will retain current account at Bank1 to service the loan. The overdraft facility on the current account at Bank1 will be removed - borrower will make sure the current account at Bank1 is always in credit. Bank1 is are retaining its charge over the property. Because the equity is so large, Bank2 just want to take out a second charge on the property. Bank1 are bitter they have lost the current account. Bank1 had confirmed verbally that there would be no additional costs for this arrangement, but today Bank1 have notified the borrower that they want £400 to allow Bank2 to take out a second charge. Is this permitted? Is it anything to do with Bank1 that Bank2 (or anyone else) is taking out a second charge? Or is this sour grapes because Bank1 has lost the business?

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By Hansa
20th Apr 2012 17:37

Check the contractual terms

It is possible that Bank 1 reserved the right for their solicitors to "approve" the terms of the 2nd charge - this would be in the small print of the original loan agreement.  If so, your client is probably caught between a rock & a hard place. However banks are notorious for losing documents and you could suggest your client demands proof from the bank that such a clause exists AND that he specifically agreed to it.

It has been known (ahem) for a 2nd charge to be given WITHOUT notifying the 1st charge holder (although they could easily find out later) ... what might be the consequences?  In my experience (several times during various property booms but not recently) there are no consequences whatsoever.  (a) the first charge holder doesn't look (b) they assume it is with consent (c) they couldn't care less.  In other words, go ahead, and wait for a reaction from Bank 1 - If they levy a fee, require they justify it by reference to the agreement your client signed (not an updated version of general T&C.

I won against HSBC who tried to charge a 3 month interest penalty on early redemption but couldn't produce the bit of paper I purportedly signed.  ... Result - charge "waived".

Finally the round sum of £400 does rather give the impression of an "administration" or "contribution towards legal costs" rather than anything else.  Check the client's loan agreement.

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20th Apr 2012 18:22

Normal

IIRC it's quite normal for a 1st charge holder to require permission for a second charge to be given (mainly because it increases the likelihood of the charged asset being called on ).

 

 

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By Hansa
DJKL
20th Apr 2012 19:33

Permission for 2nd charge

I agree it's "quite normal" but my point was that if the client goes ahead WITHOUT permission what are the likely repercussions - I would suggest none in many cases ... it rather depends on what the original loan agreement actually says.

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21st Apr 2012 10:39

Be careful you don't upset Bank 1 too much or they may find a reason to call in the loans their T & C's certainly will contain some restrictive clauses 

Is the £400 fee so large to risk upsetting the apple cart further

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21st Apr 2012 19:57

check your deeds
If there's property involved, the Land Registry record will show if anyone's permission is needed to register a further charge. If it is then the approach Hansa hints at is likely to fail when the second chargor comes to register their charge.

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By Hansa
21st Apr 2012 21:21

circular discussion

I think my approach may be summarised as "suck it and see".

I DID manage (more than once) to get a 2nd charge registered without notifying the 1st charge holder.  As I earlier suggested, the "deeds department" of bank 1 may well not react - as far as I recall the Land Registry's notification is passive - don't object within the specified time and the charge is registered. (and the first charge holders did not object with me).  If this turns out to be the case, the OP's client is home & dry.  If they DO object, then (having proved the existence of the £400 charge in the signed agreement) the fee might have to be paid.

I am suggesting that the OP's client will lose nothing by trying and might save himself £400.  I am not suggesting it to be the "correct" or legalistic route.  

The equity is large, the risk is therefore small and the first charge remains, just that, a first charge and therefore Bank 1's risk is identical with or without a subsequent charge.  I did however say in both my earlier posts that the Loan Agreement as signed should be checked.  It is not enough to point to general conditions unless it can be shown that the OP's client was  shown them and actively consented. 

 

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22nd Apr 2012 00:11

Hmm...

"I DID manage (more than once) to get a 2nd charge registered without notifying the 1st charge holder. "

Please can you clarify: either the first charge didn't require you to notify them before granting a second charge (in which case no problem, and there's not much to 'managing' to get it registered) or it did and you ignored your contractual obligations (albeit without consequence). Which was it?

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By Hansa
22nd Apr 2012 00:59

Irrelevant ....

... but since you ask, it was NOT in either of the 1st Loan agreements that I signed, but WAS in both lender's general T&C (which required prior consent before a 2nd charge could be granted). These T&C were NOT provided at the time of signing, but afterwards (by post).  I took the view that if it was that important, the lender should have drawn it to my attention at the time of signing.

So the answer to WhichTyler's question is neither!  

As an aside, I doubt whether the clause was enforceable anyway in these circumstances as (a) the 1st charge holder suffers no impairment to his security (b) the property belongs to the owner, not the lender. (c) such a restrictive covenant should feature prominently in the documentation signed.

My stance is not "interesting", it is practical. I DID read the agreement, and DID record that which was provided later (the general T&C)  -  with the relevant dates.

The fact that the lenders concerned chose not to pursue the matter either at the time or on redemption would rather support my contention that their own legal departments knew it was probably unenforceable and at best would gain them a pyrrhic victory

The only caveat I would add is that in my own case, the Unfair Contract Terms Act 1977 could have been argued (I was a "consumer" within the meaning of the Act) whereas the OP's client may not be.

As a final comment, I would mention that a contract is in effect an private agreement between two parties and not a 'legal act' as seems to be implied by WhichTyler.  If either party repudiates, ignores or otherwise fails to comply with the (apparent) terms of that contract, it is for the other party to seek remedy by negotiation or through the civil courts.  In all such cases that reach the courts, the plaintiff would have to demonstrate and quantify the damage caused by the alleged breach.

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