The court of appeal handed down judgment which confirms that, when a lender receives unidentified payments directly from an occupier claiming to be a tenant, the payments alone are insufficient to create a tenancy binding on the lender where the lender has done nothing else to accept, acknowledge or encourage the tenancy.
This is an important case because the court has clarified that lenders will not become bound by a tenancy purely by the receipt of payments from an occupier. There must be something more to suggest the lender has accepted the occupier as a tenant.
The property was fraudulently purchased with the use of a mortgage loan from Paratus AMC, formerly GMAC-RFC. The person committing the fraud, Dixit Shah, who was subsequently sentenced to five and a half years in prison, then granted a tenancy through his agent to Doe Fosuhene.
Paratus accepted payments towards the mortgage from an unidentified third party which exceeded the current monthly instalment. It was later discovered that the payments were from the occupier Doe Fosuhene. The payments were not returned.
Paratus subsequently commenced possession proceedings.
In her defence Fosuhene alleged that an agreement was reached with Paratus for her to pay the mortgage payments plus an amount towards the arrears. As a result she claimed that Paratus was stopped from enforcing the mortgage against her and was bound by her tenancy until the fixed term expired in August 2014.
At the possession hearing the master rejected the arguments because: Paratus was unable to identify the source of the payments, and there was no evidence to suggest that Paratus had expressly or impliedly consented to Fosuhene becoming its tenant or that it treated the tenancy as binding on it.
Consequently Fosuhene’s defence was dismissed and a possession order made. This order was affirmed by the high court on appeal in October 2012.
But Fosuhene was granted permission to make a second appeal to the court of appeal on the basis that the case raised an important point of principle or practice.
The court of appeal confirmed that if Fosuhene could arguably demonstrate that Paratus had consented to treat her as its tenant, or had precluded itself from denying her status as its tenant, the appeal should be allowed and the matter should be returned to the lower court to proceed to trial.
The court accepted the submissions on behalf of Paratus that there was nothing to connect the payments received on the account with the person in possession of the property.
It was also confirmed that even if Fosuhene’s name had appeared on the bank transfers there was no reason why Paratus should connect that name with the person in possession whose identity remained unknown to it.
The Court rejected the suggestion that Paratus should have instigated a range of enquiries to uncover more information.
In his judgment, Lord Justice Floyd, said: “A discussion or even an agreement about the levels of payment of mortgage arrears would only be of significance if Ms Fosuhene had identified herself as a tenant, as opposed, for example to someone speaking on behalf of the mortgagor.”
The appeal failed because there was no evidence to support the claim that Fosuhene personally reached an agreement with Paratus and there was nothing to alert Paratus to the fact that it was the occupier who was paying in the capacity of tenant.
A spokesman for Optima Legal, Dan Marland, said: “This is a welcome decision from the Court of Appeal as it clarifies an ambiguous area and gives lenders some peace of mind when accepting unidentified third party payments.
“Lenders accept millions of pounds each day from third parties towards mortgage repayments where the source cannot be identified. If Optima Legal had not been successful in this case it is possible that lenders would have had to adapt their policies towards accepting third party payments and in some cases repay previously accepted payments to avoid third parties in occupation of a property claiming a binding tenancy with the lender.
“The Court of Appeal made it clear that if the lender is not aware of the source of the payments and the capacity in which those payments were made, it would not be bound by any tenancy with the occupier.”
