The High Court has granted a lender possession of a property after the borrower failed to repay the loan as a result of becoming a Designated Person.
A borrower under a secured mortgage became a Designated Person for sanctions purposes during loan period and, as a result, did not make any repayments on the loan from the date of designation. Some months after the designation, the lender, having notified OFSI of the loan as soon as the designation had been made, then applied to OFSI to a licence to enforce its security as a result of the payment default. OFSI granted the licence. The borrower subsequently applied for and, after nearly a year, was granted a licence to sell the property – but this was nearly 2 years after the Designation had been made.
It was accepted that the Designation did not prevent the lender from bringing the claim and nor would they prevent the Court from making a possession order.
The lender said the Designation meant that circumstances arose that resulted in the borrower being in breach of the mortgage terms which also constituted events of default and that this triggered an immediate obligation to pay and a right for the lender to take possession of the property. The borrower said that she could not be liable for her failure to repay the loan because it would be illegal for her to do so. She did not have the funds to pay in UK bank accounts, but did in Russian bank accounts which the sanctions prohibited her from using.
The Court looked at several arguments and concluded:
- the obligation to repay the loan on the repayment date was not suspended by the Designation, or at least not so far as the claim to possession of the property was concerned;
- that the defendant could not argue that s44 SAMLA protected her from liability because she reasonably believed her omission to repay was in compliance with the relevant sanctions Regulations – following the logic that the duty to repay the debt was a pre-existing liability, and that a recovery action merely seeks recovery of an amount owed irrespective of any action or inaction in purported compliance with sanctions;
- the borrower had breached the basic repayment obligation by not redeeming the loan when required, the Designation had not prevented that result and the borrower could not rely on it;
- although the Designation made it illegal for the borrower to pay and the lender to accept payments (absent licences) it did not mean that the underlying agreements ceased to have effect, and remained enforceable. However, the effect of the Regulations was effectively to mean there was no event of default, which in turn meant the lender had no right to possession of the property. In the case of the relevant agreements, the Designation and its consequences were surely enough to trigger the MAC provisions, and this then meant that the “No MAC” warranty had been breached, which had the effect of creating an event of default by that means.
The case was strange, since by the time it was heard, both parties had obtained appropriate licences to sell, but the lender wanted to control the process. The Court’s analysis is interesting, as are its conclusions that supported the lender’s arguments on several points.