Declaration of Trust in breach of mortgage term

I act for a farming family who wish to carve out land to a discretionary trust. The land is currently all subject to a charge and the bank will take a long time to release security over the land in question (although the carved out land makes virtually no percentage difference in terms of overall land value). It has been asked whether the legal owners could enter a declaration of trust specifying retained land stays as current beneficial ownership, carved out land is held on the terms of the Settlement. There would be an indemnity by the retained land’s beneficial owners that they would continue being liable for monies under the charge.

the mortgage restriction says: “not without the prior written consent of the Bank……. to dispose of or agree to dispose of or create any legal or equitable estate or interest in or in the proceeds of sale of the Property or any part, nor part with possession or share occupation of the Property or any part.”

So clearly in breach of the mortgage terms but for this purpose (purely a tax planning exercise within a family) does it matter? I appreciate a commercial property lawyer acting for the bank may have a problem with this in the future if there was a remortgage but are there other issues?

Gareth Marland

Sounds fine to me-you need the indemnity re the charge to avoid sdlt, and watch the apr and bpr time limits for relief once in the trust.

Simon Northcott

The proposed action is clearly a breach of the mortgage terms.

The question really is how the bank would respond.

In recent years, some financial organisations have leapt upon even minor breaches to enable the calling in of mortgages, whereas others have been more generous in allowing the breach to be remedied, even waiving the breach subject to certain safeguards being implemented to protect the institution’s security.

Without knowing how the bank might react to such a breach, I would be inclined to follow the strict position in order to avoid a potential calling in of the debt (and possible foreclosure if insufficient funds are available). On that basis, perhaps the first step is to discuss the proposal with the bank, pointing out the time scale within which any action needs to be completed if the maximum benefit of the arrangement is to be achieved. It maybe , of course, that the bank will look to the whole arrangement being re-documented with the new parties, which could result in a change in the underlying terms, such as the rates of interest to be charged.

Paul Saunders