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Making A Loan to Individuals – Is It A Regulated Mortgage Contract?
If you are considering lending money to a family member or a friend, you may believe you are acting prudently by obtaining security (for example, a mortgage) against the borrower’s home to ensure you get your money (and any agreed interest) back.
However, without getting professional legal advice, you could find yourself inadvertently straying into the realms of a regulated mortgage contract (RMC). If this occurs, the loan contract may be deemed unenforceable, and you could be in breach of the Financial Services and Markets Act 2000 (FSMA).
What Is A Regulated Mortgage Contract?
Under article 61(3)(a) of the FSMA (Regulated Activities) Order 2001 (RAO), a contract is a regulated mortgage contract if, at the time it is entered into, the following applied:
- The contract is one under which the lender provides credit to a person or to trustees;
- The lender takes security for the repayment of the loan in the form of a charge over land of which 40% is used for or is intended to be used, as or in connection with a home by the borrower or (in the case of credit provided to trustees) by a beneficiary of the trust or a related person.
Under the RAO, anyone who is not authorised to carry out a regulated activity is prohibited from doing so. The contract will be unenforceable and criminal charges may be laid.
Read The Case Study
An example of how someone can suddenly find themselves entering into an RMC without meaning to is illustrated in the case of Jackson v Ayles and another [2021] EWHC 995 (Ch).
Mr Pumphrey lent money to Mr and Mrs Ayles, the Defendants. The Borrowers were property developers. The loan was secured by a charge on their family home. The Ayles defaulted on their loan repayments and declared bankruptcy.
Mrs Jackson, the Claimant, was subsequently appointed Mr Ayles’ trustee-in-bankruptcy. She applied for a declaration that the security held by Mr Pumphrey was unenforceable under FSMA.
Mr Pumphrey contended that because the activity had not been carried on “by way of business”, it was not regulated and so did not infringe the general prohibition in section 19 of the FSMA. The High Court disagreed because:
- Mr Pumphrey’s association with the Defendants was “not built on trust”. Instead, it was a commercial relationship.
- Mr Pumphrey made several loans to the Defendants over many years.
- Mr Pumphrey had sought advice from a lecturer of law at Kingston University about “private lending”. He had also obtained a charge template for the purpose of securing his lending to ensure he got his money back.
- Mr Pumphrey’s ROI exceeded market rates.
- Since 2005, Mr Pumphrey lent more than £3.5 million (albeit not at the same time) to 14 different people and companies.
The Court ruled that Mr Pumphrey was not an authorised or exempt person for the purpose of the FSMA. He was therefore barred from carrying on a regulated activity but did so anyway. He was therefore in breach of the general prohibition in section 19 of the FSMA. Consequently, the loan was unenforceable under section 26(1).
What Are The Exemptions That Mean A Loan Is Not An RMC?
Article 61A(1) and (2) of the RAC provide that a contract is not a RMC if it falls into one of the below categories:
- An Islamic mortgage.
- A limited payment second charge bridging loan.
- A second charge business loan.
- An investment property loan (this also applied to commercial borrowers as long as certain conditions are met)
- An exempt consumer buy-to-let mortgage contract.
- An exempt equitable mortgage bridging loan.
- An exempt housing authority loan.
- A limited interest second charge credit union loan.
If one of the above exemptions applies, the loan agreement is defined as an unregulated mortgage contract.
Wrapping Up
Given that inadvertently creating an RMC can lead to expensive civil litigation and criminal prosecution and could potentially leave you with an unenforceable loan agreement, it is important to seek legal advice if you are considering providing a loan that will be secured over property.
Doing so will ensure you understand the consequences of the contract and that you are able to protect your best interests.
To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.
Do I Need a Shareholders’ Agreement?
When starting out with a new business venture, many aspects demand your attention, from product development and marketing strategies to financial planning and recruitment.
In this bustling landscape, it’s not uncommon for certain critical elements to slip under the radar. Among them, the question arises: “Do I need a Shareholders’ Agreement?”
This is a vital consideration, particularly for SMEs and owner-managed businesses, as it lays the groundwork for a secure and smoothly running company, offering a safety net for potential future scenarios. Here’s why:
Identifying Roles and Responsibilities
Typically, shareholders will have different roles within a growing venture. One shareholder may be drawing a salary and responsible for the day-to-day operations of the business, another shareholder may be providing funding but not getting involved in the operational aspects and the third may just be providing marketing and PR support.
Whilst the employee shareholder will have their obligations governed by an employment contract, the other shareholders should have their obligations defined in writing so that there is clarity and a level playing field in relation to what each party is bringing to the table.
Defining Exit Strategies
Shareholders’ agreements can set out the roadmap for the entire projected pathway of your business, from incorporation all the way through to exit.
Setting out the anticipated exit plan and associated requirements (such as consent thresholds) for a sale can help focus the parties and avoid disputes in the future.
Navigating Shareholder Departures
When a shareholder decides to leave, whether due to relocation, new challenges, or other reasons, default articles might not offer the best solutions. Shareholders’ agreements provide mechanisms to determine fair valuations, ensuring a smoother process of share transfer.
Critical questions are addressed, such as: Should a departing shareholder retain their shares, or must they offer them to remaining shareholders?
Good leaver, bad leaver – these distinctions matter. A shareholders’ agreement can outline provisions for “bad leavers,” preventing those who breach contracts from profiting. This ensures that a departing shareholder is held accountable for misconduct and doesn’t benefit unjustly.
Extended Safeguards
Just as employee contracts include restrictive covenants, shareholders’ agreements can incorporate such clauses which can supplement or be in replacement of any restrictions on employees.
This extension of protection helps safeguard the business from competition, both during shareholders’ tenure and after their departure.
Peace of Mind
Consider a shareholders’ agreement as the business equivalent of a prenuptial agreement. You hope that you can sign it, put it away in a draw and never look at it again. However, it can be a practical safeguard for the unpredictable.
Just as prenuptial agreements provide assurance in personal relationships, shareholders’ agreements offer protection in the commercial world.
Incorporating these insights into a shareholders’ agreement can seem daunting, but we can help ensure that nothing falls through the cracks.
Whether it’s defining exit strategies or orchestrating airtight decision-making, we can help you craft a shareholders’ agreement that empowers your business for success.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.
Death and Duties | The Most Unwelcome of Inevitables
Inheritance tax (IHT) has long been a polarising subject in the United Kingdom. Over the years, IHT has been the subject of fierce debate and faced scrutiny, on all ends of the political spectrum, for both its impact on wealth distribution and the burden it places on heirs.
And yet, despite being levied on a very small portion of the population and generating relatively little in tax revenue, this tax is supposedly considered ‘unfair’ by half of the taxpaying population of this country. But what is all the fuss about? Perhaps it is our cultural resistance to the discussion of death or we really are, as a nation, so deeply opposed to the concept of a perceived ‘double taxation’.
In this article, we delve into some of the detail and also point you to our recent video in which Ben Rosen canvasses the views of the public on this divisive issue.
The Fundamentals
Inheritance Tax is a tax on the estate of a deceased person, including their property, money, and possessions. It is charged at a rate of 40% on the value of an estate above a specific threshold, known as the ‘nil-rate band’, which currently stands at £325,000. Any assets above this threshold are subject to the tax, although there are various exemptions and reliefs available, such as the spouse exemption, the residential nil-rate band for primary residences and business/agricultural property relief.
The Divisiveness of Division
What are the arguments that cause such division?
Wealth Distribution
Those in favour advocate for its power in redistributing wealth by preventing the concentration of assets within a select few families. By imposing a tax on large estates, they argue that it promotes a fairer society and ensures that the wealthy contribute their share to public finances.
Burden On Heirs
Critics often highlight the emotional and financial burden it places on heirs. Losing a loved one is already a difficult time, and the added stress of navigating Inheritance Tax and dealing with lawyers can be overwhelming. Heirs may need to sell assets, such as family homes or businesses (often with a sentimental connection), to cover the tax bill, leading to concerns about the potential destruction of family legacies.
Tax Planning
Many point to the ability for wealthier families to instruct lawyers and tax advisors to assist in mitigating their exposure to IHT. This has fuelled debates about the fairness of the tax, as critics argue that it disproportionately affects those who are less able to engage in such planning.
Regional Differences
There are significant regional variations in property prices across the UK, particularly given that prices in London and the South East are significantly higher than in other parts of the country. However, the increase in property prices has brought many estates into the scope of IHT for the first time, despite those families not being ‘wealthy’ in the traditional sense, other than through passive wealth expansion through bricks and mortar. This means that families in these regions are more likely to be affected by IHT, leading to concerns about regional disparities.
Some Closing Thoughts
As you will see from this article and the video, the subject to IHT provokes a strong and impassioned reaction in many.
Whatever form it takes, IHT will always remain a polarising issue due to its complex interplay with wealth distribution, the emotional burden on heirs, tax planning strategies, and regional disparities in property values. While some argue that it plays a crucial role in promoting fairness and funding public services, others believe it requires reform to address its shortcomings, and reform is unlikely to lessen the volume of the debate!
For tax and private client advice and services, please contact Ben Rosen via our contact form below.