This is a short Bill to amend the building societies Acts in one respect only. It is necessitated by a judgment of the High Court delivered on 24 June 1983, which has immediate and far-reaching implications for building societies.
Section 80 of the Building Societies Act, 1976, provides that a building society shall not make a loan on the security of a freehold or leasehold estate which is subject to a prior mortgage unless the prior mortgage is in favour of the society. In this context a "mortgage" is defined to include a charge. The Act further provides that, where a loan is made in contravention of any requirement of the Act, the directors of the soceity who authorised the loan are liable for any loss occasioned by the society.
The particular case before the court related to a house, the title to which commenced with a lease subject to a rent and to certain covenants including a covenant to build houses on the land. The house in question was assigned to a purchaser subject to an apportioned part of the rent and indemnified against the balance, the purchaser convenanting to pay his portion, to comply with the covenants in the lease and to indemnify the vendor against any claims arising from failure to pay the rent or from breach of covenant. The assignment charged the house with any moneys that might become payable under the covenants of indemnity. The High Court decided that this charge constituted a prior mortgage under section 80 of the Building Societies Act, 1976, and that as a result a building society was precluded from advancing a loan on the property.
The implications of this judgment have been discussed with representatives of the principal building societies and their legal advisers and with the registrar of building societies. It is clear that the law as it stands now after the judgment is unsatisfactory in that it would lead to a hold-up in new loan issues for certain properties and raise questions about the validity of a number of existing mortgages. It also has implications for directors of building societies on account of the personal liability which they carry and to which I have already referred.
In his judgment, Mr. Justice Murphy acknowledged that it would be in the public interest generally to uphold the validity of the argument that a charge of the kind at issue in the particular case did not prevent the building society from making a loan as it did not reduce the value of the leasehold interest. However, he did not believe that the accepted canons of construction would permit him to support that view. He also referred to the far reaching effects of his interpretation and directed that a copy of the judgment be sent to me and to the registrar of building societies in case an amendment to the legislation would be thought desirable.
The Bill seeks to do no more than restore the position to what, in general practice, it was considered to be prior to the judgment. So its purpose is to ensure that the reference to a "prior mortgage" in section 80 of the 1976 Act does not include a charge to secure the payment of a rent or to secure payment of money arising from the non-performance or breach of a covenant in a lease or fee farm grant. Other types of charge, which might have the effect of diminishing the value of the security, are not affected by this measure and are still caught by section 80. Within the statutory framework, it is, of course, always a matter for the societies to satisfy themselves that the security for any loan is adequate.
Enactment of the Bill will enable building societies to continue with the approval and issue of loans in respect of the properties affected which, the societies inform me, are significant in number. Since this provision is being given retrospective effect it will also remove any doubts about the validity of loans already advanced on properties subject to the type of charge in question.
It is difficult to over-emphasise the importance of the building societies to the national housing programme. This year they will provide about £340 million in mortgage finance which represents almost 70 per cent of total mortgage funds. For this reason and in view of the acutely difficult situation that would otherwise affect the societies, remedial action could not await the resumption of both Houses in the autumn.
I commend the Bill to the Seanad.
