The great land security swindle - Cambridgeshire County Council throws away £55 million

By Andrew Rowson

When private citizens or commercial organisations purchase a property with a legal mortgage, if they later sell it to a third party before paying off all the mortgage, they need to settle the balance with the lender before the lender can release the property title deeds.  

Solicitors are involved to make sure all the proper searches and other paperwork is done properly, holding moneys and deeds in client accounts on behalf of their respective clients.

At Cambridgeshire County Council's (CCC) wholly owned housing development company, This Land Ltd, (TLL) different rules seem to apply.  This Land began life borrowing lots of money from its sole shareholder (CCC), with which it bought land, mostly from CCC, and paid for staff salaries and other overheads.  Because it did not sell its first house for four years, and produced no revenue, the loan interest owing to, and sometimes paid to CCC was sourced from more borrowing from its sole shareholder.  That worked reasonably well for four years, until November 2020, when the government banned councils borrowing principally for commercial yield, which is just what CCC was doing.  It borrowed from the Public Works Loan Board (PWLB) at around 2% interest, and lent on to TLL at around 7.4% interest, taking the difference (up to £6.1m/year) as revenue to support the authority's frontline services.  The arrangement was described by one county councillor in 2016 as "making money out of nothing". 

After the ban, This Land's house sales still fell well short of covering its outgoings (in particular loan interest payments).  To find extra cash, the company resorted to selling its mortgaged land to property developers, but unlike normal mortgages, TLL kept the sale proceeds for itself instead of repaying the mortgages on each land sale.  Thus, in the last four financial periods, long term borrowing has remained static at £113.85m, whilst CCC's land security against the borrowing fell from £80.5m in December 2029, to £25.4m at 31 March 2024 - a loss of security for Cambridgeshire taxpayers of £55.1m.  Following a further, unsecured, and allegedly unlawful £6.3m loan to TLL in July/August 2024, CCC's current land security represents only around 21% of all outstanding loans.

This irregular behaviour was not even done in secret.  The note on Inventory in TLL's audited 2023/24 accounts reads:

How did that work in practice?  What were the solicitors doing, and who at CCC waived the rules in the mortgage contracts that required TLL to settle the mortgage before selling the properties?  TLL's accounts show £78.3m worth of land sales since 2020/21.  One example of a mortgage (charge) of £13.2m in 2019 and satisfaction of the same charge two years later provides a clue as to what has been happening.

In 2019, This Land purchased land from CCC's County Farms Estate in the village of Cottenham, north of Cambridge.  The charge, or legal mortgage of £13.2m between the Lender (or chargee) CCC and Borrower, TLL is filed at Companies House under This Land Development Ltd, one of the This Land group of companies.  The solicitor was LGSS Law Ltd, a law firm in which CCC has a one third ownership.  The CCC officer responsible for the charge was the Head of Finance (see mortgage document, p34). 

The Borrower owns the Property from day one

Over the next two years TLL failed to progress the site, and sold it in March 2021 to the Kier Group of Companies.  The Land Registry records the sale of the site for £12 million + VAT on 26th March 2021, apparently for a loss of £1.2 million.  When loan interest of 7.05% for just over two years is added, the overall loss to TLL on the purchase and subsequent sale of that property would have been in the region of £3.1 million.

The charge (1121 0011 0027) was satisfied in full on 25th May 2021.  Two curious details about the statement of satisfaction are that it was delivered by This Land Development Ltd, not CCC, and its interest in the charge is stated as "chargee" (i.e the lender), when the real chargee was CCC, as the 2019 charge document makes clear.

How could the real chargee allow this to happen?   One of the normal conditions of a legal mortgage is that the chargee holds the title deeds, and releases them only when the chargor (borrower) satisfies the charge by paying all the loan principal and interest due to the chargee.  Only then will the borrower have title to the property and be free to pass the title deeds on to another purchaser.

The charge agreement drawn up by LGSS Law in 2019 is unclear.  It claims to be a legal mortgage document.  However, under the "Background" section on p3, the deed states:

"The Borrower owns the Property"

This is underlined later, in clause 6.2 - "Ownership", which states:

"The Borrower is the sole legal and beneficial owner of the Charged Property and has good and marketable title to the Property."

An experienced mortgage professional commented that he had never seen similar statements in a mortgage agreement.  Normally, ownership and the title deeds vest with the lender until the mortgage is repaid in full.

Clause 2 - Covenant to pay states:

"The Borrower shall, on demand, pay to the lender and discharge the Secured Liabilities when they become due."

Beneath clause 4 "Perfection of security",  clause 4.1 "Registration of legal mortgage at the Land Registry" states:

(a)    The Borrower covenants with the Lender not to make any Disposal (other than a Permitted Disposal) of the Property without the Reasonable Consent of the Lender.

(b)    The Borrower consents to an application being made by the Lender to the Land Registrar for the following restriction to be registered against its title to the Property:

"No disposition of the registered estate by the proprietor of the registered estate, or by  the proprietor of any registered charge, not being a charge registered before the entry of this restriction is to be registered without a certificate signed by a conveyancer that the provisions of clause 4.1(a) of a legal mortgage dated 12 April 2019 and made between This Land Development Limited (1) and Cambridgeshire County Council (2) have been complied with or that they do not apply to the disposition."

Nowhere in the deed is it stipulated that the Borrower is required to pay all, or any of the mortgage principal and interest owing to the Lender (CCC) before it (the Borrower) has satisfied the charge.

The bottom line appears to be that under this arrangement, CCC has given the Borrower (This Land Development Ltd) legal ownership and presumably the title deeds at the outset, from the charge registration date, and that without needing to pay CCC the full loan principal or the full interest owing under the agreement, the Borrower is allowed to pass on the property's title deeds and ownership to a third party merely on the strength of a certificate signed by a conveyancer that reflects CCC's "reasonable consent" to do so, even though, the Lender potentially loses some or all of its security in the process - in this case, apparently, £13.2 million of taxpayers' money.

This Land Development Ltd has filed many charges and full or partial satisfactions of charges on Companies House.  In all satisfaction/release documents, This Land Development Ltd is the person delivering the statement.  In most cases it is correctly described as the "Chargor" (Borrower), but in several instances, as in the Cottenham case above, the company is incorrectly described as the "Chargee".  However the company is described, This Land Development Ltd is always the Borrower, not the Lender.  The above arrangement between Borrower and Lender seems to go against the normal conditions protecting the Lender's interests and security.

If This Land Development Ltd has complied with the charge obligations set out in the deed, there should be documents signed by a conveyancer that evidence CCC's "reasonable consent" to waiving the obligation on This Land to pay the mortgage principal and any interest owing in respect of this charge.  According to This Land's audited accounts, the total land security lost by CCC from this and other waivers up to March 2024 is £55.1 million.  That is even higher than This Land's £50.23m overall comprehensive losses since its incorporation in June 2016.

KPMG is investigating

In the summer of 2024, a local elector in Cambridgeshire submitted an objection to CCC's 2023/24 accounts questioning the lawfulness of this very arrangement.  The local auditor (KPMG) agreed to consider the objection, and investigate it thoroughly.  Its findings are still pending.

Three relevant aspects that the auditor may look at are:

a) the lawfulness of the above charge and all others like it, and whether such arrangements meet with the County Council's statutory obligations to secure value for money, and 

b) whether council officers (e.g. the Head of Finance) have acted under delegated authority, without the permission (or knowledge?) of elected members when This Land's obligations to pay the mortgage principal and interest relating to the charges have been waived.  Or, have elected councillors in one or more relevant committees authorised those waivers, perhaps without being aware of the full consequences.

c) the degree to which CCC's and TLL's respective solicitors have acted properly to protect the interests of their clients and to comply with the law in agreeing to the unusual legal mortgage deeds and the manner in which the charges have been satisfied, apparently without This Land paying any of the loan principal back to CCC. 

As KPMG's audit of the 2023/24 financial year approaches completion, the objector and councillors on the Audit & Accounts Committee may soon be provided with the auditor's conclusions.