Lending to individuals carries with it the inherent risk for a lender that the borrower may pass away during the term of the loan. Executors should be aware of what will actually happen at law to the borrower’s liabilities as they may need to act quickly to repay the debt. Depending on the terms of the loan agreement, the borrower’s death may also trigger a default, enabling the lender to take immediate action to recover the loan and, where the loan is secured, take enforcement action against the borrower’s assets. Executors can expect that the lenders will seek repayment out of the deceased’s estate and the navigation of such repayment in conjunction with the probate process can be complicated. In this article we consider the rights and duties of lenders upon the occurrence of the death of an individual borrower, and how this could impact those executing the will or managing the borrower’s estate.
This article focuses on the general issues impacting lenders and executors. If the loan is a regulated mortgage contract or a regulated credit agreement, additional requirements may apply to the lender which are beyond the scope of this note. In these cases we recommend that the lender obtains specialist advice from their legal advisors or our Financial Services team. This article also assumes that the borrower has made a valid will in England and Wales with validly appointed executors.
Executors and probate
After the death, the executors of an individual’s estate become liable for the debts of that individual. These debts must be repaid out of the assets in the estate, assuming there are sufficient assets in the estate to do so. If there are insufficient funds in the estate the executors do not have to repay debts from their own funds; the estate would instead be an insolvent estate. An executor that has been validly appointed by a will derives their authority to act as a personal representative of the borrower and to deal with their estate from the will itself but the Grant of Probate confirms that authority and acts as proof of title to the deceased’s estate. This proof of title will be needed if estate assets are to be sold to release cash to repay debts of the estate.
From the date of death, it can take several months for Probate on a very simple estate to be granted, and this may be significantly delayed if the estate is complex (due to high value, international or unusual assets) or if the will itself is disputed. Where an Inheritance Tax return is required, the Grant of Probate cannot be applied for until the return has been submitted to HMRC. Gathering the necessary information on the deceased’s assets and liabilities to prepare the return can also take time.
Event of default and repayment
Most loan agreements with individual borrowers will include either an event of default or a mandatory prepayment event upon the death or incapacity of the individual borrower. This could cause significant problems for the executors of the borrower’s estate as it may entitle the lender to demand the loan is repaid early. The exact timing and process for such a demand will depend on the drafting of the relevant provisions in the loan agreement and, in some cases, repayment may be triggered automatically. The terms of the loan may also provide the lender with a right, upon the death of the borrower, to charge a higher rate of interest or, where security has been granted, to enforce its security interests and perhaps even take assets, sell them and use the proceeds to repay the loan.
In our experience, lenders are likely to inform the executors of the borrower’s estate that the loan is cancelled (and possibly that the event of default or mandatory repayment event has happened) after they have been notified of the death. However, the deadline the lender provides for repayment will be determined by the information they have been provided by the executors about the estate and the status of the Grant of Probate application. From the perspective of the executors, it is therefore extremely important that the lender is informed as soon as possible of the death and is provided with a death certificate as evidence so that the lender does not assume the loan is continuing as normal. The lender should then be sent the sealed Grant of Probate upon receipt. This proves the executor’s title to the borrower’s estate and enables the realisation of the assets in the estate which may be necessary to liquidate enough cash to repay the loan or to allow the executor to take on the loan in their own name, if that is agreed between the parties.
Where a lender is informed of the death of a borrower by someone other than the borrower’s executors, they should try to find out who the executors are as soon as possible. Any cancellation notice or other correspondence they may wish to send must be sent to the executors of the borrower’s estate after they have been notified of the death, not to the borrower. Details of the executors may be available if Trustee Act notices have been published in the London Gazette. Once Probate has been granted, the deceased’s will and Grant of Probate (which will include the executors’ details) will also be publicly available. A lender could set up a standing search so that they are notified as soon as the will is available.
Lenders who are regulated by the Financial Conduct Authority should also consider whether the loan is being provided as a service to a regulated activity. If that is the case, the lender should bear in mind the overarching principles of the Financial Conduct Authority and applicable rules.
If the loan agreement does not contain any provisions dealing with the death of the borrower the loan will technically be unaffected and capital and interest payments will still be payable on the same basis as before the borrower’s death but such payments will be payable by the executors. However, typically the deceased’s assets are frozen on death until the Grant of Probate is obtained and the executors may therefore not be able to make these payments while the Grant of Probate is outstanding. In most cases lenders, especially those with internal policies governing the death of a borrower, will stop requiring such payments from the date they are informed of the death until they receive evidence of the Grant of Probate but interest may continue to accrue until the loan is fully repaid. The loan may be capable of cancellation by the borrower’s executors or the lender on a voluntary basis and if it is cancelled the executors and the lender should maintain a dialogue on the status of the Grant of Probate and the strategy for repayment of the loan.
Loss of capacity
Where a borrower loses mental capacity or becomes a patient for the purposes of any statutes relating to mental health, the same analysis applies as would apply had the borrower died, but the lender may instead need to deal with an attorney acting under a Lasting Power of Attorney (LPA) or a deputy appointed by an order of the Court of Protection. An LPA or deputyship order enables the attorney or deputy to make financial decisions on behalf of the borrower (subject to any limitations in the court order) including making payments on the loan or making repayment in full should a loss of mental capacity trigger a default under the loan agreement.
If the lender does something in reliance on instructions from an attorney or deputy which causes the borrower to suffer a loss, then the borrower’s primary claim will be against the attorney or deputy not against the lender, who is under no duty to police the deputy’s or attorney’s actions in managing the borrower’s affairs. The lender should however apply any applicable policies for vulnerable customers and should take further advice if it appears that the deputy or attorney is not acting in the best interests of the borrower. An attorney or deputy will not necessarily be liable for any losses unless those losses are as a result of the attorney’s deliberate wrongdoing.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2023