Mortgages II

Question 1

Undue influence

Answer 1

If the consent to a transaction was produced in a way such that the consent ought not fairly to be treated as the expression of a person’s free will, then the transaction will not be allowed to stand. The objective is to ensure that the influence of one person over another is not abused.

Question 2

Undue influence - key case

Answer 2

RBS v Etridge

• Undue influence exists where a person’s consent to a transaction was produced in a way such that the consent ought not fairly to be treated as an expression of their free will.
• Two types of undue influence set out:
  (1) Instances of overt acts of improper pressure or coercion e.g. unlawful threats
  (2) Situations where one party has influence or ascendancy over the other, and the first party takes advantage of that influence/ascendancy. There may be no specific or overt act of pressure/coercion, but the underlying relationship is sufficient for the undue influence to be exercised.

Question 3

Overt acts of improper pressure or coercion

Answer 3

• Rare; would more likely be decided on the basis of duress
• If the behaviour constituting undue influence is of a deceitful/fraudulent nature, the causation test is the same as for duress. It is necessary only for the innocent party to establish that the undue influence is a factor in inducing the claimant to enter into the contract. The innocent party does not need to establish that it was the decisive factor.
• If the behaviour is not deceitful/fraudulent, the situation is less clear, and the ‘but for’ test applies: but for the behaviour constituting undue influence, would the innocent party have entered into the contract?

Question 4

Taking advantage of undue influence/ascendancy in a relationship

Answer 4

• More common
• A common situation is where a husband/wife (business owner) wants their spouse to enter into an agreement with the effect that the spouse’s share in the matrimonial home is used as security for a loan to the business owner’s business.
• If the spouse has placed trust and confidence in the business owner and the business owner abuses this trust in seeking the spouse’s consent to the transaction (e.g. by misrepresenting the nature of the transaction), then this can amount to undue influence. Note the absence of a specific act of coercion/pressure.
• No definitive list of relationships of influence or ascendancy; will come from the trust and confidence one party has in the other.
• A relationship where one party is very vulnerable or dependent might also allow the other party to have significant influence, even if the innocent party has not positively placed trust or confidence in the other party

Question 5

Relationships in which there is an irrebuttable presumption that one party has influence over the other

Answer 5

• The courts will not allow any argument that there was no influence in the relationship.
• Parent and child, guardian and ward, trustee and beneficiary, solicitor and client, doctor and patient
• Parent and adult child or husband and wife do not give rise to this presumption. The influence will need to be positively shown
• It is not every transaction between parties to such a relationship that gives rise to undue influence; it is only where the relationship is taken advantage of, e.g. the party with influence has deceived the innocent party, or taken a decision entirely in their own interests.

Question 6

Proof of taking advantage of influence or ascendancy in a relationship

Answer 6

• If the party can show that there is a relationship of trust and confidence and also a ‘transaction which requires explanation’, then this will be enough for the court to determine that the transaction is the product of undue influence, unless the alleged wrongdoer can produce evidence that there is not
• A transaction will require explanation if it does not fit with what would usually be expected in the relationship concerned e.g. a suspicious type/suspiciously high value
• In the majority of cases, a spouse offering their interest in the matrimonial house as security for a loan on their spouse’s business is not a transaction which requires explanation, so the party alleging undue influence would need to prove that unfair advantage had been taken.

Question 7

Allcard v Skinner

Answer 7

‘where a gift of a small amount is made…some proof of the exercise of the influence of the donee must be given. The mere existence of the influence is not enough…But if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity of other ordinary motives on which ordinary men act, the burden is upon the donee to support the gift.’

Question 8

Legal advice in undue influence

Answer 8

The court has made clear that even when someone fully understands a transaction having received independent legal advice, it is possible that their consent to it is still being given only as a result of undue influence.

Question 9

Limits on equitable relief

Answer 9

• Where undue influence is proven, a contract or gift by deed may be set aside. However, this relief is equitable and therefore discretionary.
• The court may not allow this relief where the innocent party has delayed making its claim because ‘delay defeats equity.’
• It may also be disallowed where the claimant’s conduct has been underhand because ‘he who comes to equity must come with clean hands.’

Question 10

Undue influence and third parties

Answer 10

• It sometimes arises that a victim is persuaded into a guarantee or surety contract with a bank or some other creditor on the basis of undue influence, misrepresentation or legal wrong, not by the bank/creditor but by a third party, e.g. a spouse
• If the contracting party (e.g. the bank) has actual notice of the undue influence, the contract will be affected.
• It is highly unlikely that the bank will have actual notice of undue influence. Much more likely is that there are circumstances which might lead a bank to realise that a transaction carries a risk of undue influence.
• The problem translates to the question of when will the bank be fixed with constructive notice of the undue influence - i.e. when will it be treated as having notice of something it is not actually aware of.

Question 11

Barclays Bank plc v O’Brien

Answer 11

FACTS: Mr O’Brien secured his liability by a charge over the matrimonial home, which he owned jointly with his life. The bank manager gave instructions for a legal charge to be signed by both Mr O’Brien and his wife, and instructed that MOB and his wife should be made aware of the nature of the transactions and obtain independent legal advice.
ISSUE: The bank staff had not followed these instructions and both husband and wife signed the documents without reading them. Mrs O’Brien contended that her husband had put undue pressure on her to sign the agreements and that her husband misrepresented the effect of the legal charge.
HELD: The bank was aware that the parties were husband and wife and as such were put on notice that influence may be exercised. The bank had failed in its duty to take reasonable steps to warn the wife of the risks, nor had it properly advised her to seek independent legal advice. The bank was fixed with constructive notice and the wife was entitled to have the legal charge set aside.

Question 12

Barclays Bank plc v O’Brien: held that a credit would be put on notice when…

Answer 12

‘a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction’
- Unless the creditor who is put on inquiry takes reasonable steps to satisfy themselves that the wife’s agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife’s rights.

Question 13

Post O’Brien developments in surety transactions

Answer 13

RBS v Etridge

• extended the principles of constructive notice beyond cases of spouses; a bank is put on inquiry whenever one party in a non-commercial setting is standing as surety for the other party
• CIBC Mortgages plc v Pitt: wife’s claim to have mortgage set outside due to unndue influence was rejected. The husband had not been acting as the lender’s agent and the lender had no actual or constructive notice of the husband’s undue influence. As the mortgage application said that the loan was for a holiday cottage, there was nothing to put the lender on notice that the transaction was anything other than a normal advance for the couple’s joint benefit.

Question 14

Undue influence - What are reasonable steps for the creditor to take?

Answer 14

• They must ensure that the innocent party is fully aware of the risks being taken and advise him/her to take independent advice.
• (a) there is no obligation on the creditor to have seen the spouse itself as it is ordinarily reasonable to rely on a confirmation from a solicitor that they have advised the spouse in an appropriate manner, unless the creditor is aware that this has not been done.
• (b) the creditor must provide the solicitor with sufficient information about the transaction so the solicitor can fully explain it to the spouse
• (c) if the creditor is aware, either actually or constructively, that the spouse may have been misled, then the creditor must tell the solicitor of this.

Question 15

Undue influence - The solicitor’s position

Answer 15

• The solicitor should start by warning the spouse that their involvement might be relied upon by the bank to counter allegations of undue influence. If the spouse then consents to the advice being given, the core minimum the advice should contain is:
  (a) An explanation of the documents and their practical consequences;
  (b) The seriousness of the risk;
  (c) The fact that the spouse has a choice.
• The solicitor should obtain any necessary information from the lender/creditor.
• If the solicitor fails in their duty to the spouse, they will have an action in negligence against the solicitor, but they will have no recourse to the lender/creditor which is entitled to assume that the solicitor has properly advised the spouse.

Question 16

Priority of mortgages

Answer 16

e.g. if a number of different mortgagees lend money on the same property, the borrower defaults and the property has to be sold, but the proceeds of sale are less than the total outstanding under the mortgages. Which lender will be paid first, etc? The rules that determine these questions are the rules on priorities of mortgages.

Question 17

Legal mortgages

Answer 17

• Under the LRA, all mortgages over registered land must be registered to attain the status of a legal mortgage (LRA 2002, s 27(2)(f))
• A mortgage over registered land which is not completed by substantive registration will not take effect as a legal mortgage (LRA 2002, s 27(1))
• Under LRA 2002, s 48 priority between registered charges depends upon the order in which they are entered on the register. This is regardless of the order of creation.
• Where two or more mortgages are created at the same time, the application for registration will specify the order of priority.

Question 18

Equitable mortgages

Answer 18

Two types of equitable mortgage:

(1) Mortgages of equitable interests
(2) Defective legal mortgages

• As against another equitable mortgagee, equitable mortgages rank in order of creation (LRA 2002, s 28)
• This is the ‘basic rule’ of priority that applies to all equitable interests
• An equitable mortgage over registered land can be protected by the entering of a notice on the charges register (LRA 2002, s 32). As between competing equitable mortgages, this does not affect the priority, which will always be determined by creation.
• If the equitable mortgage has been protected by a notice, a subsequent lender takes subject to it, even if that subsequent lender holds a legal mortgage (LRA 2002, s 29(1))
• However, an equitable mortgage not protected by a notice will not take priority to a subsequent registrable disposition of either a registered estate or a registered charge (LRA 2002, s 29(1)).

Question 19

Modifying the priority rules: Postponement

Answer 19

The priority rules can be modified to allow a mortgage to take priority over a pre-existing interest if there is an express or implied postponement of that pre-existing interest.

Question 20

Express postponement

Answer 20

• Lenders can agree to alter the position that would apply according to the priority rules by entering into a deed of priority or intercreditor deed
• Any agreement would need to be registered at the Land Registry
• Mortgagees will also often require an express waiver or postponement to be included in the mortgage agreement so that the rights of any person living at the mortgaged property with the mortgagor are postponed to the interests of the mortgagee. This is important for the lender to be able to enforce their security and take possession of the mortgaged property in the event of default
• If the lender’s interest does not rank in priority to the interest of a person in occupation then the lender would not be able to take possession of the land

Question 21

Implied postponement

Answer 21

• Postponement can be implied in certain circumstances.
  Bristol & West Building Society v Henning
  FACTS: A couple purchased a house with a loan secured by a mortgage. The intention was that the couple would own an equal proportion of the house, though the mortgage was in Mr Henning’s name only. The loan was necessary for the purchase, which Mrs Henning knew.
  HELD: Mrs Henning had, as a result of this knowledge, impliedly postponed her interest to that of the mortgagee.

Question 22

Remedies available to the lender

Answer 22

(a) Debt action
(b) Possession
(c) Sale
(d) Receiver
(e) Foreclosure

Question 23

Remedies available to the lender - further considerations

Answer 23

• There is no obligation for a lender to exercise any particular remedy, or indeed any remedy at all. If the lender does decide to pursue one, it will be under a duty to act fairly and reasonably.
• The lender who holds the security of a legal mortgage rather than an equitable one will have a wider choice of remedies.
• An equitable lender does not, generally speaking, have the right to repossess or sell without a court order.

Question 24

(a) Debt action

Answer 24

• Contractual debt action is a personal action against the borrower. It is often in addition to, not instead of, one of the other remedies.
• If the value of the mortgaged property is less than the outstanding mortgage debt, there is said to be negative equity. The lender may take possession of and sell the property, but if the sale proceeds do not cover the outstanding debt, the lender will want to pursue personal debt action for the shortfall.
• Limitation period: if the mortgage has been created by deed, as all legal mortgages must be, the period of recovery of the debt stated in the deed is 12 years
• The limitation period for recovery of interest is 6 years; which means in reality, borrowers can find themselves involved in contractual debt actions many years after repossession.

Question 25

(b) Possession

Answer 25

• A legal lender may wish to enforce its security by taking possession of the mortgaged property as a precursor to sale. There are two reasons a lender may want to do this:
  (1) Possession will enable the lender to offer the property for sale with vacant possession, free from any rights of the borrower, making it more attractive to a potential buyer.
  (2) Possession will enable the lender to manage the property and derive an income from it. The income can then be used to reduce the outstanding mortgage debt.
• Since 2008, the Pre-Action Protocol in residential cases states that possession must be a last resort. The mortgage lender is expected to explore alternative arrangements with the borrower e.g. extending the mortgage plan and/or scheduling a new payment plan.

Question 26

(c) Sale

Answer 26

• The power of sale is the strongest right which the lender can use against a defaulting borrower. If exercised, the borrower loses all rights to the property. The sale proceeds are applied towards the outstanding debt.
• If there is a surplus, this will be forwarded to the borrower; but if there is a shortfall, the borrower may be sued personally by the lender for the outstanding debt.
• There are procedural steps that must be adhered to:
  (1) The power of sale must have arisen in accordance with statutory rules;
  (2) The power of sale must be exercisable in accordance with statutory rules; and
  (3) The lender must fulfil his duties on sale which have largely arisen from case law.

Question 27

(d) Receiver

Answer 27

• A receiver acts as manager of the mortgaged property if the lender does not wish to take possession or sell.
• The power to appoint a receiver arises under LPA 1925, s 101(1)(iii). The receiver is an administrator whose function is to get income from the land, e.g. by continuing an existing business, and will apply it towards the outstanding mortgage debt.
• The receiver is deemed to be the borrower’s agent. This may seem odd as the receiver is appointed by the lender, but it means the lender is not liable for the receiver’s negligence. This makes it a safer option for the lender than taking possession and running the business itself.
• A receiver must act with due diligence, subject to the main duty of paying off the mortgage debt.
• Medforth v Blake: the receiver, managing a pig farm business, was in breach of duty for failing to negotiate price reductions for animal feed. Feed was a major cost to the business and lack of discount had a big impact on its profitability.

Question 28

(e) Foreclosure

Answer 28

• A historic way of enforcing a mortgage which is rarely used nowadays. It allows a lender to take the mortgaged property in satisfaction of the debt, meaning the freehold will vest in the lender, and the borrower will lose all rights to the property. This could happen even though there may only be a very small amount outstanding on the mortgage security.
• The procedure for the lender is lengthy and complex. The court may order a sale in lieu of foreclosure, and almost certainly will do so if the property is worth more than the outstanding debt. Even after the final decree of foreclosure, the borrower can re-open the case if he can show that he has the means to pay.
• From the borrower’s point of view, there are some advantages in that an order of foreclosure extinguishes all other mortgages secured on the property. It also extinguishes the mortgagor’s contractual debt, so the lender cannot pursue the borrower for any surplus debt over and above the value of the property.
• Today, it is viewed as a draconian practice and rarely encountered. The Law Commission has recommended it be abolished.

Question 29

Legal mortgagee: the right to possess

Answer 29

• A legal mortgage is both a proprietary interest and a contractual debt.
• If a borrower is in arrears with payments, it is unlikely that a personal debt action will be worthwhile. The lender will therefore want to enforce its security by selling the property and recovering the outstanding debt from the sale proceeds.
• The lender will need to repossess the mortgage property in order to sell ‘with vacant possession’ and get the best possible price. They may also require possession to manage the property and generate an income.
• LPA 1925, s 95(4) acknowledges the right to take possession.
• Four Maids v Dudley Marshall: the right arises as soon as the mortgage is granted. Possession is thus strictly a right of the lender, and not simply a remedy. However, it is a last resort. Mortgage deeds almost always contain a term which recognises that the right to possess is postponed for as long as the borrower pays the agreed instalments.

Question 30

Exercising the right to possess

Answer 30

• It is not strictly necessary for the lender to obtain a court order prior to taking possession.
• However, a series of safeguards for the borrower have evolved through statute and case law.
• Most of the protections are relevant for residential mortgages only.
• However, all lenders have general duties to borrowers and the Criminal Law Act 1977, s 6 applies to all mortgage lenders.

Question 31

Lender’s duties: key cases

Answer 31

• White v City of London Brewery: imposes a duty on lenders who repossess mortgaged property in order to generate income from it. The lender must manage the property to its full potential and pay actual/potential profit back to the borrower. The lender must may any difference between income generated and income which ought reasonably to have been generated but for the lender’s ‘wilful default.’ It is unclear what this means, so lenders are reluctant to take possession to manage a property.
• Quennell v Maltby: a landlord borrower wanted to get rid of students who were protected tenants who could not be evicted. He asked his lender to exercises its power of possession to evict them. The court said that a lender had a duty to exercises its right in good faith and not for an ulterior motive. Here, the lender was not trying to enforce her security, but was seeking to evict tenants on behalf of her husband.

Question 32

Limits on the right to possession

Answer 32

• Criminal Law Act 1977, s 6 makes it a criminal offence to use or threaten violence for the purpose of gaining entry to property. This means that exercising the right to repossess by ‘self-help’ is risky. A prudent lender will make an application to the court for an order for possession, even if this is not strictly necessary.
• Such an application will kick-start protections however for the residential borrower in Administration of Justice Act 1970, s 36.
• The Pre-Action Protocol for Possession Claims 2008 sets out the steps which a court will expect a lender to have taken before resorting to possession of residential property. Lenders should try to discuss the debt with the borrower, reschedule the debt, accept reasonable requests for or give good reasons for refusing a new payment plan.
• If lenders don’t observe the Protocol, they can suffer delays in obtaining possession and may be ordered to pay the borrower’s legal costs. Non-compliance on its own does not mean that possession is denied.

Question 33

Common law jurisdiction to postpone possession

Answer 33

• The court has an inherent jurisdiction to grant relief from possession to borrowers. The court can postpone an order for possession to enable time for the borrower to obtain funds. This applies to all mortgages, whether residential/commercial.
• The jurisdiction is not available where there is negative equity (the outstanding loan exceeds the value of the property) (Cheltenham & Gloucester plc v Krausz)
• The jurisdiction is temporary only: possession can only be postponed for 28 days (Birmingham Citizen’s Permanent Building Society v Caunt)
• The court is limited in what it can do to assist the borrower. It cannot take any steps which would have a permanent effect on the status of the mortgage itself.

Question 34

Statutory jurisdiction to postpone

Answer 34

Administration of Justice Act 1970, s 36:

• ‘Where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession…the court may exercise any of the powers conferred on it by subsection (2)…if it appears to the court that…the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage’
• Powers conferred in s 36(2) include a power to postpone the date for delivery of possession for such period as the court thinks reasonable. Any postponement may be subject to payment conditions as the court thinks fit.

Question 35

Scope of AJA 1970, s 36

Answer 35

• Does not enable the court to prevent the lender from exercising its right to possess altogether, nor to postpone in possession where there has been no application for an order for possession (Ropaigelach v Barclays Bank plc)
• Does not enable the court to prevent a lender from exercising a power of sale without first obtaining a court order (Horsham Properties Group Ltd v Clark)

Question 36

Scope of AJA 1970, s 36 - Ropaigelach v Barclays Bank plc

Answer 36

FACTS: The borrowers did not live at the mortgaged property, and did not receive letters from the lender informing them the property was to be sold. They were too late to prevent a sale, but argued the purpose of s 36 was to protect borrowers from eviction, and sought a declaration that the court’s jurisdiction extended to cases where there had been no formal application for an order of possession.
HELD: s 36 was limited to cases where a court order for possession had been sought. Requirements for s 36:
(a) Possession proceedings must have started
(b) The mortgaged property must be fully or partly residential
(c) Borrower must be able to pay ‘any sums due’ ‘within a reasonable period’ subject to such conditions ‘as the court thinks fit.’

Question 37

s 36 - Meaning of ‘any sums due’

Answer 37

AJA 1973, s 8: for the purposes of s 36, ‘any sums due’ means the arrears and accrued interest, and not the whole of the mortgage debt.

Question 38

s 36 - Meaning of ‘reasonable period’

Answer 38

Cheltenham & Gloucester Building Society v Norgan: the starting point for pinpointing a ‘reasonable period’ was the remainder of the mortgage term. The court should then consider factors such as how much the borrower can afford to pay now and in future; the reason for the arrears; whether the borrower’s financial difficulty is temporary and how long it is likely to last; and the contractual terms of the mortgage.

Question 39

s 36 - Meaning of ‘reasonable period’ case examples

Answer 39

• National & Provincial Building Society v Lloyd - a borrower requesting a postponement of possession should present a detailed financial plan to the court, showing how the loan and arrears will be paid off before the term expires.
• Bristol and West Building Society v Ellis - the court needed to see that the sale proceeds would be sufficient to cover the debt due.
• Mortgage Services Funding plc v Steele - the court required firm evidence of an imminent exchange of contracts for a conveyance in order to grant a postponement to allow the borrower to sell.
• Target Home Loans Ltd v Clothier - court awarded a short, three month postponement of possession to allow the borrower to sell the property. There was evidence from an estate agent that a genuine offer had been received.

Question 40

Legal mortgagee: the right to sell

Answer 40

• The strongest of the lender’s rights so there are strict rules controlling it
• No court order is required
• The right can arise expressly or impliedly under statute, a statutory power of sale coming from the LPA 1925. If there are co-owners of the property, the lender will rely on the provisions of TLATA 1996.

Question 41

Express power of sale

Answer 41

Most mortgage documents will include an express power of sale and will set out exactly how and when the power will be exercised. The lender will not need to rely on any statutory provisions, although they will still be subject to duties on sale.

Question 42

Implied or statutory power of sale

Answer 42

• A right to sell can be implied under LPA 1925 s 101(1)(i) unless it is excluded or modified in the mortgage deed.
• Arises ‘when the mortgage money has become due.’ Whether the mortgage money has ‘become due’ depends on whether the mortgage is a capital and interest repayment mortgage, or an interest-only mortgage.
• Capital and interest repayment mortgage: the power of sale arises as soon as one portion of capital is due, so as soon as one payment is unpaid (Payne v Cardiff)
• Interest only: the mortgage money will ‘become due’ at the legal redemption date
• If the lender sells after the power has arisen but before it is exercisable, a sale to an innocent purchaser will be valid, but the lender will be liable in damages to the borrower (LPA 1925, s 104)
• If the power arises under LPA 1925, s 101(1)(ii), the power will become exercisable only when at least one of the criteria in s 103 applies:
  (1) Notice requiring payment of the whole loan has been served by the lender and the borrower has defaulted. No arrears necessary: the lender can request the full loan at any time
  (2) Interest is unpaid and arrears for at least two months
  (3) Some breach of another mortgage provision such as a covenant to keep the mortgage insured or in good repair, something which could affect the value of the security.

Question 43

Lender’s duties when exercising the right to sell

Answer 43

• The lender cannot simply consider its own interests; these must be balanced against the interests of the borrower
• After the sale, the lender is trustee of the surplus proceeds of sale (LPA 1925, s 105) and must hand them to the person next entitled. This may be another lender, or the borrower.

Question 44

Lender’s duty on price

Answer 44

• Lender owes the borrower a duty to take reasonable care to obtain the ‘true market value’ or ‘proper price’ for the property. (Cuckmere Brick Co v Mutual Finance)
• The lender will not be liable for losses if the price is within the correct bracket or within an acceptable ‘margin of error’

Question 45

Lender’s duty on method of sale

Answer 45

• Lenders often sell repossessed properties by auction, but they cannot simply put the property under the hammer as a matter of course.
• Courts will scrutinise a sale very closely where the property is sold to a buyer closely associated with the lender. Lenders are under a duty to take expert advice as to the method of sale, the marketing strategy and the reserve price. (Tse Kwong v Wong Chit)
• in Bishop v Blake, the lender made very little effort to market the property and this was a breach of duty

Question 46

Lender’s duty on timing of sale and condition of property

Answer 46

The timing of the sale does not come within the lender’s duty of care: it can sell the property when it please, even if a higher price could be obtained by marketing the property for a longer period.