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This scenario involves the mortgage of the property by the joint tenants and a subsequent second mortgage on the property for the purpose of one party (Ali), where the other party (Ben) is unaware that he has signed a second mortgage deed. Ali has taken out the second mortgage for the purpose of financing her business, which fails and as they are unable to make the payments on the mortgage, the lender bank claims the right to possession of the family home.
This advice relates to the rights of Ben as the injured party and the defence of undue influence that he can take to prevent the possession of the family home by the bank. For that purpose, the advice considers the concept of undue influence, especially as defined in important case laws. The doctrine of notice is also considered, as this is an important element of undue influence and can ensure that the lender bank is put on notice for the purpose of safeguarding the interests of the injured party in a case of undue influence used for signing of the mortgage deed.
In England and Wales, the rules regarding registered and unregistered interests in land vary from each other. A mortgage of a registered land is a registered charge against the title number of the legal estate related to which it has been made. As Ali and Ben are registered freeholders, the rules regarding registered land is applicable in this case. An important rule is that all subsequent dealings in registered land, including a mortgage, is to be reported to the Land Registry using the appropriate form. Such a transaction is effective in law, only if it has been registered. In this case, there is a second mortgage that has been taken out in the property, but this mortgage is not registered.
Undue influence or misrepresentation may be involved in a case such as the one in the problem, that is, related to a family home. In a typical case involving undue influence, there are joint borrowers, and the lender (in this case, the Cantander Bank), seeks to repossess the home due to arrears. Here, one of the joint borrowers can claim that he signed the mortgage deed because the other joint borrower had misused their influence and taken advantage of their relationship of trust. A mortagage that is obtained through undue influence is likely to
be set aside. However, there are certain elements of undue influence that need to be involved, for such an undue influence to be proved. There must be a relationship of trust and confidence as between the joint borrowers and one of these should have abused this relationship, which gives rise to presumption of undue influence. Here there may be a difference drawn between actual and presumed undue influence, where the former sees one party actually exerting undue influence as against the other, and the latter is seen where one party is in a position of power with respect to the other (in similar cases to the scenario, this would be the husband), and can be assumed to exercise this influence.
Presumed undue influence cannot be applied in the case in favour of Ben, as it is usually applied in favour of wives. Actual undue influence can be seen in the context of "... some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating and generally, though not always, some personal advantage gained." This is seen in the present scenario because Ali has actually indulged in improper conduct with respect to Ben by not informing him about the exact nature of the second mortgage and getting her accountant to mislead Ben. Ben is advised to use actual undue influence with respect to the conduct of Ali.
Undue influence may also be seen in certain relationships (such as, solicitor and client) and in situations where one party places so much trust in the other, that the presumption of undue influence may arise. In this case, Ali’s accountant has given advice to Ben regarding the mortgage. It is therefore pertinent to question whether such advice can be seen in context of undue influence. As such the relationship between accountant and client is not one that gives rise to the presumption of undue influence. Therefore, Ben is not advised to use this in the present scenario. For the purpose of Ben, he can show actual undue influence as discussed above.
Undue influence is the abuse of power by one party, seen in the nature of the control exercised over the joint borrower in order to procure his consent to the signing of the mortgage deed. This is to be differentiated from misrepresentation. In either case, the court must see whether the lender (in this case, the Candanter Bank), had notice of the undue
influence or misrepresentation being applied by one party as against the other. Here, if the lender had some notice still it took steps to ensure that the mortgage deed was signed, then the mortgage will be void. Therefore, the notice to the lender becomes an important element in deciding whether there was undue influence or misrepresentation. However, such a notice is presumed only in cases of presumed undue influence.
In Barclays Bank Plc v Mrs O’Brien, the wife (respondent) successfully argued against repossession of her family home on the basis that the mortgage papers signed by her were obtained under misrepresentation of the actual amount of money being borrowed by her husband for his business.
In CIBC Mortgages v Pitt, the outcome was different for the injured as the borrowers were joint owners of the mortgaged property. The mortgage amount was used by the husband to put some money on the stock market, whereas the respondent has been told that the amount would be used to refinance a second home. However, the House of Lords held that the lending bank would not be put on notice to protect the position of the respondent, because as joint owner, she can be assumed to also benefit from the mortgage amount.
An important case here is Royal Bank of Scotland Plc v Etridge (No.2), where the House of Lords laid down important directions to be followed for determining the defence of undue influence in mortgage cases. The House of Lords followed the principle laid down in Allcard v Skinner, which provides the test of explicability of the relationship of the parties, which then puts the lender at a notice. The term ‘manifestly disadvantageous’ is no longer to be used because it is ambiguous. The bank is put on enquiry where the relationship of marriage exists and the wife stands surety for the debts of the husband. Here, the bank needs to take appropriate steps to ensure that the wife has been reasonably advised. In Davies v AIB Group (UK) Plc a husband’s undue influence against his wife was held to entitle her to set aside, as against the lender, a personal loan granted to her and her husband jointly.
Ben can use these cases to show undue influence and also put the lender bank on notice. It is noteworthy that although courts have been specific in saying time and again that the wife is to be given protection in cases where undue influence may be used by the husband, the principle
would apply in other relationships as well. In Royal Bank of Scotland Plc v Etridge (No.2), the House of Lords held that where there is a non-commercial relationship between the co-borrowers, the possibility of undue influence may be presumed by virtue of the existence of the relationship of trust and confidence as between the two parties and the bank is aware that the loan is being taken for the purpose of one of the parties. This has also been followed in Abbey National v Stringer, where the legal charge of mortgage was held unenforceable against the mother as it was obtained by undue influence exercised by her son.When the lender bank is aware that there is a possibility of undue influence in the transaction, it is required to take some reasonable steps in order to ensure that the party is brought to notice. In Wright v Cherrytree Finance Ltd, it was held that a lender must ensure that the person giving security has had the financial arrangements explained to them and is giving informed consent to the transaction and even when this principle is established with reference to a wife, it applies equally in respect of any other party. Ben is advised that he can use this notice as against the lender as the bank did not ensure that he received proper legal advice before agreeing to sign the mortgage papers.
Ben can use the rule of actual undue influence and the doctrine of notice to his advantage for the purpose of preventing the bank from repossession of the house. As Ali has actually manipulated Ben into signing the papers, got the accountant to convince Ben, and the bank did not ascertain whether Ben has received advice, this legal recourse can be taken by Ben.
Land or estate in land usually involves competing interests of different parties, as the same land can be subject to the rights and interests of different parties. Mortgage gives a good example of such competing interests, wherein the mortgagor owns the land but creates a charge in favour of the mortgagee. Due to this, both the mortgagor and mortgagee have interest in the land, which comes into conflict if the mortgagor is unable to make the required payments on the mortgage and the mortgagee claims possession of the property as that is the security for the mortgage. This essay discusses the competing rights and interests of mortgagor and mortgagee in context of the problem scenario. The essay also discusses the outcome for Ben in light of his interest in the family home.
Property law in itself, and creation of charge over an estate in particular, witnesses conflicting interests. The area of mortgage law is complex and there may be many tensions, which are to be ultimately decided by the courts when these conflicting interests come to the courts. Lenders should be able to lend money as against the security given by the property and they should not have to face a situation of a loss of security. At the same time, in case of joint-tenancy, the other owners who may be vulnerable to undue influence must be protected. The mortgage is a contract between mortgagor and mortgagee and this creates contractual rights and duties as between the parties. At this point, it is pertinent to discuss the different rights of the parties involved and understand the context in which such rights and interests may conflict.
The right of the lender (mortgagor) that is involved in this particular scenario, is the right to take possession of the mortgaged property. The true value of the mortgage can be said to only by the assurance that the mortgagee has that in the event of the mortgagor’s inability to pay the mortgage loan, the property will serve as a security for him, through which the mortgagee will be able to realise the amount of the money loaned by him to the mortgagor. It is noteworthy that the mortgage makes the mortgagee the secured creditor with the security of
the house. Law protects the mortgagee because individuals and institutions such as banks would have a security and incentive to lend money due to these protections. In White v City of London Brewery, the court held that the right to possession of the mortgagee is the same as the lessee. This means that the mortgagee has the right to possession even if the mortgagor is in default, unless there is something in the mortgage deed that prevents such an action. This right of the mortgagee arises by virtue of his interest in the land. Nevertheless, the right to possession is usually claimed by the lender when the borrower fails to make payments on the mortgage. The second right of the lender that is involved here is the right to sale. This right is exercised by the mortgagor for the purpose of realising the loan amount given to the mortgagor as the mortgagor is not in a position to repay the loan. With respect to lenders, the case law has been seen to be sensitive to their interests as well, which may be seen to be caught between two borrowers, one of which is claiming undue influence, which will potentially make the bank lose the security for the mortgage.
With respect to mortgagee as well, the law recognises some rights which allow him to protect his interest as against the mortgagor when the mortgagor wants to repossess the mortgaged property. It seems that the court does not want to lightly deprive the right of the mortgagor to the property, especially if the mortgaged property happens to be a family home. One of the remedies that can be given by court is to adjourn the repossession of the property. In Birmingham Citizen’s Permanent Building Society v Caunt, the court held that it had to power to adjourn possession proceedings in order to give more time to the mortgagor to find the means with which to pay off the mortgage debt and avoid possession.
The mortgagor may also have rights under the Human Rights Act 1998, specifically, the right to family life under the European Convention of Human Rights, Article 8, where the family home of the mortgagor is the subject of the mortgage. However, this is to be balanced with the mortgagee’s equally important rights and interest in the property, as was held in Wood v United Kingdom. In fact, the creditor is usually seen by the legislators as well as the courts
to be in a more advantageous position, due to the legitimate expectation that the creditor has on lending money on the security of the mortgaged property. In this scenario, Ben’s rights and resultant outcomes are also to be seen in the light of the fact that the mortgaged property is his family home. Here the presence of undue influence in the signing of the second mortgage will play an important role in the determination of the rights of the injured party (in this case, Ben, as he is unaware of the second mortgage). It is also noteworthy that the mortgaged property is the shared home of Ben and Ali, as it is a property “purchased in joint names for joint occupation by a married or unmarried couple, where both are responsible for any mortgage”. Thus, Ben and Ali are joint tenants in the property. As such, the creation of an equitable charge by one co-owner, constitutes an act operating on the joint tenant’s share to sever the joint tenancy. In case of the bankruptcy of one joint tenant, the lender may be able to get at the interest of the joint tenant’s interest in property, but will not be able to get at the interest of the other joint tenant whose interest is severed as a result of undue influence. In First National Bank v Achampong where, although the charge was ineffective as against the wife because of undue influence it did create an equitable charge over the husband's interest which led to the bank obtaining an order for sale to get at his interest.
It is a fact that the interests of the home owners may be even more complex. As such, in cases where undue influence is claimed, the conceptual underpinnings of the debate are also made more complex, by being either claimant based (Ben) or defendant based (Bank) in which case the latter’s exploitative conduct comes into picture. However, here the bank has not acted in an exploitative manner. The person who has acted improperly is Ali, as she has obtained the second mortgage for her purpose under false pretenses, which do amount to undue influence. This makes the matter complex as between the joint-tenants, Ben and Ali, and the lender bank. In this case, the competing interests of Ben and Ali also come into play. As mentioned above, Ben and Ali are joint-tenants and Ali’s procuring of the mortgage will lead to the severance of joint tenancy, in which case Ben can protect his interest in the
property from being used for the repayment of the second mortgage, although he is still required to pay for the first mortgage.
There are many competing interests that come into effect in cases such as the one depicted in the scenario. The mortgagor and mortgagee have entered into a contract, and there are resultant rights and duties of the parties to the contract. The mortgagee can ask for right to possession or sale as a consequence of non-payment of mortgage amount. The mortgagor can ask the court for more time to make the payments by giving an order of adjournment of possession. As Ben and Ali are joint-tenants, the joint tenancy can be severed as a result of undue influence being used by one party to get the other party to sign a deed of mortgage. In that case, the interest in the property gets severed and the injured party can claim his interest to be outside the scope of the lender. Again, as the property is a family home, the mortgagor can claim rights under the Human Rights Act 1998 in order to prevent the house from being possessed by the lender. It is also important to remember that in all of these legal scenarios, the court basically balances competing interests of the parties involved.
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