Экзамен зачет учебный год 2023 / Dixon, Modern Land Law

Modern Land Law

In consequence, the court of equity, acting under the maxim ‘once a mortgage, always a mortgage’, would allow redemption of the mortgage after this date (Thornborough v. Baker (1675)). This became known as the ‘equitable right to redeem’. The equitable right to redeem was the epitome of the property lawyer’s approach to a mortgage; that is, that a mortgage is a security for a loan, not an opportunity for the mortgagee to obtain the mortgagor’s property or impose any other burden upon him. It meant, in effect, that payment of principal, interest and costs even after the contractual date for redemption would free the land of the mortgage.

10.9.3 The equity of redemption

The equitable right to redeem the property at any time after the legal date for redemption has passed is certainly one of the most valuable rights that the mortgagor has. If it were otherwise, mortgage lending in England and Wales would be wholly different from that which it is now. In fact, however, the intervention of equity goes further than this because the equitable right to redeem is just part of the wider rights that a mortgagor enjoys under the mortgage. These wider rights are collectively known as ‘the equity of redemption’. The equity of redemption represents the sum total of the mortgagor’s rights in the land which is subject to the mortgage. In essence, it comprises the residual rights of ownership that the mortgagor has, both in virtue of their paramount legal estate in the land, and the protection that equity affords them.43 Indeed, the equity of redemption is itself valuable, and is a proprietary right, which may be sold or transferred in the normal way. It represents the mortgagor’s right to the property (or its monetary equivalent) when the mortgage is discharged (redeemed) or the property sold, and its existence is the reason why second and third lenders are willing to grant further loans. As noted above, equity regards the mortgage as a device for the raising a loan, secured on property, which can be redeemed once the debt is repaid. Fundamentally, a mortgage is not seen as an opportunity for the lender to acquire the mortgagor’s property. For this reason, a court of equity will intervene to protect the mortgagor and their equity of redemption against encroachment by the mortgagee. This protection manifests itself in various ways.

10.9.3.1 The rule against irredeemability

It is a general principle that a mortgage cannot be made irredeemable. It is a security for a loan, not a conveyance, and the right to redeem cannot be limited pro tanto to certain people or certain periods of time (Re Wells (1933)). Thus, any provision whereby the mortgagor is said to forfeit his property on

43 See, for example, Re Sir Thomas Spencer Wells (1933).

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the expiry of the legal right to redeem is void, and any undue postponement or limitation on the mortgagor’s right to redeem thereafter will not be enforceable (Jones v. Morgan (2001)). However, this does not mean that the parties’ hands are always tied, especially in cases of mortgages negotiated between commercial corporations at arm’s length. Consequently, a provision postponing the date of redemption may be valid where the mortgage is not otherwise harsh and unconscionable, so long as the right to redeem is not made illusory. In such cases, the mortgagor might be held to his bargain by being compelled to pay all the interest which would accrue up to the lawfully postponed date of redemption if he wishes to redeem early.44 For example, a provision in a mortgage of residential property that the borrowers cannot redeem for 20 years unless they pay an additional percentage (say 15 per cent) as a ‘redemption fee’, might well be void as tending towards irredeemability. A similar provision in a mortgage between Powerful Industries plc and MegaBank plc may not.

10.9.3.2 The mortgagee and attempts to purchase the mortgaged property

A provision in a mortgage contract which provides that the property shall become the mortgagee’s, or which gives the mortgagee an option to purchase the property, is void and it need not be shown that either the mortgage itself or the offending term is also unconscionable (Samuel v. Jarrah Timber (1904)). Such a term is repugnant to the very nature of a mortgage and is offensive both to the legal and equitable right to redeem and is void both at law and in equity (Jones v. Morgan (2001)). The rationale is thus part contractual (it offends against the essence of a mortgage) and part equitable (that the vulnerable mortgagor should not be forced into a conveyance when he requires only a loan). Importantly, however, it is clear that it is necessary to determine first that the transaction really is a mortgage and second that the offending terms are part of that mortgage transaction. So, in Warnborough Ltd v. Garmite Ltd (2003) the court made it clear that the true nature of the agreement between the parties must be determined by reference to its substance rather than the label given to it and, in that case, what appeared at first to be a mortgage with a provision for the mortgagee to purchase the property (which would have been void) was in fact a complex sale and re-purchase transaction that did not attract the intervention of the court. Second, an option to purchase the property given to the mortgagee in a separate and independent transaction can be valid, providing it does not de facto form part of the mortgage itself (Reeve v. Lisle (1902)). A mortgage is a mortgage, but separate agreements will be enforced in the normal way. Of course, there may be some doubt as to whether the option to purchase is truly a separate transaction,

44 Knightsbridge Estates v. Byrne (1940); Fairclough v. Swan Breweries (1912).

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and its artificial divorce from the mortgage is not enough. So, in Jones v. Morgan (2001) a clause in a document executed in 1997 whereby the lender became entitled to a 50 per cent share of the borrower’s land, after the borrower had redeemed the mortgage, was held void and this was so even though the document was executed some three years later than the mortgage. The 1997 document was treated as a variation of the original mortgage, and as part of it, and so the clause was unenforceable as being repugnant to the very nature of a mortgage. Finally, it should also be noted, for the sake of clarity, that the rule prohibiting the mortgagee from having a right to purchase the land as a term of the mortgage does not prevent the mortgagee exercising its normal rights over the land in the event of the mortgagor’s default on the loan; for example, its power of sale. Purchase by the mortgagee is repugnant to the very nature of the mortgage; sale by the mortgagee in the event of default is the enforcement of the security that they have been given.

10.9.3.3 Unfettered redeemability: collateral advantages

As a matter of principle, the mortgagor should be able to redeem the mortgage and have the mortgagee’s rights extinguished on the payment of the principal debt, interest and costs. There should be no other conditions attached to the right of redemption because a mortgage is merely the security for a loan that ends when its reason – the money – has been repaid. Consequently, on several occasions, a court has struck down ‘collateral advantages’ made in favour of a mortgagee, as where the mortgage contract stipulates that the mortgagor should fulfil some other obligation as a condition of the redeemability or continuation of the mortgage. An example is where the mortgagor promises to buy all his supplies from the mortgagee, or to give the mortgagee some other preferential treatment. Typical cases would be brewery/mortgagees requiring pub landlords/mortgagors to take only the brewery’s beer, or similar arrangements between oil companies and the owners of petrol stations. At one time, such collateral advantages were uniformly struck down as being a ‘clog’ or ‘fetter’ on the equity of redemption (Bradley v. Carrit (1903)). They were seen as striking at the essence of the mortgage as only security for a loan. However, it is now clear that there is no objection to a collateral advantage that ceases when the mortgage is redeemed. This is a matter of contract between the parties, and provided that the terms of the collateral advantage are not unconscionable, or do not in fact restrict the right to redeem,45 they will be valid.46 This is a fair outcome given

45For example, a contractual clause that provided that the mortgagor had to buy such a great amount of oil before he could redeem that in fact redemption was practically impossible, would be void.

46See the earlier cases of Santley v. Wilde and Biggs v. Hoddinot (1898).

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the reality of many mortgage transactions which are more in the nature of a comprehensive tie between mortgagor and mortgagee than simply about a loan. Indeed, with commercial mortgages made between equal parties at arm’s length, Kregliner v. New Patagonia Meat Co (1914) suggests that a collateral advantage which does continue after redemption (e.g. a continuing obligation to take supplies from the mortgagee even though the mortgage has ended) may be acceptable, so long as the mortgagor’s land returns to them in the same form that it was mortgaged. It seems that such commercial arrangements are acceptable, because they neither restrict the former mortgagor’s use of the land as such, nor hinder the redeemability of the mortgage. They are truly ‘collateral’ and, therefore, not objectionable.

It is apparent that this is one area where the ‘contractual’ nature of a mortgage may be in conflict with its ‘proprietary’ nature. As we have been discussing, the extent to which the parties to a mortgage should be able to modify the essential nature of a mortgage and provide additional benefits to the mortgagee is a matter for argument. Does it matter if the parties are commercial organisations, and should the same considerations apply to residential mortgages? How far may the parties to a mortgage – especially those with whole batteries of legal advisers and accountants – be permitted to change the essential nature of a mortgage from a security for a loan to something outside the realm of property law altogether?

10.9.3.4 Unconscionable terms and unreasonable interest rates

It is also clear that a court has the power to strike down any term of a mortgage – or indeed the whole mortgage – where it is the result of an unconscionable bargain and irrespective of whether it also amounts to a clog or fetter on the equity of redemption. The basic proposition is that found in the judgment of Browne-Wilkinson J in Multiservice Bookbinding Ltd v. Marden

(1979) to the effect that a term will be unconscionable (and hence unenforceable) where it is in substance objectionable and has been imposed by one party on the other in a morally reprehensible manner.47 This means, in essence, that there must be some impropriety both in the substantive term and the conduct of the party imposing the term and which taken together ‘shocks the conscience of the court’. An example is an interest rate at such a high level that it renders the equity of redemption valueless, as explained in Cityland Properties v. Dabrah (1968).48 However, in exercising this jurisdiction the court is not concerned with excusing a mortgagor from the consequences of a bad bargain, especially if they have had the benefit of legal advice. That is,

47Confirmed in Jones v. Morgan.

48In this case, the interest rate amounted to the equivalent of 57 per cent and was held unconscionable.

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the mortgagor’s own affair and a bad bargain, or hard terms, does not necessarily make an unconscionable mortgage. Thus, in Jones v. Morgan (2001), the mortgagor had the benefit of legal advice and was able to evaluate the options presented to him and so, even though aspects of the mortgage were struck down on other grounds, the mortgage itself was not unconscionable.

In similar vein, it also seems from Nash v. Paragon Finance (2001) that a mortgagee – at least a commercial mortgagee – is under an implied contractual obligation (a ‘limited duty’) not to set interest rates dishonestly, for an improper purpose, capriciously or arbitrarily and not in a manner that no reasonable mortgage lender would countenance (so called ‘Wednesbury unreasonableness’). However, with due respect to the Court of Appeal in Nash, it is not immediately clear where such a wide principle comes from, even though Paragon Finance did fall foul of it in this case. A commercial mortgagee is not in any sense a public authority (for Wednesbury unreasonableness) and the court gives little authority for the proposition that these implied terms can be imported in to the mortgage contract. Indeed, in Paragon Finance v. Pender (2005), a later Court of Appeal accepted the Nash argument in principle, but noted that it did not prevent a lender, for good commercial reasons, from raising interest rates to such a level that borrowers, or a class of borrowers, might be forced to seek refinancing elsewhere. Consequently, it remains to be seen how far the Nash argument can run. If the ‘implied term’ argument gains momentum – as it may well do in times of economic slowdown – this will add another string to the bow of the mortgagor in trouble.

10.9.4 Undue influence

There have been many cases where a mortgagor has claimed that the mortgage is void (i.e. unenforceable against them in whole or in part) because of ‘undue influence’. In general terms, a mortgage may be struck down on the ground that it was obtained by the undue influence of the mortgagee directly, or by the undue influence of a third party which is attributable to the mortgagee; for example, a husband inducing his wife to sign a mortgage over the jointly owned matrimonial home.49 In either case, if the plea is successful, the mortgagor (or guarantor of the mortgagor50) who is released from the mortgage because of the undue influence might nevertheless be required to repay part of the sums lent if she derived some material benefit from it, but the mortgage itself may be unenforceable.51 We should note, however,

49For example, Castle Phillips Finance v. Pinnington (1995).

50This is the person who promises the lender to meet the obligations under the mortgage should the mortgagor default.

51Allied Irish Bank v. Byrne (1995). Thus, the mortgagee would lose its proprietary claim to the land in priority to the victim of the undue influence and may have to resort to other means of recovery, as in Alliance & Leicester v. Slayford.

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that the law in this area has undergone several transformations in recent years, not all of which are consistent with each other or earlier authority. However, the following is an attempt to highlight the basic principles of undue influence after the House of Lords’ decisions in Barclays Bank v. O’Brien

(1992), CIBC Mortgages plc v. Pitt (1993), and Royal Bank of Scotland v. Etridge (No 2) (2001).

A mortgage will be set aside for undue influence in so far as it binds the ‘victim’ when either there is ‘actual undue influence’ or ‘presumed undue influence’. Actual undue influence arises where the claimant (i.e. the mortgagor or guarantor) proves affirmatively that undue influence has been exerted. This will be established from the facts of the case, ranging from a husband standing over his wife with a shotgun threatening her unless she consents to the mortgage, to a woman threatening to leave her lover unless he signs. The possibilities are endless. However, the influence must be both ‘actual’ and ‘undue’. Persuasion after full explanation of what was involved is not undue, even though the influence may have been actual (in the sense of causative of the consent). Walking, eyes wide open, into a bad bargain, having made an informed choice, is unfortunate, but it is not the result of undue influence.52 However, as Steeples v. Lea (1998) illustrates, it is the consent of the claimant that must be given freely. So, being aware of the nature of a mortgage, after having received advice as to its effect, does not mean an absence of undue influence if the claimant can prove that she was not making a ‘free’ choice at the time. As the Court of Appeal emphasised in Stevens v. Leeder (2005), the critical point is not only that the claimant knew what she was doing, but also why she was doing it, for only then could she genuinely consent. Importantly, if ‘actual’ undue influence is proved, it is not necessary for the ‘victim’ to establish that the transaction was to their ‘manifest disadvantage’, meaning a transaction obviously not to their benefit. It is enough in such cases that the victim was persuaded to enter into a transaction that they would not otherwise have entered into.53

By way of contrast, presumed undue influence arises where the relationship between the person who is alleged to have exercised undue influence (e.g. the claimant’s spouse or partner) and the mortgagor is one of trust and confidence, so making it likely that unacceptable influence has been exerted. After the House of Lords decision in Barclays Bank v. O’Brien (1992), presumed undue influence cases were subdivided into class 2A and class 2B type cases. Class 2A cases were where the relationship between persons was of such a nature that the presumption existed independently of the facts

52See the forceful judgment of Scott VC, in the context of presumed undue influence, in

Banco Exterior Internacional v. Thomas (1997) and note also Bank of Scotland v. Bennett (1998).

53Barclays Bank v. O’Brien.

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of the case. Typical examples are the relationships of doctor/patient, solicitor/client and parent/child,54 but do not include the bank/customer and husband/wife relationship. These class 2A cases are rare in mortgage transactions, not least because patients and clients do not normally lend money to doctors or solicitors and rarely go into business with them. On the other hand, class 2B cases of presumed undue influence were where, although the relationship per se was not one of the ‘special’ cases, nevertheless the substance of the relationship between the parties was such that one person placed so much confidence in the other that the presumption of undue influence should arise. Clearly, husband/wife or lover/lover could fall within this class, as might employer/employee.55

In fact, the difference between class 2A ‘presumed’ cases and class 2B ‘presumed’ cases has been explored again by the House of Lords in Royal Bank of Scotland v. Etridge (No 2) (1998) and this long and impressive judgment sheds much light on the issue. As is made clear in Etridge, if the case is not one of actual undue influence, it is indeed possible that undue influence may be ‘presumed’. However, this presumption is properly to be regarded as an evidentiary presumption that simply shifts the burden of proof from the victim to the alleged wrongdoer (the influencer).56 In other words, for presumed undue influence to exist, it is necessary for the claimant to show a relationship of trust and confidence which, if established, requires the alleged wrongdoer to explain the impugned transaction. So, in Turkey v. Awadh (2005), there was no presumed undue influence because although there was a relationship of trust and confidence, the transaction was easily explicable and in Popowski v. Popowski (2004), the relationship of trust and confidence did not lead to a transaction that was manifestly disadvantageous to the claimant, thus displacing the presumption of undue influence. In other words, the alleged wrongdoer may still dispel any whiff of undue influence by producing evidence as to the propriety of the transaction. Importantly, when viewed in this light, Etridge makes it clear that there is no real merit in adopting the O’Brien categories of ‘class 2A’ and ‘class 2B’ presumed undue influence. There are some relationships, such as parent/child and doctor/patient (the old ‘class 2A’ cases), which necessarily and irrebuttably establish a relationship of trust and confidence and, if the transaction called for an explanation (was ‘manifestly disadvantageous’), this shifts the burden of proof to the alleged wrongdoer to explain the transaction. Failure to do so necessarily leads to a finding of undue influence. There are other cases where the claimant can demonstrate on the evidence that a relationship was one of trust and confidence (the old ‘class 2B’ cases) and, if the transaction called

54For example, Langton v. Langton (1995).

55Steeples v. Lea (1997).

56Turkey v. Awadh (2005).

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for an explanation (was ‘manifestly disadvantageous’), this then shifts the burden of proof to the alleged wrongdoer to explain the transaction. Consequently, two things are now clear. First, that the ‘presumption’ of undue influence is no more than a tool to explain the shift of the evidentiary burden from the claimant and so ‘manifest disadvantage’ is necessary as it explains why the burden should shift. The ‘presumption’ is not that undue influence exists, but that it will exist if the wrongdoer cannot explain the transaction (i.e. discharge the burden of proof). Thus, as noted above, manifest disadvantage (meaning a transaction which needs explaining) is not needed in ‘actual undue influence’ cases, because the claimant has already established undue influence on the facts. Second, the difference between the now defunct class 2A and class 2B cases is simply that in the former the fact of trust and confidence could not be disputed by the wrongdoer, whereas in the second it could. So, in the second type of case (class 2B), the wrongdoer could adduce evidence to show that no such relationship existed and hence avoid even having to explain the transaction. In the former case, a disadvantageous transaction always needs an explanation.

Although this seems complicated, Etridge has made the matter rather straightforward, and certainly more straightforward than was the case under O’Brien. In cases of actual undue influence, any transaction (disadvantageous or not) can be attacked if the victim has shown by positive proof that they have been unfairly persuaded to enter a mortgage. In cases of a successful plea of presumed undue influence, only transactions which are ‘manifestly disadvantageous’ to the victim can be impugned (being transactions which on their face appear not to be for the benefit of the victim), because it is the existence of this disadvantage which, if not explained away, permits the court to infer that undue influence has occurred.

With this matter now clarified by Etridge, we must consider the circumstances in which a mortgage actually can be voided as a result of proven actual or presumed undue influence. Of course, in reality, there are few cases where the mortgagee itself exerts the undue influence over the victim and the usual scenario (considered below) is that the victim claims first that they were unfairly induced (actual or presumed) to enter the mortgage by another person (usually the victim’s domestic or business partner who co-owns the property and who is pressing for the mortgage) and second that this undue influence taints the mortgagee. According to O’Brien, there are two sets of circumstances where a mortgagee will not be able to enforce the mortgage against the victim, even though the mortgagee itself has not exercised undue influence. These are: first, where the real inducer (the husband/wife, lover, etc.) was acting, in a real sense, as agent of the mortgagee (this is quite unlikely in the majority of cases); or, second, where the mortgagee has actual or constructive notice of the inducer’s unfair conduct, and has not taken steps to ensure that the claimant has been independently advised. Moreover, a mortgagee will be deemed to have notice of the unfair conduct (and therefore

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risk losing the security unless they have offered independent advice) when the transaction is prima facie not to the advantage of the mortgagor, and the transaction itself is of such a kind that there is a substantial risk that undue influence may have been exerted. Such a risk, and therefore notice to the mortgagee, will be present when a person signs a mortgage as guarantor (surety) for the debts of their domestic partner (O’Brien), although such a risk may not be present, and therefore no notice to the mortgagee, when a person signs a mortgage as joint mortgagor for a loan made to the mortgagors jointly for their joint benefit (Pitt). In the end, however, as explained in O’Brien, the existence or absence of such notice very greatly depended on the particular facts and, following Barclays Bank v. Boulter (1997), it was clear that the burden is on the mortgagee to prove that it is not tainted by the undue influence (or misrepresentation) of the actual inducer. So, the claimant may raise undue influence as a defence to an action on the mortgage instigated by the mortgagee, and the burden of proof then shifts to the lender.

As expected after O’Brien and Pitt, there was a wave of claims of ‘undue influence’ by mortgagors/guarantors/sureties facing repossession of their property or a demand for payment of moneys owed. Unfortunately, a consistent approach was not possible and two powerful difficulties emerged. First, if the mortgagee is to avoid being fixed with notice of another person’s undue influence (e.g. that of the husband/wife, lover, etc.), the mortgagee must ensure that the mortgagor is ‘independently advised’. Does this mean advised independently from their partner (the undue influencer), independently of the mortgagee, or both? Some cases suggested that the mortgagee escaped liability by ensuring that the claimant was advised by someone other than its own staff,57 and conversely did not escape when the adviser was closely linked with the mortgagee (Byrne), save only that a mortgagee did not seem to incur liability simply because the same solicitor acted for both wrongdoer and victim58 Other cases suggested that such advice must also be given independently from that given to the wrongdoer.59 Second, given that the mortgagee must take steps to see that the claimant has been independently advised, what steps are sufficient? Can the mortgagee avoid its potential liability by merely recommending the mortgagor to take independent advice? The decision in Crédit Lyonnais Bank v. Burch (1997) (contra to the tenor of Massey) suggested that merely advising the claimant to seek advice may not be sufficient if the claimant did not then seek or receive such advice. Does this mean that the claimant must be led like a horse to water to a solicitor’s office and be ‘made’ to listen? Again, Dunbar and Midland Bank v. Kidwai

57Midland Bank v. Massey (1995), Banco Exterior Internacional v. Mann (1995) and Scottish Equitable Life v. Virdee (1998).

58Bank of Scotland v. Bennett (1998).

59TSB v. Camfield (1995).

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(1995) made it clear that, having received advice, the mortgagee is not tainted if the claimant then chose to ignore it. So why cannot a claimant legitimately choose to ignore the advice to seek advice! May the mortgagee avoid liability by relying on a solicitor’s certificate (a formal letter) that the claimant has been given advice – even if this is not true? Mann suggests that reliance may be placed on a solicitor’s certificate that independent advice has been given, even if this is not the case. Camfield suggests that the mortgagee may not avoid liability if, in fact, no proper advice has been given, even if the mortgagee was misled by a solicitor’s certificate into believing that it had been.

Clearly, this was an unsatisfactory state of affairs and it became apparent that O’Brien had failed in its attempt to clarify the law. In fact, there was a litigation industry and the result of O’Brien appeared to be that mortgagors merely had to raise the plea of undue influence to propel the mortgagee into a (usually forlorn) attempt to explain why undue influence had not in fact incurred.60 Indeed, after O’Brien there were still many cases going to the Court of Appeal, not all taking a consistent approach to the problem, and in consequence, there was considerable uncertainty among lenders and borrowers alike. It was thus no real surprise when the House of Lords reconsidered the issue in Royal Bank of Scotland v. Etridge (and seven other co-joined appeals). In that case, if any reminder was needed, Lord Bingham, leading the House, put the matter succinctly and his words bear repetition and need no elaboration:

The transactions which give rise to these appeals are commonplace but of great social and economic importance. It is important that a wife (or anyone in a like position) should not charge her interest in the matrimonial home to secure the borrowing of her husband (or anyone in a like position) without fully understanding the nature and effect of the proposed transaction and that the decision is hers, to agree or not to agree. It is important that lenders should feel able to advance money … on the security of the wife’s interest in the matrimonial home in reasonable confidence that, if appropriate procedures have been followed in obtaining the security, it will be enforceable if the need for enforcement arises. The law must afford both parties a measure of protection … The paramount need in this important field is that these minimum requirements should be clear, simple and practically operable.

This concern, echoed by Lord Nicholls in the leading judgment,61 led the House of Lords to lay down a set of procedures which, while not being cast

60One wonders how many of these O’Brien cases really involved undue influence or were rather the clever tactical deployment of the undue influence rules by mortgagors who saw the O’Brien defence as the way out of an onerous mortgage.

61Lord Nicholls noted that couples should not be restricted in using the matrimonial home to raise finance for small businesses or any other purposes and that ‘[t]hese businesses comprise about 95 per cent of all businesses in the country, responsible for nearly onethird of all employment. Finance raised by second mortgages on the principal’s home is a significant source of capital for the start-up of small businesses’.

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