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Modern Land Law

in stone, would bring certainty and stability to this sector of the mortgage market. Sometimes known as ‘the Etridge Protocol’ these steps (or a tailored version to same effect) are now followed as a matter of routine by most institutional lenders.

First, it is necessary to prove actual or presumed undue influence by the ‘wrongdoer’ over the claimant. This has been discussed above and the impact of Etridge on the law of presumed undue influence should be noted here. In particular, the House of Lords explain the role of ‘manifest disadvantage’ and how the mortgagee can dispel the presumption of undue influence by producing an explanation for the impugned transaction.

Second, we must determine whether the mortgagee is put on inquiry as to the existence of the undue influence: in other words, assuming no agency,62 does the lender have notice of the undue influence so as to put its mortgage at risk? In this connection, the first point is that the House makes it clear that ‘notice’ does not mean that the lender is in some way being bound by a proprietary right of the claimant. This is not property law notice of some equitable interest. Rather, it is a loose description of the idea that the lender can be affected by undue influence in certain circumstances and that, if so affected, it must take steps to prevent its mortgage being tainted.63 More importantly perhaps, the House then adopts a robust and blunt approach to the question of when such ‘notice’ exists. Recognising that there are difficulties, and that its approach is ‘broad brush’ rather than precisely analytical, the solution is that a lender will always be put on inquiry if a person is standing surety for another’s debts,64 providing that such surety is not offered as a commercial service.65 This is both clear and an extension of the pre-existing law, for now there is always ‘notice’ when one person is a non-commercial surety for another and this has the great merit of ensuring that lenders do not have to probe the relationship of the parties in order to assess whether they are on notice. Thus, it is not the relationship between the parties that triggers the ‘notice’, but rather the very nature of the transaction irrespective of the relationship. The principle is not relationship specific and may apply equally to married and unmarried couples, same sex couples or persons in no emotional relationship at all. If, however, the loan is made to the parties jointly for their joint purposes (i.e. the claimant is not merely guaranteeing the wrongdoer’s borrowing but is also taking a benefit from the mortgage66) then the

62As noted above, it will be rare for a mortgagee to have formally appointed one borrower to act as its agent in securing the consent of the other.

63This confirms Barclays Bank v. Boulter.

64That is, mortgaging their own property, or share of property, to guarantee a loan which benefits the other party.

65For example, a bank might stand as guarantor for a fee.

66For example, the mortgage is to fund a company jointly owned by the parties.

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lender is not put on inquiry unless it is aware (or possibly ‘ought to be aware’) that in reality the money is for the wrongdoer’s purposes alone. An example is provided by Chater v. Mortgage Agency Services (2003), where a joint loan to mother and son did not, on the facts, put the lender on notice of the undue influence that had occurred.

Third, there remains the question of what the mortgagee must do in order to avoid being tainted by the undue influence of which it has notice, for failure to take appropriate steps could result in the loss of its security. Indeed, it is this aspect of the Etridge decision that is of the greatest practical importance. Lenders are not in the business of taking chances so, undue influence or not, they will adjust their lending practices just in case there is the possibility of the transaction being attacked. In fact, it seems that the judgment in Etridge is not principally concerned with preventing the occurrence of undue influence over a claimant at all, but rather identifying what a lender must do to avoid being tainted by it if such influence occurs. Fortunately (although it is not accidental) the steps which a lender must now take are such that the chances of undue influence occurring will be much reduced, but it is important to appreciate that the primary purpose of these steps is protect the bank, not to stop the undue influence. Thus, for past cases – that is, mortgages executed prior to the Etridge decision – the lender must take steps to ensure that the wife understands the risk she is running and should advise her to seek independent advice. For future cases – that is, mortgages executed post- Etridge – the lender must insist that the wife attend a private meeting with the lender at which she is told of the extent of her liability, warned of the risk she is running and urged to take independent legal advice.

How this will operate in practice for ‘past cases’ is still open-ended, although it does seem that it is not the lender’s responsibility to see that no undue influence has been exercised, nor necessary that the lender seeks confirmation from a solicitor that no such influence exists (as opposed to confirmation that advice has been given). This is because the solicitor will be acting for the claimant and the lender can expect the solicitor to act properly for his or her client. Consequently, if a solicitor gives inadequate advice, the lender is not affected, provided the lender does not know (or ought to have known) that no advice was received or that it was inadequate. After all, the claimant can sue the solicitor. In reality then, the past practice of relying on solicitor’s certificates will suffice, unless the lender knows or ought to have known that the claimant was not thereby properly warned of the nature of the transaction or of the risks it posed.67 In this sense, National Westminster Bank v. Breeds (2001) is rightly decided as the lender should have known that the advice given to the claimant was defective despite receiving a certificate from the

67 Bank of Scotland v. Hill (2002)

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advising solicitor. Likewise, in National Westminster Bank v. Amin (2002), a decision on a pre-Etridge claim, the House of Lords sent a case back for retrial on the basis that the bank might have known that the solicitor had not given appropriate advice (e.g. the bank knew that the mortgagors could not speak English and the solicitor could not speak Urdu) and that it was not clear in any event whether the solicitor was acting for the mortgagors or for the bank when giving advice.

For future transactions – that is, those taking place after Etridge – the practical steps indicated by the House in Etridge will give the lender the security they have bargained for and will essentially reduce the risk of a mortgage being set aside for undue influence to a minority of cases – cases which will only arise because of the lender’s failure to follow the simple guidelines. First, the lender should check directly with the potentially vulnerable party for the name of the solicitor who is acting for her or him, advising that it will seek written confirmation that advice about the proposed transaction has been given. The potentially vulnerable party should be told that this is because the lender does not intend that he or she should be able to dispute the mortgage later. The potentially vulnerable party should also be told that she may (but not must) use a different solicitor from that which her partner uses. The lender must await a response from the potentially vulnerable party before it proceeds. Second, the lender should provide the advising solicitor with all the necessary financial information required for the solicitor to give proper advice; for example, level of total indebtedness of the husband and a copy of the application form. This usually will require the consent of the other proposed mortgagor, failing which the mortgage is unlikely to go ahead and of itself will give a pause for thought as to the wisdom of the mortgage. Third, the lender must inform the solicitor of any concerns it has over the genuineness of the potentially vulnerable party’s consent or understanding and, of course, this will vary from case to case and often be non-existent. Fourth, the lender should obtain written confirmation from the solicitor that all these steps have been complied with and that appropriate advice has been given. If, after taking such steps, the lender is provided with a written certificate from the advising solicitor, the lender will be protected against a claim of undue influence even if it transpires that such influence did in fact occur. Consequently, the lender’s mortgage will be secure unless it knew, or ought to have known, of some defect in the advice or some material untruth in the solicitor’s certificate of compliance.68 In this sense, the purpose of the Etridge guidelines is to provide a firm base for institutional lending which might also prevent undue influence being practised on the unwary.69 It is, however, the

68As in National Westminster Bank v. Amin.

69The risk of litigation, therefore, passes to the advising solicitor.

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first of these results that is the avowed aim of the Etridge protocol. Protection of the potential ‘victim’ is perhaps more than a happy coincidence, but this benefit is more because the interests of the lender and the potential victim coincide rather than an a priori desire to protect the financial naive.

Such evidence as does exist – for example, the reduction in claims of undue influence in post Etridge cases seems to indicate that the House of Lord’s decision has provided the certainty that was so desired.70 Undoubtedly, it has forced a change in lending practices, but this has been absorbed into the administrative practices of the competent lending institutions and does not appear (so far as one can tell) to have increased lending charges.71 Of course, some lenders will fail to observe the new procedures and they are likely to get short shrift from the courts. After all, it is not that difficult to understand what must be done. As for the law, we now know that the ‘presumption’ of undue influence is really a presumption that reverses the burden of proof and is not a presumption that such influence really exists. Hence it can be met with an explanation of why the transaction is undue influence free.72 We also know that ‘manifest disadvantage’ in the weak sense of a transaction which on its face needs explaining is still an element in ‘presumed’ cases because it (merely) helps prove the presumption to reverse the burden of proof; that the class 2A and 2B dichotomy in presumed cases is not helpful; that ‘notice’ does not really mean property law notice; that a lender will always be on inquiry (‘have notice’) in non-commercial surety cases; that in other cases, the lender will be on inquiry only in exceptional cases because it is entitled to assume that a person knows what he or she is doing when the loan is for their own benefit; that for past cases, reliance on a solicitor’s certificate will normally protect a lender; that for future cases, the steps a lender must take are greater than before, but not onerous and may both protect the lender and prevent any undue influence from arising in the first place; and finally, that a lender can never be protected when it knows, or ought to know, that the claimant has not received the guidance and counsel he or she needed to judge the appropriateness of the transaction. Of course, we also know that in reality Etridge has shifted the risk. The risk of being sued by a claimant because of undue influence can now be deflected by a bank onto the shoulders of the solicitor that advises the potentially vulnerable party. Failure to give advice,

70Recent cases where undue influence has been established have not involved mortgagees, but other transactions set aside for undue influence. In these cases, the Etridge rules were applied, so demonstrating the importance of this case beyond the sphere of mortgages. But see Abbey National plc v. Stringer (2006) where the finding of undue influence in a mortgage situation was catastrophic for the lender.

71However, it may well have increased overall costs to the borrower because the solicitor’s mandatory advice will not be free and someone has to pay for the increased risk of solicitor’s liability.

72For example, Turkey v. Awadh (2005).

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or the giving of negligent advice, will no longer result in the mortgagee losing its security. However, it may well result in the solicitor being sued by the victim.

Finally, and for the sake of those cases where despite Etridge, undue influence can be established,73 we must consider the effect of a successful plea of undue influence on the mortgagee. For example, is the mortgagee’s entire security voided completely (Camfield, Pinnington), or is it voided only to the extent that the undue influence was operative, as where the claimant genuinely agreed to a mortgage of £X, but in fact signed a mortgage for £X + Y. In Barclays Bank v. Caplan (1998), the court held that if a claimant could establish that only part of the mortgage transaction was void for undue influence, that void part could be severed, with the balance of the mortgage remaining valid. This might arise, for example, where the original mortgage was validly consented to, but a ‘top-up’ sum was secured from the mortgagee only after undue influence. It is submitted that this is, indeed, the correct approach. The purpose of the undue influence rule is to ensure that mortgagors enter mortgages freely; it is not to give them a windfall by voiding an entire mortgage if only part is tainted by undue influence.74 Another way of apparently achieving the same result is to void the entire mortgage on condition that the claimant gives credit to the mortgagee (i.e. pay them) for any sums advanced that resulted in a benefit to that claimant (Byrne). However, although this seems attractive, in fact there is no necessary correlation between the extent of the undue influence and the benefit received by the victim. To put it differently, should the victim be made to account for a benefit they may not have wanted, and which was given in a transaction already held to have been procured by undue influence? Seen in this light, whether the claimant secured a benefit or not is not the real issue. A better view might be that either the entire mortgage is void for undue influence, or it remains valid in part to the extent of the borrowing to which the claimant really did consent.75

10.9.5 Unlawful credit bargains

Mortgages are contracts for the provision of credit. As such, they may be subject to statutory controls similarly imposed on other types of credit relationships: controls that are designed to protect an impecunious borrower from the unfair practices of unscrupulous lenders. Thus a mortgage may fall within the provisions

73Which, as noted above, may well involve transactions other than mortgages, because mortgagees learn quickly.

74In the same vein, if an initial mortgage is void for undue influence, a replacement mortgage which paid off that mortgage is also void, Yorkshire Bank v. Tinsley (2004).

75This is a property-based approach. A restitutionary analysis would require the victim to account for benefits received, save to the extent that she could claim to have changed her position in reliance on such receipt.

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of the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006) as a regulated credit agreement. However, it is unusual for a mortgage to be regulated in this fashion, not least because this part of the Consumer Credit Act 1974 (as amended) does not apply to mortgages offered by building societies, local authorities and institutions regulated by the Banking Act 1987.76 These are ‘exempt agreements’ and the practical effect of these provisions is that most normal ‘land purchase’ mortgages will not be caught by the main provisions of the Consumer Credit Act 1974 (as amended). For those mortgages caught by the Act – such as second mortgages securing loans for other purposes – they may not be enforced without a court order.

In addition to the above protection, under the Consumer Credit Act 1974, it was possible for any mortgage to be set aside, or its terms adjusted, if it was found to be an ‘extortionate credit bargain’ within the meaning of sections 137–140 of the Consumer Credit Act 1974. This power was used sparingly and the courts were reluctant to interfere with the bargain struck by the parties except in the clearest cases of abuse of a dominant position by a lender,

A Ketley Ltd v. Scott (1980).77 Thus, in Paragon Finance v. Nash (2002), the court held that whether a mortgage was ‘extortionate’ was to be judged by reference to the ‘total charge for credit’ as determined at the start of the mortgage under its original terms and so a mortgage could not become ‘extortionate’ merely because at some time after its commencement, the lender legitimately varied the interest rate so that the charge for credit became greater. However, by virtue of the Consumer Credit Act 2006, since April 2008, the ‘extortionate credit bargain’ test has been replaced with a test of whether there is an ‘unfair relationship’ between creditor and debtor.78 This test now applies to all mortgages (including mortgages already in existence), except a first legal mortgage over residential land that is regulated under the Financial Services and Markets Act 2000. (Of course, many mortgages are exactly this: see below.)79 The 2006 Act provides guidance as to what is ‘unfair’80and the court has broad powers in relation to repayment, redemption, variation of terms and may set aside the mortgage in whole or in part.

10.9.6 Restraint of trade

A mortgage that attempts to tie a mortgagor to a particular company or mortgagee may well fall foul of the contractual rules prohibiting contracts in restraint

76Note that there is now no upper limit on the amount of credit caught by these provisions. Section 2 of the CCA 2006 abolishes the £25,000 limit that applied previously.

77In this case, the borrowers had known exactly what they were doing and an annualised interest rate of 48 per cent was not extortionate.

78Consumer Credit Act (CCA) 2006 sections 19–22.

79See CCA 1974, section 16(6C).

80See CCA 1974, section 140A(1), inserted by CCA 2006.

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of trade. Typical examples include brewery mortgagees using the mortgage to tie the pub landlord to the brewery as sole supplier of beer, and oil company mortgagees using the mortgage to tie in the owner of a petrol station.81 However, once again, the unwillingness of the courts to interfere unduly with contractual relationships must be remembered, and in the same way that the courts have become more relaxed about collateral advantages, so these ‘solus’ agreements are less likely to be disturbed.

10.9.7 Financial Services and Markets Act 2000

Mortgages entered into on or after 31 October 2004 are likely to fall within the consumer protection regime of the Financial Services and Markets Act 2000 (FSMA). This umbrella statute, which seeks to regulate many aspects of financial services, requires providers of ‘regulated mortgage contracts’ to ensure that the ‘consumer’ is treated fairly and is not open to excessive or hidden charges. It is, essentially, an early warning system that is designed to alert the borrower as to the full extent of their liability in the worst possible case. The provision of mortgage business must thus confirm to the good practices of the FSMA, as detailed in the FSMA Handbook. It has led primarily to the adoption of pre-mortgage administrative practices by lenders whereby warnings about the nature and extent of liability follow a ritualised pattern, which in many cases is understood neither by person providing the advice (the employee of the lender) or the borrower to whom the advice is given. Whether this regulatory framework does indeed ensure that borrowers are treated fairly – or whether borrowers in need of finance simply carry on regardless – remains to be seen. Crucially, however, the FSMA does not interfere with the mortgagee’s extensive remedies should the mortgagor enter into the mortgage and then default.82

10.9.8 Powers of the mortgagor

As well as benefiting from the protective mechanisms outlined above, the mortgagor also has certain powers and rights under the mortgage or by statute. In outline, these are: the power to redeem the mortgage, which may be enforced by action in the courts (section 91 of the LPA 1925); the power to lease the property for certain limited purposes and the power to accept surrenders of existing leases (section 99 of the LPA 1925), but not if this is contrary

81See, for example, Esso Petroleum v. Harpers Garage (1968).

82The FSMA appears to regard mortgages as consumer items, like loaves of bread that carry a list of ingredients and suitable health warnings. Most consumers of bread do not read the labels, and this author doubts whether most ‘consumers’ of mortgages take any notice of the formalised warnings adopted by mortgagees because of the FSMA.

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to the terms of the mortgage;83 the power to claim possession where this is not claimed by the mortgagee (section 98 of the LPA 1925); and the ability to apply for an order for sale of the property under section 91 of the LPA 1925, even in the teeth of objections by the mortgagee. On this last point, the court’s discretion to order sale on an application by the mortgagor is now thought to comprise a power to order sale even if the proceeds of sale will not pay off the mortgage debt – Palk v. Mortgage Services (1993)84 – and possibly even if the mortgagee is seeking possession of the property because of the mortgagor’s inability to pay any sums due.85 Indeed, the right to ask the court for sale under section 91, and to have it granted against the wishes of the mortgagee, is particularly valuable to a mortgagor whose debt is increasing because of his inability to meet interest payments. Sale in such circumstances stops the debt increasing further, and the mortgagor remains liable only for outstanding sums. If this jurisdiction exists in the wide form advocated by Palk, it will be used sparingly because of the adverse effect on the mortgagee and the value of its security.86

10.10The rights of the mortgagee under a legal mortgage: remedies for default

A mortgage is as valuable to a mortgagee as it is to a mortgagor. Obviously, the main benefit is that a rate of interest can be charged for the money lent and an income is generated for the mortgagee on the security of what is, in all but the most severe economic conditions, an asset that is not going to depreciate in value. However, just as the property owner uses the mortgage to liquidate his assets, the mortgagee uses the mortgage to capitalise his income. As is apparent from all that has gone before, the essential characteristic of a mortgage is that it is security for money lent, and the ultimate goal of any mortgagee will be to recover payment of the principal debt, plus interest and related costs. As we shall see, this can be achieved in a number of ways, some of which spring from the nature of a mortgage as a contract, and some of which spring from the fact that the mortgagee has a proprietary interest in the land. Note, in this respect, that a mortgagee under a mortgage created by ‘a charge by deed expressed to be by way of legal mortgage’ – the only way now to create legal mortgages of registered estates – obtains the

83Leeds Permanent Building Society v. Famini (1998).

84See also Lloyds Bank v. Polonski.

85Palk, but see contrary to this view Cheltenham and Gloucester plc v. Krausz (1997) and Scottish & Newcastle v. Billy Row Working Men’s Club (2000). See also, section 10.10.3 and State Bank of New South Wales v. A Carey Harrison III (2002).

86Cheltenham and Gloucester v. Pearn (1998).

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same powers and remedies as if the mortgage actually had involved the grant of a proprietary right to the mortgagee.87

The particular remedy employed by the mortgagee will depend on the precise nature of the default of the mortgagor and the particular requirements of the mortgagee. So, some remedies are more suitable for the recovery of unpaid interest, while others are more suitable for recovery of the entire loan and the termination of the mortgage, or even the termination of the mortgagor’s rights over the property. Moreover, whereas the mortgagee can never recover more than the principal debt plus interest and costs,88 it is clear that the mortgagee’s remedies are cumulative and the mortgagee may deploy them in combination or successively until the debt is repaid. Where one fails, another might be employed until all are exhausted or the mortgagee is successful.89

10.10.1 An action on the contract for recovery of the debt

It is in the very nature of a mortgage as a contract of loan between the parties that the mortgagee has an action on the mortgagor’s express contractual promise to repay the money owed. Such a contractual term forms part of every mortgage. In short, the mortgagor will promise to repay the sum due on a certain date plus accrued interest. This is the legal date of redemption (encapsulating the mortgagor’s legal right to redeem) and as soon as this date has passed, the mortgagee has a personal action on the contract for repayment of the sum owed, unless the mortgagee has also promised to defer the remedy pending the payment of instalments.90 If the mortgagor fails to repay (or fails to pay a due instalment), the mortgagee can have the personal judgment debt satisfied in the normal way, including execution against the property of the mortgagor or by making the mortgagor bankrupt: Alliance & Leicester v. Slayford (2001). It may seem surprising that the mortgagee has a remedy as soon as the legal date for redemption has passed, but this flows naturally from the mortgage as a contract, wherein each party has promised to fulfil certain obligations. Of course, in the normal course of events, the mortgagee will not sue for the money owed after such a short time, but will be happy to collect the outstanding interest and continuing repayments. However, an action on the contract always remains a possibility, and may be

87Sections 85(1) and 87 of the LPA 1925 and Regent Oil Co v. Gregory (1966). The assumption is that the mortgagee is treated as if they had been given a long lease by deed – importantly this ensures that the right of possession still exists.

88Or the secured property itself (by foreclosing) where its value is less than the entirety of the debt. Foreclosure is rare.

89For an exceptional example, see Alliance & Leicester v. Slayford.

90Wilkinson v. West Bromwich BS (2004). The date of default is usually the date on which the first instalment is missed as this is when the mortgagee’s right to receive the money accrues.

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used whenever the mortgagee wishes to recover the full amount of the debt, often in conjunction with other remedies. It is particularly useful if a sale of the mortgaged property fails to realise enough money to pay off the debt and the mortgagor has sufficient additional assets to meet their mortgage liability. Of course, being a personal remedy against the mortgagor (that is, not against the property), it may be valueless if the mortgagor is bankrupt.91 On the other hand, being an action in debt (and not for breach of contract per se), the mortgagee is under no duty to mitigate its loss, and, therefore, cannot be compelled to exercise any of its other remedies (Lloyds Bank v. Bryant (1996)). Moreover, it is clear that the mortgagee has 12 years from the date of default in which to sue the mortgagor for the principal sum owed under the mortgage, rather than the usual six years on a ‘normal’ contract.92 This is because the right arises under a ‘speciality’ (i.e. a deed) and so benefits from a longer limitation period than mere contractual debts.93 However, should the mortgagee fail to commence proceedings during this period, the debt will be unrecoverable (Wilkinson v. West Bromwich BS (2004)) although any acknowledgement of the debt due by the borrower during this time will restart the 12 year period (Bradford & Bingley plc v. Rashid (2006)). Although most lenders have voluntarily agreed (via the Council of Mortgage Lenders94) that they will not enforce a claim to the principal debt beyond six years, it remains a valuable weapon and allows a mortgagee to return to a defaulting mortgagor many years after the property has been sold if that sale did not pay off the entire debt. If money is owed, therefore, a mortgage does not end with the disposal of the mortgaged property unless the mortgagee forecloses on the mortgage and itself takes the land.95

10.10.2 The power of sale

Another remedy which is designed to recover the whole sum owed, and also thereby to terminate the mortgage if the loan is fully repaid, is the mortgagee’s power of sale of the mortgaged property. In most cases, a mortgage will contain an express power of sale, but if not, a power of sale will be implied into every mortgage made by deed by virtue of section 101(1)(i) of the LPA 1925, unless a contrary intention appears.96 This means that, subject to any express provision in the mortgage itself, a mortgagee will be able to

91In such a case, the lender would share pro rata in the bankrupt’s assets along with other unsecured creditors.

92The mortgagee has the normal six years to recover any unpaid interest.

93Sections 8, 20 of the Limitation Act 1980.

94The representative body to which most institutional lenders belong.

95See below. A foreclosure necessarily brings the mortgage to an end in its entirety and kills even the personal obligation to pay. Foreclosure is rare to the point of extinction.

96This is why it is good practice to execute equitable mortgages by deed, even though a deed is not required for their validity.

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