Legal charge.

The charge by deed expressed by legal mortgage is useful for mortgaging leasehold property where the mortgagor has no right to sub-let. The system operates to create a legal interest in favour of the mortgagee and gives the mortgagee identical protection. The mortgagor can create second and subsequent legal charges.

Equitable mortgages

Equitable mortgages can be either first or second and subsequent mortgages. There are three ways of creating an equitable mortgage.

Memorandum plus deposit of title deeds/land certificate.

The memorandum can be in writing or by deed which will affect the mortgagee’s remedies, and will generally contain an undertaking to create a legal mortgage. It is not possible to create an equitable mortgage of land by mere deposit.

Memorandum unsupported by deposit of title deeds/land certificate.

The memorandum can be in writing or by deed which will affect the mortgagee’s remedies.

Agreement to create a legal mortgage.

Where there is a legally enforceable agreement to create a legal mortgage, the agreement creates an immediately binding equitable mortgage. The court may order specific performance of the agreement and convert it to a legal mortgage.

Mortgages and reality of consent

A mortgage over land may be set aside where it has been obtained by misrepresentation or undue influence. In Barclays Bank plc v. O’Brien [1994] a mortgage was set aside as against a wife who had been induced to stand as surety for her husband’s debts by a misrepresentation of which the mortgagee had notice. And in TSB Bank plc v. Camfield (1994) the wife had been induced to stand surety by her husband’s innocent misrepresentation that their maximum liability for the business loan was limited to £15 000. The wife claimed the right to have the charge set aside in its entirety whereas the bank claimed that it was a valid security for £15 000. The Court of Appeal decided that the wife’s right to set aside the transaction was ‘an all or nothing’ process.

In CIBC Mortgages plc v. Pitt [1993] the bank advanced money on the security of the matrimonial home which was stated as being for the purpose of acquiring a holiday home but was in fact to pay the husband’s debts. The wife claimed that she had signed the documents reluctantly and sought to set the charge aside on the ground of her husband’s undue influence over her. The House of Lords held that for the wife to set aside the charge, she had to show that the bank had actual or constructive notice of the undue influence and that as far as the bank was aware this was a normal advance for the parties’ joint benefit. In Banco-Exterior v. Mann (1994), the husband wished to charge the matrimonial home as security for his company. The bank sent documents to the company’s solicitor, including a declaration relating to the effect of the charge to be signed by the wife in the solicitor’s presence. The solicitor explained the declaration to the wife who said she had little choice but to sign and the solicitor certified that the nature and effect of the charge had been explained. When the company went into liquidation and the bank sought to enforce, the judge declared that the presumption of undue influence had not been rebutted and that the bank had constructive notice of the undue influence. On appeal, the Court of Appeal held that bank had taken such steps as were reasonable to avoid being fixed with constructive notice and granted the appeal. Hobhouse LJ dissented, saying that the bank had taken no steps to ensure that the wife was independently advised. The decision was followed in Bank of Baroda v. Rayarel (1995), where a wife, her husband and son executed a legal charge over their home to secure the debts of the husband and son’s company. The wife received legal advice before signing and signed a certificate to that effect. The Court of Appeal upheld the High Court’s decision that the charge was valid.