Security for repayment of a loan
Mortgages are essentially a pledge or security for the repayment of a loan. Usually, the response of a mortgage lender would be to take possession of the mortgaged property when a borrower continuously defaults on the mortgage, with a view of realising its security. In this case, the issue that arises is whether the mortgagee, Reading Bank is allowed to repossess the mortgagors' (Margaret and Jack Sanning) property. To solve that problem, the rights and responsibilities of Reading Bank are focused in this situation. However, we would first discuss about Margaret and Jack's rights in brief.
Rights Of The Mortgagor
The equity of redemption is represented by a bundle of rights in land which are subject to the mortgage, namely the right to redeem the mortgage, the right to be protected against unconscionable terms imposed by the mortgagee, and the right to be free from undue influence. Only the latter right seems to be relevant in this case. In essence, undue influence is any act of persuasion or influence that overcomes the judgment and free will of another. In this case, presumed undue influence arises because of the relationship between the person who is alleged to have exercised undue influence and mortgagor is one of trust and confidence, which makes it likely for influence to have been exerted. In order for the burden of proof to shift from the bank to the husband, there must be ‘trust and confidence reposed in the husband', and the ‘transaction is not readily explicable by the parties' relationship'. In Turkey v Awadh, although a relationship of trust and confidence existed, there was sufficient consideration and the transaction proved beneficial to the claimant and thus there was no presumed undue influence. Besides, if the relationship did not lead to a transaction that is manifestly disadvantageous to the claimant, there is no presumption of undue influence. This presumption is capable of being rebutted by provision of independent legal advice. As Margaret and Jack are joint owners of the property, he would require her consent to provide adequate security to Reading Bank. By constantly persuading her, Margaret had succumbed to Jack's wishes and had signed the papers without reading them. In other words, there was no actual consent to the mortgage. If it is successfully proven that there was undue influence, the mortgage may be struck down as the mortgagor should not be held to a transaction where there was exercise of power and influence over the mortgagor.
Mortgagee's (Reading Bank) Rights
There are three primary rights of a mortgagee in any case where the mortgagor fails to repay him. Firstly, Reading Bank may opt to sue Jack and Margaret on personal covenant to repay the mortgage. The couple has a contractual obligation to pay Reading Bank the capital sum borrowed together with the accrued interest at a certain date. As set forth in Alliance & Leicester plc v Slayford, if the mortgagor fails to repay, the mortgagee may satisfy his debts by execution against his property. This brings us to the right of repossession by the mortgagee. At common law, the mortgagee has an absolute right to acquire possession of the property immediately once the mortgage is created. This is said to be an inherent right which arises from the nature of the legal mortgage itself, even where no default has taken place. This is enunciated by Four Maids Ltd v Dudley Marshall Properties Ltd where Harman J said that this right crystallizes “before the ink is dry on the paper” , irrespective of any fault on the part of the mortgagor. However, in this case, Jack and Margaret do actually owe Reading Bank of some arrears. In most cases, the mortgagee would opt for possession to effect the power of sale, as it is easier to sell a property when it is vacant. If the property is a dwelling-house, as in this question, the mortgagee's right to possession may be restricted by section 36 Administration of Justice Act 1970 (AJA 1970) and section 8 Administration of Justice Act 1973 (AJA 1973). As the term has clearly been breached, Reading Bank as the mortgagee may undoubtedly, in theory, claim possession of the property immediately. Normally, a notice is issued to advise the mortgagor that they are in default of the loan, and would be given a specified date to rectify the situation. In the present scenario, the Bank did write to Jack and Margaret of their intention. However, they should obtain a court order for possession so as not to be in breach of the section 6(1) Criminal Act 1977 which prevents the use of threatening behaviour or force while property is currently occupied. If it was a peaceable entry, the mortgagee is allowed to take possession of the mortgaged property without a court order. As it would seem that Jack and Margaret are currently in occupation of the property, it is advisable for Reading Bank to proceed in this manner as it is one of the ways to avoid protection available to the mortgagors when an order for possession is sought in court.
However, there are a few ways where the mortgagor is granted relief. In equity, courts have inherent jurisdiction to restrain possession where there is no justifiable reason. The courts in Albany Home Loans Ltd v Massey saw no benefit in ejecting a husband from a property which was jointly owned with his wife, where the wife had a valid possible defence of undue influence, under the principle in Barclays Bank v O'Brien. Therefore, Margaret who may claim that she was unduly influenced would apply to court to resist possession. Besides that, Jack and Margaret may apply for relief under statute for dwelling houses under s36(2) AJA 1970. This provision gives power to the courts to set aside the mortgagee's claim for possession in respect of a dwelling house, but is subject to whether the mortgagor is likely to be able to meet his commitments under the mortgage and pay off any sums due within reasonable time. Whether a property is considered as a ‘dwelling house' for purposes of s36 AJA 1970 is determined at the time the mortgagee brought an action for possession, and by discretion of the courts. This provision, however, gives the court power only to suspend an order for possession for ‘such period or periods as the court thinks reasonable'. Therefore, it must be for a specified time and cannot be an indefinite adjournment. There must be actual prospects of the mortgagor making a reasonable attempt to repay the accumulated arrears, such as refinancing the loan. Consequently, Margaret who has now ‘gone back to nursing' may argue that she would be able to meet future payments, however this argument is unlikely as the prospect of such repayment is merely speculative. As decided in First National Bank v Syed, it would be unreasonable to expect a mortgagee to accept instalments which the mortgagors can afford, but are too little to even reduce the accruing interest on their account.
As to the question of ‘reasonable period' in s36 AJA 1970, the courts have always considered a period of two to four years to be reasonable. In fact, Judge Parmiter in his article “Wrongly Dispossessed” referred to a Judicial Studies Board ‘recommendation' of two years, while other judges were thinking ‘in much longer terms'. In Cheltenham & Gloucester Building Society v Norgan, the security was valued at a sum £100,000 in excess of the debt, which provided adequate security. The property in this case is currently worth £500,000, which is equivalent to the mortgage loan. Therefore, even if the couple is not able to persuade the court to reschedule their repayments for a longer period, they may be able to persuade the court that it is possible for them to pay off the arrears by selling the land while in possession. In Target Home Loans Ltd v Clothier & Clothier, the courts used the power to suspend a possession order under the 1970 and 1973 Acts as there were good prospects of sale. They accepted that the mortgagor is likely to obtain a higher sale price than if the mortgagee repossessed and then sold the vacant property. Besides, Dixon commented that mortgagors in their pursuit of resisting possession may try s 91 Law of Property Act 1925 or plea to the courts that losing possession of their family home without court order amounts to a violation of right to life guaranteed by the European Court of Human Rights.
Lender's (Reading Bank) Responsibilities
In O'Brien, the courts came to a decision as to where the balance of the conflicting interests of the bank and the wife lies. There was a pressing need to protect the innocent wife from a transaction arisen out of undue influence, while the bank would also need to have reasonable confidence in the strength of security of the loan. Therefore, the House of Lords came to a solution as to the steps a bank should take to ensure that it is not deterred from any claim brought by the wife. It was established that the bank could be reasonably expected to inform the wife of the risks involved and to advise her to obtain independent legal advice.
The doctrine of constructive notice arises if the mortgagee has knowledge of facts or circumstances which puts him ‘on inquiry' about the risk of such undue influence, and he fails to take reasonable steps to satisfy himself that the consent of the other party in entering into the transaction had been properly obtained. The question pertaining in the O'Brien's case concerned the circumstances which will put a bank on inquiry when something is amiss. In the later case of Etridge, Lord Nicholls stated, “A bank is put on inquiry whenever a wife stands as surety for her husband's debts”. His Lordship was of the opinion that the minimum requirement is that the bank is aware of the husband/wife relationship. Furthermore, he suggested that ‘the only practical way forward' would be to take into account whether the relationship between the surety and the debtor is non-commercial. If so, ‘the creditor must always take reasonable steps to bring home to the individual guarantor the risks he is running by standing as surety.' If the loan is for both husband and wife jointly, the wife's claim would fail as the bank is not put on inquiry unless it was aware that the loan was solely for the husband's purposes, where there is no mutual benefit. However, it would seem that the bank would be put on inquiry even though Margaret was named as a director in Jack's company as ‘such cases cannot be equated with joint loans'. As such, Reading Bank would be deemed to have constructive notice if reasonable steps were not taken to satisfy themselves that the signature and agreement of the wife was property obtained.
While accepting that it may be sufficient for the protection of the bank's interest to receive confirmation that the surety or guarantor has been advised appropriately from the solicitor, Lord Clyde stated that in reality, the wife may have understood little about the transaction due to insufficient advice. Therefore, various requirements were laid down in order to assist the bank as to how the certification of solicitor should be obtained. It is noted that a private meeting by the bank with the wife is unnecessary and it is not a general practice of the banks to perform this arrangement. Hence, the bank may discharge its obligation to an independent legal advisor. She should be asked to nominate a solicitor, and he may act for her independently of her husband if she wishes. If there is already a solicitor acting for the couple, the bank should ask whether she would prefer to have a separate solicitor with regard to the confirmation needed by the bank. Nevertheless, where the solicitor is acting for both parties, he should advise the wife in her best interests. The responsibility is then onto the solicitor to advise her in a private meeting, while the husband is absent. Unless there is a direct response of agreement by the wife, the bank shall not proceed with the transaction. The bank must also inform the solicitor of any concerns they have over the genuineness of the wife's consent. This is to ensure that her consent to the transaction was based on free will. In addition, she should be told of the extent of her liabilities as surety, should she decide to proceed with the mortgage. However, it must be understood that the wife cannot be precluded from entering into a clearly financially unwise transaction if she wishes to do so. Moreover, if the bank is reluctant to assume the responsibility of explaining the financial affairs of a husband to the wife, they must provide the solicitor with the relevant information. For example, the information would usually include the purpose of the new proposed facility requested by the husband, the current amount of indebtedness, and the amount and terms of the new facility. A copy of his application of the mortgage must also be sent to the solicitor. If however, the husband wishes to keep the information strictly private and confidential, the bank cannot proceed with the application. Subsequently, the bank would need to seek a written confirmation from the solicitor that the nature and effect of the documents have been thoroughly explained to the wife.
It is crucial that the solicitor informs the wife of his purpose and role as to his involvement in this arrangement. If necessary, the bank will rely on his participation to ‘counter any suggestion that the wife was overborne by her husband or that she did not properly understand the implications of the transaction'. However, in the Etridge case, the House of Lords reconsidered the issue of the effectiveness of ‘independent legal advice'. Lord Nicholls illustrated his doubt stating, “Independent legal advice is a fiction. The system is a charade. In practise, it provides little or no protection for a wife who is under misapprehension about the risks involved... She may not even know the present state of her husband's indebtedness.” His Lordship did not think it unreasonable if the meeting with the wife would be undertaken by an independent legal advisor, but warned that the bank should be aware of the risk that the wife may not be properly advised. Therefore, if the bank is to rely on the solicitor's advice as protection, it is required to have direct contact with the wife confirming that the practical implications of the loan has been understood, and she would not be able to claim that she is not legally bound by the documents henceforth.
Since Reading Bank is put on inquiry and had not taken reasonable steps to satisfy themselves that Margaret had understood the nature and effect of the transaction she was entering into, they would have constructive notice of her consent procured by Jack's undue influence. However, assuming that Margaret cannot claim that she was unduly influenced, she may claim on the basis of misrepresentation instead. Misrepresentation, which occurs when a joint borrower persuades the other to sign the mortgage agreement and lies about the extent of the liability, acts as a vitiating factor in this situation would regard the mortgage voidable. As a result of misrepresentation made by Jack, she thought the mortgage was for £300,000 when in actual fact, it was for £500,000. Therefore, Reading Bank would be deemed to have constructive notice of the misrepresentation, and the mortgage would be rendered void.
Dixon, M. (2009) Modern Land Law, 6th ed., Oxon: Routledge Cavendish
Albany Home Loans Ltd v Massey  2 ALL ER 609
Alliance & Leicester plc v Slayford  EWCA Civ 257
Barclays Bank v O'Brien  4 All ER 417
Bristol & West v Dace Building Society (1998) unreported
Cheltenham and Gloucester Building Society v Norgan  1 All ER 449
CIBC Mortgages v Pitt  4 Alll ER 433
First National Bank plc v Achampong  1 FLR 18
First National Bank v Syed  2 All ER 250
Four Maids Ltd v Dudley Marshall Properties Ltd  2 All ER 35
Popowski v Popowski  All ER (D) 523
Realkredit Danmark v Brookfield House  All ER (D) 35
Re Lloyds Bank Ltd, Bomze v Bomze  1 Ch 289
Ropaigealach v Barclays Bank plc  1 QB 263
Royal Bank of Scotland v Etridge  4 All ER 449
Royal Bank of Scotland v Miller  EWCA CIV 344
Royal Trust of Canada v Markham  1 WLR 1411
Target Home Loans Ltd v Clothier & Clothier (1992) 25 HLR 48
Turkey v Awadh  EWCA Civ 382
Dixon M. (1999) ‘Sorry we've sold your home: Mortgagees and their personal rights' CLJ 58(2), 281-283
Judge Parmiter (1992) “Wrongly Dispossessed”, L.S.G., 89(16), 17-18
Administration of Justice Act 1970
Administration of Justice Act 1973
Criminal Act 1977
Law of Property Act 1925
Reading RG6 7BA.
4th February 2010
Mrs. Margaret Sanning
14 Sunshine Park
Wokingham RG41 3BR.
Dear Mrs Sanning,
Re: Summary of the discussions and advice in our face-to-face meeting.
Further to our meeting today, I am writing to confirm what was discussed.
In order for us to achieve better understanding, firstly I would have to inform you of the purpose of my involvement in this proposed transaction. I am involved because Reading Bank has discharged its obligation to a solicitor, for you to take independent legal advice. Should it become necessary, the bank will counter any suggestion or claim that you were influenced or misrepresented by your husband to sign the agreement, or that you did not fully comprehend the implications of this transaction.
Secondly, it is important to know the extent of your liabilities as a guarantor for this mortgage loan. Basically, this mortgage works as a security for the repayment of the loan that your husband requested, to raise £500,000 in order to promote his business. Attached are the documents Reading Bank has provided me that explains Mr Sanning's current financial status, which includes his current amount of indebtedness and the terms of this facility. The bank reserves the right to increase the amount of the facility or change its terms without your reference.
The risks and consequences of this agreement ought to be understood. Should you and your husband be unable to repay the mortgage with interest, you could lose your family home. The bank would seek possession of your property. Furthermore, if this is your only substantial asset, you could be made bankrupt. Repayment of the mortgage would be made out of any other assets if Mr Sanning's business fails.
However, you have told me that this property is your only security and would be the children's inheritance. Therefore, I would advise you against this agreement as it is clearly not in your best interests. For six years, Mr Sanning's business had not prospered and this would mean that you are financially unstable at the moment. It would be risky for him to use your joint property as security, because it is impossible to know whether many Americans would come into Britain for holidays. As I have said earlier, you may very well lose your home and would be declared bankrupt should Mr Sanning's business be unsuccessful.
However, it should be noted that this is entirely your choice and you cannot be prevented to go on with the agreement even if it is not to your financial advantage. If you wish to proceed, I will confirm with the bank that the nature and practical implications of the documents have been thoroughly explained to you. If not, it is possible for me to negotiate the terms of the transaction with Reading Bank to your liking. For example, if you wish to change the order in which the various securities or assets will be called upon should Mr Sanning's business fail, or if you would like to reduce the limit of your liabilities. I would not carry on with the confirmation without obtaining your consent first.