Seminar Notes 07.06.06 - Keith Knight

If the mortgagee is not a party to the fraud, and was not otherwise put on notice by suspicious circumstances, it will get good title on completion as a purchaser for value without notice

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Undue Influence

Types

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Actual undue influence – overt acts of improper pressure or coercion

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Presumed undue influence – arises from the relationship between the parties where one party takes an advantage of a degree of ascendancy over the other and the transaction calls for an explanation.

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Test – has the complainant reposed trust and confidence in another to allow that other to take an unfair advantage*

*note: This is not a comprehensive test. It is simply a test of vulnerability.

Pre-Etridge

Royal Bank of Scotland v Etridge (No.2) [2002] 2 AC 773 [2001] UKHL 44

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In respect of pre-Etridge (pre-11 October 2001) transactions if a mortgagee is on notice of the potential for undue influence (i.e. a wife acting as surety for her husband):

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The onus is on the mortgagee to take reasonable steps to ensure that the consent of the surety has been properly obtained.

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the mortgagee discharges its obligation if a solicitor acting for the wife gave the lender confirmation to the effect that he had brought home to the surety ‘in a meaningful way the risks she was running by standing as surety’.

Only if it discharges these obligations will the mortgagee be able to enforce its security.

Principles Post-Etridge

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The ambition of Etridge is to ensure ‘the fiction of independent advice and consent should be replaced by true independent advice and real consent’.

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The mortgagee is put on inquiry* whenever the surety is non-commercial and is obliged to take reasonable steps to satisfy itself that the surety understands and freely enters into the transaction.

*note: That is of undue influence

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Once on inquiry the mortgagee must take steps to ensure that the surety gets independent advice either from:-

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the mortgagee* or

*note: Insist that the wife attends a private meeting with the representative of the mortgagee where an explanation of the extent of her liability and of the risks involved is given and she is urged (or in exceptional circumstances required) to take independent legal advice

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by directly requiring the surety to seek independent advice from a solicitor.

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The mortgagee can rely on confirmation that a solicitor has advised independently on the effect of the transaction

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*NOT sufficient simply for a solicitor to be involved – the solicitor must have been instructed or confirm that he has advised on effect of the transaction

*note: National Westminster Bank v Amin [2002] FLR 735

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The mortgagee must ensure that it has delivered sufficient information to allow the solicitors to deliver appropriate advice. If it fails, it will be unprotected.

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The mortgagee is not concerned with whether the advice is correct, unless it has actual notice of the defective advice.

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Solicitor must act for the surety BUT need not be totally independent. What is necessary is that the advice is independent.

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These steps are intended to minimise the risk NOT to eliminate the risk.

Obligations of Solicitors (Undue Influence)

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To explain nature and effect of the transactions comprised in the documents to be executed using the information provided by the mortgagee.

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IT IS NOT the duty of the solicitor to satisfy himself that the surety is free from improper influence or to consider whether the transaction is one the surety could sensibly be asked to enter.

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While a solicitor may advise both the debtor and the surety, he must give independent advice and he assumes a duty to her in law and professionally. Accordingly, the solicitor is obliged to consider carefully whether there is a conflict of interest and act accordingly.

Checklist for solicitors (undue influence)

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Must advise the surety at a face-to-face meeting in the absence of the borrower.

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Must ensure, before he gives any advice, that he has got full financial disclosure from the mortgagee of the borrower's position. Solicitors should NOT advise until the mortgagee has delivered to them in writing all the requisite information.

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Must first explain to the surety the purpose for which he has become involved and that, should it ever become necessary, the mortgagee will rely upon his involvement to counter any argument or suggestion that the she was overborne by the borrower or that she did not properly understand the implications of the transaction*. However, the solicitor should confirm that the surety is his principal.

*note: The obligations owed by the solicitor to the mortgagee are largely administrative

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If the surety instructs him to continue, the content of the advice given by the solicitor will depend upon the circumstances of the case but, typically, it should cover the following:

(1)

an explanation of the nature of the documents and the practical consequences these will have for the surety if she signs them (i.e. she could lose her home or be made bankrupt – the worst case scenario).

(2)

he should point out the seriousness of the risks involved; she should be informed of:

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the purpose of the new facility

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the amount and the principal terms of the facility

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the fact that the mortgagee may change the terms of the facility or grant a new facility without reference to her

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the extent of her liability under the security

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the duration of the security

(3)

the solicitor should discuss the surety's own financial means with her, including her understanding of the value of the property being charged.

(4)

he should discuss with her whether the borrower has other assets out of which debts could be paid if his business fails.

(5)

he should explain clearly that she has a choice and the decision is hers alone. This will call for some discussion of the present financial position including the amount of the borrower's indebtedness and the amount of his current overdraft facility.

(6)

he should check whether the surety wishes to proceed and if so ask whether she is content for the solicitor to write to the mortgagee confirming that he has explained to her the nature of the documents and the practical implications that they may have for her or whether for instance she would wish him to seek to negotiate better the terms with the mortgagee (or such things as the order in which securities are called in or a specific or lower overall level of liability in the surety).

(7)

no confirmation should be sent to the mortgagee without the surety's express instructions.

Tips

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Only advise when you have full details of the transaction from the mortgagee

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Seek to discover what understanding the surety has of the transaction

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Keep detailed attendance notes of:

Information received.

Advice given

not whether or not surety should enter into the transaction, but on the effect of the transaction

particularise when, where and who present.

Reaction to advice.

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Action on a Mortgage Deed

The Limitation Act 1980 Chapter 58

Why is this issue important?

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Between 1990 to 1994 there were about 300,000 mortgage repossessions*

*note: At one stage 1 in every 250 borrowers faced repossession

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Many of those repossessions involved negative equity properties which resulted in shortfalls

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Recently banks have been seeking to recover these shortfalls

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Borrowers who had thought they had put their financial troubles behind them face substantial claims and the best, and often the only defence opened to them, is that the claim is statute barred

Limitation – relevant period

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Section 20 of the Limitation Act 1980 provides as follows:-

"(1)

No action shall be brought to recover –

(a)

any principal sum of money secured by a mortgage or other charge on property (whether real or personal); or

(b)

proceeds of the sale of land;

after the expiration of twelve years from the date on which the right to receive the money accrued.

..........

(5)

Subject to subsections (6) and (7) below, no action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of sale of land, or to recover damages in respect of such arrears shall be brought after the expiration of six years from the date on which the interest became due.”

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The relevant period in mortgage shortfall cases has been put beyond doubt by the House of Lords (Bristol and West plc v Bartlett [2003] 1 WLR 284 CA approved by the House of Lords in West Bromwich Building Society v Wilkinson and another [2005] UKHL 44).

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Section 20 applies despite the fact that the property has been sold and that the debt is no longer secured.

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In respect of the principal sum the mortgagee has 12 years from the date upon which the right to receive money accrued

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In respect of interest the mortgagee has 6 years from the date when interest fell due

When does time start to run?

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Time begins to run from the date of the default, NOT the date when the shortfall was ascertained

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Check the date when the mortgagor first failed to make payment.

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Check the mortgage deed to ensure that one failure to pay amounts to a default (as opposed to two or more payments).

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Remember that neither the realisation of the property or of any secondary security amounts to a payment under the mortgage.

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Charging Orders - Limitation

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In Kevin Leonard Doodes v (1) Peter Gotham (2) Cheryl Perry [2005] EWHC 2576 (Ch), Lindsay J held that the only time at which the chargee's "right to receive the money" could accrue was the time at which the charge was made, as

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There was no obligation on a chargor to pay anything unless and until the charge was enforced by the court by way of an order for sale and for payment of proceeds.

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A chargee's role was entirely passive.

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In coming to his conclusion Lindsay J followed that well known case (not) of Hornsey Local Board v Monarch Investment Building Society (1890) LR 24 QBD 1.

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Consequently, a charging order MUST be enforced within 12 years of the making of the charging order.

Extension of Limitation period

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The date of the accrual of a claim may be extended by an ‘acknowledgement’ or part-payment.

Acknowledgment

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The LA deals with acknowledgments in sections 29-31.

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For an acknowledgment to be effective it must be:-

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in writing and signed by the person making it (section 30 of the LA), and

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must contain a sufficiently clear admission of the title or the claim being acknowledged; see: Kamouh v Associated Electrical Industries International Limited [1980] QB 199.

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The document must be construed as a whole; David Ross v Francis McGrath [2004] EWCA Civ 1054 at paragraph 19.

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The representative of the borrower must be extremely careful in responding to letters before action if time has not yet expired.

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Asking for time to pay or querying the amount outstanding may amount to an acknowledgment

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Less care needs to be taken after the claim is issued for the debt cannot be revived by acknowledgement after expiry of the limitation period*

*note: Limitation Act 1980, section 29(7).

Without prejudice correspondence

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Without prejudice documents are inadmissible in court and consequently nothing contained in those documents can give rise to an acknowledgement see: Bradford & Bingley plc v Rashid [2005] EWCA Civ 1080.

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Remember the document must be a genuine attempt to settle a matter for it to have the ‘without prejudice’ cloak.

Part payment

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Part-payment will only have the effect of re-starting the clock if it amounts to an admission that the balance of the debt remains due.

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The debtor must intend to acknowledge the claim when making payment.

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It is the belief and intention of the parties that is relevant.

Appropriation

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This will be important where the claim is brought after six years from the accrual of the claim as the interest on the original shortfall will be statute barred. The issue will then be whether the proceeds of sale should be attributed to capital or interest.

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The issue will usually be dealt with in the mortgage deed.

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Unless the mortgagor makes an express appropriation, or an appropriation can be implied from the mortgage deed (e.g. where it is a repayment mortgage) the mortgagee will be free to appropriate any payments as it sees fit (and at any time); see: West Bromwich Building Society v Crammer [2002] EWHC 2618 (Ch) Neuberger J.

Interest – under the powers of the Court

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If a claim is made for interest under section 69 of the County Courts Act 1984, or section 35A of the Supreme Courts Act 1981 (to which no limitation period applies)

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The court has a discretion both as to the period and the rate

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The Courts should have in mind the six year period under section 20(5) of the LA, and

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The ability of mortgagees to borrow money at a rate close to the Bank of England base rate.

Costs in Mortgage possession proceedings

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The Courts forget that they have the power to make an order for costs

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An inherent discretion under section 51 of the Supreme Court Act 1981 and as a court of equity (CPR 48PD50.3(1) and (3))

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The court can construe the mortgage deed to determine whether or not the contract permits recovery (CPR 48PD50.4(c))

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The court can order an account to be taken under CPR 25 or sections 70 and 71 of the Solicitors Act 1974 with the court subsequently assessing costs (CPR 48PD50.4(1) and (3))

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Where there is a contractual right to costs the court should ordinarily exercise its discretion so as to reflect that contractual right (CPR 48PD50.3(2))

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In extremis the mortgagor may resort to seek to declare a ‘cost recovery clause’ invalid under the Unfair Terms in Consumer Contracts Regulations 1999.