Legal charge — Undue influence — Wife executing charge over property in favour of appellant bank — Whether bank having constructive notice of undue influence by husband — Whether equitable charge to be imposed over husband’s half-share — Whether order for sale appropriate — Section 63 of Law of Property Act 1925 — Appeal allowed
The first and second respondents were a husband and wife who jointly owned their marital home in beneficial half-shares. In 1989, they executed a legal charge over the property, by way of a mortgage to the appellant bank, as security for a loan to raise money for the business of the third and fourth respondents. The loan was negotiated indirectly through a mortgage broker, but the charge bore the apparent signatures of all four respondents, and was executed in the presence of the respondents’ solicitor. The second respondent’s husband left her shortly afterwards.
The loan repayments fell into arrears, and the bank brought possession proceedings. The second respondent counterclaimed for a declaration that the charge was null and void on the ground that her execution of it had been procured by her husband’s undue influence. In response, the bank contended that even if the charge were ineffective to charge the whole of the interest in the property, it was none the less entitled, under section 63 of the Law of Property Act 1925, to an equitable charge over the first respondent’s half-share. It maintained that an order for sale should therefore be made. The judge found in favour of the second respondent and set aside the charge. The bank appealed.
Held: The appeal was allowed.
1. The judge had been right to set aside the legal charge. The bank had been put on inquiry by the second respondent’s offer to join in granting a legal charge to secure a loan to the third and fourth respondents. Accordingly, it should have taken reasonable steps to satisfy itself that her consent to the transaction had been properly obtained. Although it was a question of fact in each case as to whether such steps had been taken, it was not, in general, sufficient that the bank knew merely that the wife had a solicitor acting for her; that could not definitively ensure that the nature of the risks she was taking had been made clear to her. In the instant case, the judge had been correct to hold that the bank had not taken sufficient action to avoid having constructive notice of any undue influence or other misconduct concerned with the obtaining of the second respondent’s execution of the charge: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773 applied.
2. Although it could not be enforced against the second respondent, the charge had achieved two things by virtue of section 63(1) of the 1925 Act: (i) it had created an equitable charge in the bank’s favour over the first respondent’s beneficial interest to secure the bank’s advance, so far as possible; and (ii) as a consequence of the first, and assuming that the first and second respondents did not already hold as beneficial tenants in common, it had severed their beneficial joint tenancy in relation to the property: Ahmed v Kendrick (1988) 56 P&CR 120 and Williams & Glyn’s Bank Ltd v Boland [1981] AC 487 considered. The appeal was allowed on that ground.
3. In the circumstances, the court should exercise its discretion to make an order for sale under section 14 of the Trusts of Land and Appointment of Trustees Act 1996. The most prominent considerations were that: (i) the bank would otherwise be kept waiting indefinitely for any payment of its share of the property; and (ii) the property was no longer required as a matrimonial or family home because the marriage had effectively come to an end and the children of the marriage had reached adulthood: Bank of Ireland Home Mortgages Ltd v Bell [2001] 2 All ER (Comm) 920 considered.
Josephine Hayes (instructed by Needham & James, of Birmingham) appeared for the appellant; Latiff Adenekan (instructed by SC Pelentrides & Co) appeared for the second respondent; the first, third and fourth respondents did not appear and were not represented.
Sally Dobson, barrister
