A voidable principal mortgage may also render voidable a subsequent replacement mortgage.
In Yorkshire Bank plc v Tinsley [2004] EWCA Civ 816; [2004] 28 EG 176 (CS), the Court of Appeal considered a previously undecided point about the enforceability of a second, or subsequent, mortgage that has been granted in circumstances when an earlier mortgage was, for some reason, a voidable security.
The court examined the question of the enforceability of the subsequent mortgage as a matter of principle.
It would be natural to expect that if an obligation between parties is legally ineffective, any new obligation arising from the release of the earlier obligation would be similarly ineffective.
There was little doubt that this was the legal position in respect of void contracts, but the court held that the same principle should apply to voidable contracts. This would hold where the factual contexts of both the earlier and the subsequent contracts were materially similar, such that the second was a substitute for the earlier, and was a condition of the release of the earlier void or voidable transaction that the parties should enter into a new one.
Applying this principle to undue influence, if a mortgage or guarantee is voidable for undue influence, as, for example, against a husband or against a bank, a replacement mortgage will also be voidable if it has been taken out as a condition of discharging an earlier voidable one. This will be the case even if the undue influence is not operative at the time of the replacement and even where a new contract, rather than a variation of an old one, has been entered into.
This decision confirms that any lender granting a substitute mortgage must not only ensure that the Etridge guidelines [2001] UKHL 44; [2001] 43 EG 184 (CS) are followed in relation to the new mortgage, but must also verify that the earlier mortgage is not voidable.
Peter Gibson LJ did not consider that the decision would cause significant practical difficulties for lenders in property transactions. The court was not suggesting that a lender should be put on inquiry about previous transactions to which it was not a party.
However, if the lender is the mortgagee in a prior voidable mortgage and that mortgage is to be discharge and a new one entered into, the lender should be able to ascertain from its own records whether or not it protected itself in the earlier transaction. If the lender cannot confirm this, it can protect itself by ensuring that the wife receives independent advice on the discharge of the prior mortgage and the grant of the new one.
David Williams is a partner in the real estate department at Allen & Overy.
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A voidable principal mortgage may also render voidable a subsequent replacement mortgage.
In Yorkshire Bank plc v Tinsley [2004] EWCA Civ 816; [2004] 28 EG 176 (CS), the Court of Appeal considered a previously undecided point about the enforceability of a second, or subsequent, mortgage that has been granted in circumstances when an earlier mortgage was, for some reason, a voidable security.
The court examined the question of the enforceability of the subsequent mortgage as a matter of principle.
It would be natural to expect that if an obligation between parties is legally ineffective, any new obligation arising from the release of the earlier obligation would be similarly ineffective.
There was little doubt that this was the legal position in respect of void contracts, but the court held that the same principle should apply to voidable contracts. This would hold where the factual contexts of both the earlier and the subsequent contracts were materially similar, such that the second was a substitute for the earlier, and was a condition of the release of the earlier void or voidable transaction that the parties should enter into a new one.
Applying this principle to undue influence, if a mortgage or guarantee is voidable for undue influence, as, for example, against a husband or against a bank, a replacement mortgage will also be voidable if it has been taken out as a condition of discharging an earlier voidable one. This will be the case even if the undue influence is not operative at the time of the replacement and even where a new contract, rather than a variation of an old one, has been entered into.
This decision confirms that any lender granting a substitute mortgage must not only ensure that the Etridge guidelines [2001] UKHL 44; [2001] 43 EG 184 (CS) are followed in relation to the new mortgage, but must also verify that the earlier mortgage is not voidable.
Peter Gibson LJ did not consider that the decision would cause significant practical difficulties for lenders in property transactions. The court was not suggesting that a lender should be put on inquiry about previous transactions to which it was not a party.
However, if the lender is the mortgagee in a prior voidable mortgage and that mortgage is to be discharge and a new one entered into, the lender should be able to ascertain from its own records whether or not it protected itself in the earlier transaction. If the lender cannot confirm this, it can protect itself by ensuring that the wife receives independent advice on the discharge of the prior mortgage and the grant of the new one.
David Williams is a partner in the real estate department at Allen & Overy.
Related article: Yorkshire Bank mortgage voidable for undue influence
