Mortgage – Legal charge – Fraud – Appellant transferring property into joint names with son – Appellant making declaration of trust to that effect – Respondent bank granting mortgage on property – Son being convicted of fraud in relation to mortgage – Loan not being repaid – Court holding respondent separately having equitable charge over son’s beneficial interest in property – Appellant appealing – Whether respondent entitled to possession and sale of property – Appeal dismissed
The appellant was the sole owner of a property in Plymouth. In 2011, a TR1 form was signed and the property transferred into the joint names of the appellant and her son. On the same day, the appellant signed an “agreement statement” drafted by her son which represented that he wanted to raise an enterprise finance loan of £125,000 under a government scheme which required 25% to be secured, so he needed to secure £31,250 on the property. It referred to his name being on the deeds and asserted that the loan would be paid in full within one month. A mortgage offer was made and £120,995 was advanced by the respondent bank. The money was paid to the son’s sole account. When the loan was not repaid, the bank brought a mortgage possession claim.
The son was subsequently convicted of fraud, having represented to the appellant that the loan was for a much smaller sum. At trial the judge accepted the appellant’s case that the mortgage should be set aside for undue influence of which the respondent had sufficient notice to be on inquiry. He held that, provided she paid back the sum she had thought the mortgage was for, the respondent could not enforce the mortgage against the appellant. However, a problem arose from the fact that, in form TR1 the appellant had ticked the first box in section 10 “Declaration of trust” which stated: “The transferee is more than one person and they are to hold the property on trust for themselves as joint tenants”. As an express declaration of trust, that took effect so that in the circumstances (which involved a severance of the joint tenancy) the appellant and her son each held 50% of the beneficial title. The respondent argued that, although the mortgage was not enforceable against the appellant, it separately had an equitable charge over her son’s beneficial interest which arose even if the legal charge under the mortgage was ineffective. Accordingly, the house had to be sold and half the proceeds used to pay off the son’s indebtedness to the respondent.
The appellant appealed contending that she was entitled to a declaration that her son did not hold any beneficial interest in the property and the respondent had no right to seek possession and sale of the property.
Held: The appeal was dismissed.
(1) It was well established that where a legal mortgage was over a jointly held property by two parties, and the legal mortgage was set aside on the application of one party, the result of the application of section 63 of the Law of Property Act 1925 was that the bank might still have an equitable charge over the beneficial interest of the other party. Although it was not absolutely necessary for the appellant to have pleaded a claim for rescission to succeed, it would still be necessary for her to establish such a right. The fact that the respondent was on inquiry in relation to undue influence affecting the mortgage deed did not carry with it the necessary consequence that it was on notice of any taint affecting the conveyance. The conveyance was a separate and earlier transaction to which the respondent was not a party. The judge did not decide the question of notice relating to the conveyance because he was not required to by the way the arguments were put. It was clear that the conveyance into joint names was, from the appellant’s point of view, part of the same arrangement with her son. The principled approach was to ask whether the respondent had constructive or actual notice of the putative mistake by the appellant, despite the clear words of the declaration of trust in the TR1 form. The only relevant factor was the same timing point which the judge relied on as putting the bank on inquiry as to undue influence. That was the fact that the mortgage deed was less than six months after the TR1 form was signed. That was not enough to fix the respondent with constructive notice of a right held by the appellant to rescind the declaration of trust in the TR1: First National Bank v Achampong [2003] EWCA Civ 487; [2003] PLSCS 72 and Edwards v Lloyds TSB[2004] EWHC 1745 (Ch) distinguished.
(2) The respondent clearly relied on the TR1 in entering into the mortgage in joint names and lending the money. At the time they did so the TR1 had not been rescinded and the son had a beneficial interest in the property. Therefore, the bank acquired an equitable charge over the son’s beneficial interest even if the legal charge was set aside. The appellant intended to put the property into joint names when she executed the TR1 and, at that time, she understood that there would then be a mortgage to secure borrowing of about £32,000. It was not clear what her intentions were relating to the period before the mortgage was paid back. However, it was not necessary to decide that issue. The judge was not required to make a finding about whether the declaration of trust itself (or the TR1 as a whole) was procured by fraud and did not do so. The TR1, as opposed to the mortgage deed, might have been procured by fraud but there was no sufficient basis on which to make such a finding on appeal about the instrument itself, rather than the later mortgage deed. A distinction between the TR1 and the legal mortgage and an examination of whether the former as opposed to the latter was procured by fraud was not properly explored at trial because it was not relevant to the way the case was put at that stage. Overall, it would not be unconscionable for the respondent to enforce its equitable charge over the son’s beneficial interest in the property.
Guy Adams(instructed by Fursdon Knapper, of Plymouth) appeared for the appellant; Daniel Gatty (instructed byEversheds Sutherland) appeared for therespondent.
Eileen O’Grady, barrister
Click here to read transcript: Santander UK plc v Fletcher and another
