Mortgages voidable for undue influence — New mortgage substituted over different property — Whether invalidity of original mortgages affecting replacement mortgage — Appeal allowed
In 1988, the appellant and her husband took out a second mortgage on their house with the respondent bank in order to secure the husband’s current and future borrowing. In 1991, they entered into a remortgage arrangement with the respondent, so that the previous mortgage was discharged and replaced by another.
The couple later separated, and the husband went to stay with friends at a property that was divided into two flats. In subsequent divorce proceedings, an exchange arrangement was agreed by which the couple’s house was transferred to the friends, who in turn transferred the flats to the appellant. The respondent sought a mortgage on the flats, and this was executed in 1994, again securing the husband’s current and future liabilities.
In 1997, the respondent required the husband to discharge his indebtedness, and served a demand on both him and the appellant. In 2001, it brought possession proceedings on the basis that the sum of £147,063 was due. In her defence, the appellant contended, inter alia, that: (i) the 1988 and 1991 mortgages were voidable as against her for undue influence of which the respondent had constructive notice; and (ii) the 1994 mortgage was also voidable because it was a replacement for the voidable mortgages of 1988 and 1991. The judge found in favour of the appellant on the first issue, but held that the invalidity of the 1988 and 1991 mortgages did not affect the 1994 mortgage, since it was on a different property. The appellant appealed.
Held: The appeal was allowed.
As a question of principle, it was natural to expect that if, without more, an obligation incurred between two or three parties that was legally ineffective in any way, any new obligation arising out of such earlier obligation would be similarly legally ineffective. The same applied to undue influence. If a mortgage or guarantee was voidable for undue influence as against a husband and against a bank, a replacement mortgage, even if undue influence was not operative at the time of such replacement, would itself be voidable if it had been taken out as a condition of discharging the earlier voidable mortgage. That should be the case even if there was a new contract, rather than a mere variation of an old contract. There was no reason, where the lender was the same on the replacement mortgage, that its constructive notice should invariably be deemed to have disappeared when the earlier mortgage was discharged. In the present case, there was no doubt that the respondent had required the 1994 mortgage on the flats to be granted as a condition of releasing the charge on the house. The appellant was entitled to succeed in her defence, and the order for possession would be discharged: Crowe v Ballard (1790) 1 Ves Jun 215 and Kempson v Ashbee (1874-75) LR 10 Ch App 15 considered.
Alex Hall Taylor (instructed by Addleshaw Goddard, of Leeds) appeared for the appellant; Peter Knox (instructed by Freemans) appeared for the respondent.
Sally Dobson, barrister
