Contract of a Mortgage

Introduction

A mortgage is a contract between two parties whereby the mortgagor uses his land as security for a loan from the mortgagee. In return for the creation of a proprietary interest in the land for the mortgagee, the mortgagor receives a loan and based on the terms of the mortgage has to pay the full sum owed. In the event that the mortgagor defaults on payment, the mortgagee is entitled to take possession of the mortgaged property and recover the full sum owed by the mortgagor usually through the sale of the property and by suing on the covenant to pay the full sum due. Jack and Margaret entered into a mortgage contract with Reading Bank whereby their matrimonial home was used as security for the loan. As Jack has fallen into arrears with regard to the mortgage payments, Reading Bank is now seeking to recover the full sum due under the mortgage.

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Mortgagee's Rights

The mortgagor essentially has the cumulative rights[1] to sue the mortgagor on the covenant to repay based on the mortgage contract[2], to take possession of the mortgaged property, to initiate and complete sale of the mortgaged property, to exercise foreclosure and to appoint a receiver. In this task we are only concerned with the mortgagor's right to possession as Margaret and Jack are resisting possession. By virtue of the way in which legal mortgages are created, the mortgagee is regarded as having an estate in land and this along with the authority of Four Maids v. Dudley Marshall[3] and Ropaigelach v Barclays Bank[4] gives Reading Bank the immediate right to possession "the moment the ink is dry on the mortgage."[5] The right to take possession is subject only to self limitation as expressed in contract and statutory restrictions. Mortgage documents generally contain a covenant that would restrict the mortgagee from taking possession unless the mortgagor is in arrears, it appears that an argument for self limitation covenants would fail. With regard to statutory restrictions on the right of possession a mortgagor, protection for the mortgagor is afforded by section 36 of the Administration of Justice Act 1970 (AJA) as amended by Section 8 of the AJA 1973. By virtue of section 36 of the AJA the court is granted a discretionary power to suspend, adjourn or postpone an application for possession of a dwelling house by the mortgagee if it appears that the mortgagor would be likely in a reasonable period of time to pay any sums due under the mortgage. Whether or not Margaret and Jack can resist possession by virtue of section 36 would depend on whether or not they satisfy the limitations of the effect of the statute. There is no dispute as to whether the mortgaged house in question is a dwelling house however the facts of the case seem to indicate that as Reading bank did not apply for a court order[6] and instead sought self help[7] as the bank merely wrote to Jack and Margaret. It should be noted that when seeking self help possession Reading Bank runs the risk of committing criminal offences if there should be any person lawfully residing on the premises at the time as they are subject to Section 6 (1) of the Criminal Law Act 1977 (if violence was used or had been threatened to be used). However the facts are silent, if Reading Bank did in fact apply for a court order Margaret and Jack will be able to rely on section 36 of the AJA and they would have to prove on the balance of probabilities that it is likely that the arrears will be cleared within a reasonable period[8] in order to satisfy the court. Application of section 36 is not necessarily a negative outcome as mortgagees do not want possession or the expense of a sale. "A possession order under section 36 gives the mortgagee all it could ask for: an order for possession, albeit suspended and an order requiring the borrower to repay the arrears and to stick to a schedule for future payments."[9] The discretion as to whether to apply for a court order or not is left to Reading Bank.

Undue Influence

As a mortgage is essentially a contract and the presence of any vitiating factors such as undue influence or misrepresentation may make the entire agreement void and thus unenforceable. The court of appeal in Bank of Credit and Commerce International S.A. v. Aboody[10] set out the categorization of cases undue influence into either class 1 of actual undue influence whereby one party to the transaction can prove on the facts that the other party to the transaction exerted undue influence through an act openly carried out amounting to improper pressure. And class 2 of presumed undue influence[11] which arises when the complainant is able to establish the existence of a relationship of trust and confidence between her and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused the relationship in procuring her agreement to enter into the impugned transaction[12] In order to resist possession Margaret would most likely attempt to argue that undue influence had in fact been exercised. The burden of proof for undue influence lies on the claimant throughout[13]. Margaret would have to prove undue influence, either actually or with the benefit of an evidential inference (a presumption), which remains un-rebutted. As class 1 cannot succeed the burden of proof would be on Margaret to rely on class 2 in that of the presumption of undue influence. Royal Bank of Scotland v Etridge (No.2)[14] indicates that in order to discharge the burden of proof, the victim has to show that there was a relationship of trust and confidence with the alleged wrongdoer and that there exists a 'transaction that calls for an explanation'.[15] Applying the requirements of Etridge (no.2) for class 2 presumed undue influence to the facts of the case, it would be necessary for Margaret to prove that there existed a close relationship of 'habitual trust and confidence' between and Jack (the alleged wrongdoer) and herself. On the facts it appears that Margaret 'reposed trust and confidence'[16] in Jack, the fact that for a great many years Margaret was a housewife raising five children seems to indicate that Jack would be left alone to manage the financial decisions of the household as well as the company. On the assumption that Jack was in fact in control of the financial decisions it would appear that he would have a sufficient position of power to abuse his influence over Margaret as is evidenced by his actions of persistently pressuring[17] her into signing the mortgage despite her obvious reluctance to re-mortgage the house which clearly indicates a betrayal of trust by seeking to fulfil his own interests.[18] When considering the transaction that calls for explanation it is submitted that it would be left to the discretion of the courts, the judgment could go either way. On one hand it can be argued the transaction is plainly disadvantageous to Margaret as she undertakes a serious financial obligation, and in return she personally receives nothing. On the other hand it can be argued that Jack's business is the primary source of the family income and Margaret would mutually benefit from having a lively interest in doing what she can to support the business. However the facts point out that Margaret was reluctant to agree to the transaction and only did so at a point where she was 'physically exhausted' and 'sick of quarrelling'. Jack had also misrepresented Margaret with regard to the actual sum that was to be borrowed, the amount was represented as £300,000 where else it was in fact for £500,000. It is submitted that in light of this it the courts would most likely infer that there was undue influence as the transaction will only be explicable on the basis that it has been procured by the exercise of undue influence by Jack. If the courts infer that Margaret's consent has in fact been procured by undue influence or misrepresentation, the bank may not rely on her apparent consent unless it has good reason to believe that she understands the nature and effect of the transaction. The burden of proof will be on the bank to rebut the presumption of undue influence. The Bank can rebut the presumption by producing an explanation for the impugned transaction[19]. Lord Nicholls in Etridge (no.2)[20] indicates that this can be done if Reading Bank can show that Margaret obtained independent advice from a solicitor or outside advisor[21]. In this case, the facts are silent as to whether or not Margaret obtained any independent advice. In the event that the Margaret has obtained independent advice it would be in the courts discretion as to whether or not the presumption can be rebutted. However if Margaret did not obtain independent advice it is submitted that the courts will most likely infer that undue influence had been exerted on Margaret by Jack tainting her consent with regard to the impugned transaction. If the courts in their discretion infer that undue influence had in fact been exerted then the onus of discharging the burden will be placed on Reading Bank. The judgment of Lord Browne-Wilkinson in Barclays Bank v O'Brien[22] appears to indicate that the wife would only be able to set aside the transaction on the grounds of undue influence if 'the third party had actual notice of the facts giving rise to her equity'. The decision in Etridge (No.2)[23] indicates that the courts will only deem the mortgagee to have notice of undue influence in every transaction where the surety and debtor are in a non-commercial relationship and the loan made was not for the mutual benefit of both parties but instead for the sole purpose of one. Applying the principles to the facts of the case at hand, Margaret and Jack are in a domestic relationship and Margaret is also listed as a director of the company. As aforementioned the courts will only be able to set aside the mortgage on the grounds of undue influence if the Bank had actual notice of the facts giving rise to Margaret's equity. The case of CIBC mortgages v Pitt illustrates a situation whereby the bank was misled by the mortgagor to believe that the loan was to purchase a holiday home, as it was for the mutual benefit of the couple the Bank was not put on inquiry. Jack sought the mortgage in order to expand his business and as aforementioned an argument for manifest disadvantage could go either way. Reading bank may argue that as Margaret was a listed director of the company they could apply CIBC v Pitt whereby the mortgagee was not put on notice as it was for their mutual benefit. However on the other side of the coin Lord Nicholls in Etridge (No.2) stated: "In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company."[24] This suggests that the fact that Margaret is a listed director on her husbands company should not thwart Reading Bank from being put on inquiry. The argument for manifest disadvantage could go either way as Margaret has never played an active part in her husbands business and instead was busy raising her five kids and subsequently working as a nurse. There seems to be no way by which the bank can avoid being put on notice to discharge their obligations to prevent the transaction from becoming impugned. In order to avoid rendering the mortgage void due to undue influence Reading Bank is advised to meet with the vulnerable party privately where by the extent and risks involved in the mortgage should be explained after which the vulnerable party should be instructed to seek independent legal advice in order to obtain a confirmation letter. A confirmation letter from Margaret's solicitors acts as proof that Reading Bank has fulfilled their obligations and responsibilities in ensuring that the vulnerable party has obtain independent advise. Proceeding with the mortgage after a solicitors confirmation letter has been obtained will make the mortgage virtually unaffected by any future pleas for undue influence. The facts of the case are silent as to whether or not Reading Bank has carried out its responsibilities in that of meeting Margaret privately and instructing her to seek independent legal advice to obtain a confirmation letter. In the event that a confirmation letter had been sought any plea for undue influence would be ignored and the Reading Bank's rights would be unhindered. However if Reading Bank had failed to discharge their responsibilities and the courts inferred that undue influence had been procured onto Margaret then Reading Bank would not be entitled to possession as the mortgage would only be exercisable upon Jack. This would result in Reading Bank having to seek other remedies to realize the loan such as suing on the covenant to pay.

Conclusion

It appears that a plea for undue influence would most likely succeed as Reading Bank has failed to discharge its duties and obligations such as ordering a private meeting and advising Margaret to seek independent legal advice. However the facts are silent, If Reading Bank failed to discharge their duties, the mortgage agreement would be deemed unenforceable[25] on Margaret however Reading Bank would still be able to sue Jack on the covenant to repay based on the mortgage contract[26]. If Reading Bank did in fact discharge their duties and obligations they would be able to set aside the presumption of undue influence. This would allow Reading Bank to exercise its rights under the mortgage such as right to possession, right to sale, right to appoint a receiver, right to foreclosure and right to sue on the covenant to repay. With regard to right to possession Reading Bank would have the discretion as to whether to use apply for a court order or not as aforementioned the invocation of section 36 of the AJA is not necessarily a negative outcome, it all depends on what Reading bank really wants.