Suggested Answer to Exercise 7.3 (Part 3)
A Detailed Answer Plan
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The owner of an equitable (beneficial) interest in land is entitled to have her consent to a mortgage of the land set aside if she can show that
- her consent was obtained as a result of misrepresentation or undue influence by the borrower; and
- the mortgagee is fixed by notice of the wrong
(Barclays Bank Plc v O’Brien  1 AC 180).
The circumstances in which a lender will not be fixed by notice are now set out in Royal Bank of Scotland Plc (No. 2) v Etridge  2 AC 773.
If Emily’s consent to the mortgage is set aside, her beneficial interest in the land is likely to be binding upon Sharks Ltd (assuming that she can satisfy the requirements in Sch 1, para 2 or Sch, 3 para 2 of the LRA 2002 (depending upon whether the land was or was not already registered prior to the mortgage to Sharks Ltd)). If Emily’s consent is not set aside, the mortgage will take priority over her beneficial interest in the land.
Clayton totally misrepresented the nature of the transaction to Emily (compare O’Brien where the defendant knew she was agreeing to a mortgage but did not know the true extent of the loan).
[There is no indication of undue influence, so it would be inappropriate to consider it in depth in this answer.]
…a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction (per Lord Browne Wilkinson Barclays Bank Plc v O’Brien  1 AC 180 at 196).
According to Lord Nicholls this means ‘that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts’ (Royal Bank of Scotland Plc (No. 2) v Etridge  2 AC 773 at ). The bank will not normally be put on notice where the loan is made jointly to the husband and wife unless the bank is aware that the loan is being made for the husband’s purposes (see CIBC Mortgages v Pitt and Etridge (at para.48). The question does not state whether Sharks Ltd were making the loan to Clayton alone, or to Clayton and Emily jointly. If the loan was to Clayton alone, Sharks Ltd should have taken reasonable steps to ensure that Emily ‘has had brought home to her, in a meaningful way, the practical implications of the proposed transaction’ (at ). However, if it was a joint loan, Sharks Ltd would only be ‘on inquiry’ if it knew the purposes of the loan.
The steps Sharks Ltd needed to take are those set out in Etridge.
- It needed to tell Emily that it required her to consult a solicitor;
- it should then have supplied the solicitor with sufficient information to allow the solicitor to properly advise Emily; and
- it should not have proceeded with the mortgage until it had written confirmation from the solicitor that the practical implications of the transaction hade been explained to Emily.
There is no indication that any of these steps were taken.
Is Emily’s Home Secure?
If Sharks Ltd is held to have notice of Clayton’s misrepresentation, void against Emily (TSB Bank Plc v Camfield  1 WLR 430). However, Emily has received some benefit from the loan as part of the advance which? was used to discharge the existing mortgage on the shop and flat. The court is likely, therefore to order Emily to account to Sharks Ltd for this benefit (see Castle Phillips Finance Ltd v Piddington (1995) 70 C & PR 592).
The mortgage remains enforceable against Clayton and his interest in the land. This means that:
- Sharks Ltd is an interested party within section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (‘TOLATA’);
- if Clayton is still solvent, the interests of Sharks Ltd will be one of the factors taken into account by the court (TOLATA, s15(1)(d)); and
- if Clayton is declared bankrupt, sale of the land is almost inevitable under s.335A Insolvency Act 1986.
If Sharks Ltd bring a section 14 action, it is likely that the land will be sold. Although Emily will receive her share of the proceeds of sale (free from the mortgage), she will lose her home.
Sharks Ltd Rights Against Clayton
If Emily’s consent to the mortgage is not set aside, Sharks Ltd will be able to enforce their charge against Clayton as legal owner. Emily’s equitable interest will be postponed to a share in any of the proceeds of sale left after the mortgage has been discharged.
A comprehensive answer would require you to advise Emily on the points below. However, these points do not appear to be the main focus of the question (and should not be allowed to eclipse the main issues considered above).
- The remedies available to Sharks Ltd (possession, receiver, sale, etc);
- Any possible relief available to Clayton: it seems unlikely that a court will exercise its discretion under s.36 Administration of Justice Act 1970 (as amended by s.8 Administration of Justice Act 1973) (see Cheltenham and Gloucester Building Society v Norgan  1 WLR 343).
- Clayton might be persuaded to have the mortgage re-opened as an unfair agreement under the provisions inserted in the Consumer Credit Act 1974 by ss.19-22 Consumer Credit Act 2002 as the interest rate seems high. However, the courts have been reluctant to reopen mortgage agreements: high interest rates are generally considered to be justified by the additional risk incurred by the lender when making a loan to a weak borrower.