The recent case of Santander UK PLC v. (1) Ashley Shaun Fletcher and (2) Paula Denise Fletcher  EWHC 2778 (Ch) provides a useful reminder of the principles of undue influence in mortgage transactions, which may entitle a party to have security set aside. It is also a reminder that in circumstances where a mortgage is set aside for undue influence, and the property is jointly held, the lender may still have an equitable charge over the beneficial interest of the party who took out the mortgage.
Mrs Paula Fletcher (Mrs Fletcher) transferred her property into the joint names of herself and her son shortly before it was mortgaged to Santander for £120,000, a sum significantly greater than the £31,250 loan that her son had told her he was taking out. Mrs Fletcher's case was that she had agreed to transfer the property into her son's name in order to obtain the £31,250 loan to be secured against it, which was to be repaid within a month, and she signed the transfer document (TR1) and mortgage deed on this basis. The loan was not repaid and Santander brought mortgage possession proceedings. Mrs Fletcher's son was convicted of fraud.
County court decision
Applying the well-established principles in Royal Bank of Scotland v. Etridge  2 AC 773, the court held that Mrs Fletcher had been subject to undue influence when she signed the mortgage, of which Santander had sufficient notice to be on inquiry given the non-commercial relationship between Mrs Fletcher and her son, and that provided Mrs Fletcher repaid the sum of £31,250, which she had thought the mortgage covered, Santander could not enforce the mortgage against her. Her son had taken advantage of his relationship with his mother, who was emotionally vulnerable at the time, to persuade her to help him financially to the extent of securing a loan against her home, on the basis the loan was only £31,250, which would be quickly redeemed. This fraudulent misrepresentation induced her to act to her detriment.
However, it is also well established that, in cases where a legal mortgage is over a jointly held property by two parties, and the legal mortgage is set aside on the application of one party, then the result of the application of s63 of the Law of Property Act 1925 is that a lender may still have an equitable charge over the beneficial interest of the other party. The court held that Mrs Fletcher's son held a 50 per cent interest in the property and Santander had an equitable charge over that interest and was entitled to possession notwithstanding that the legal charge under the mortgage was ineffective.
On appeal, Mrs Fletcher's counsel (having abandoned the point on which permission to appeal was granted) advanced a new argument, which the appeal judge allowed to continue, as follows:
- A court of equity will admit evidence of the settlor's intentions, including their subjective intentions, when considering whether or not to grant equitable relief to remedy a mistake.
- The judge had either made findings of fact about Mrs Fletcher's intentions or made sufficient findings that on appeal the appeal court could reach the same result, namely that Mrs Fletcher never intended her son to have a beneficial interest and that, when the loan (for about £32,000) was paid off, the property would revert to her as sole owner. Therefore, the declaration of trust in the TR1 was vitiated by a mistake.
- While written declarations of a party's intentions are generally conclusive, a court of equity is concerned to inquire as to a party's true intentions as regards ownership of property, which may not reflect the legal ownership.
- The judge found as a fact that execution of the TR1 by Mrs Fletcher was procured by fraud. The requirements of s53(1)(b) of the Law of Property Act 1925 (for transfers of interests in property to be in writing) cannot prevent proof of fraud.
- The authorities did not compel the judge to treat the written document as conclusive in this case because of the evidence of fraud or mistake.
- Santander could not rely on the declaration of trust in the TR1 as evidence of Mrs Fletcher's intentions for a number of reasons: the judge found Santander was on notice; it would be unconscionable in such circumstances to allow Santander to rely on it; and Santander's claim was through Mrs Fletcher's son and, since he could not conscionably enforce those rights against his mother, neither could Santander.
Having established undue influence was present entitling Mrs Fletcher to set aside the mortgage, the trial judge was only asked to determine whether Mrs Fletcher's son held a 50 per cent beneficial interest in the property pursuant to the transfer. Mr Justice Birss concluded that the trial judge had not made any finding that the TR1 had been induced by fraud, only whether the mortgage deed had. The way the case was put did not require any finding about the TR1. Nor did the judge make any positive finding about Mrs Fletcher's actual intentions. He clearly thought there was a good case to reach a conclusion that she did not intend her son to have a beneficial interest, but he did not actually go ahead and decide that issue.
Mrs Fletcher argued that the declaration of trust in the TR1 should be set aside as it did not reflect her intentions. That was an action found on mistake entitling her to rescind the declaration, set it aside or rectify it, namely rendering it voidable, not void. However, where a third party has acquired rights without notice of the right to rescind, this will provide a bar to rescission. The fact that Santander was on inquiry in relation to the undue influence affecting the mortgage deed did not carry the consequence that it was also on notice that the transfer was tainted. That was a separate and earlier transaction to which Santander was not a party. The trial judge did not decide the question of notice relating to the transfer because he was not required to by the way the arguments were put. Santander clearly relied upon the TR1 when entering into the mortgage. At that time the TR1 had not been rescinded and Santander acquired a charge over the son's beneficial interest if the legal charge was set aside. It was not now open to Mrs Fletcher to rescind the TR1.
In the circumstances, and whilst acknowledging his sympathy for Mrs Fletcher's position, Mr Justice Birss dismissed the appeal, which meant that Santander was entitled to possession.
The case reiterates the need for lenders to be vigilant when taking a guarantee or charge from a person whose relationship with the principal debtor is non-commercial, thus putting the lender on notice of presumed undue influence. Consequently they will need to take reasonable steps to satisfy themselves that no undue influence is present. While a lender may be put on inquiry in relation to the mortgage deed this does not necessarily mean that it will also be on notice that a related transfer of the mortgaged property is tainted as well; it will depend on the facts of the case. The case also provides a reminder that all is not necessarily lost for a lender in circumstances where the mortgage is set aside and the property is jointly held, as it may well be entitled to an equitable charge over the beneficial interest of the principal debtor.
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