General
There are various grounds on which a mortgage may be invalidated or reduced in value. In some cases, the risk may arise as a result of certain matters which are covered by the legal due diligence or under the borrower’s solicitor’s certificate of title. In this case, there may be a right of compensation for professional negligence or breach of the certificate of title. In other cases, the bank may have taken the risk concerned at underwriting stage or the risk may have been unforeseeable and uncovered by due diligence or a certificate of title.
Limits on the Borrower’s Title
A mortgagee cannot obtain greater rights to the secured property than those held by the borrower. Borrowers may hold their property under a long lease or be subject to easements, restrictions and conditions. A lender’s mortgage will be subject to these title conditions unless the holders of these rights released them before the loan issued.
There may be prior restrictions affecting the borrower’s title due to the terms of the lease of the property or due to covenants, easements or other rights in favour of the others. In development and construction projects, the borrower’s title is sometimes structured in such a way that third parties may have a prior claim to a share of the development profits. These rights have inherent priority to the bank’s rights because they are terms of the borrower’s title and the borrower cannot disturb them simply by mortgaging. In certain circumstances, the borrower’s title may be completely lost, if the relevant conditions are not complied with.
These kind of issues and risks should have been covered as part of the certificate of title /due diligence process. It may be that the risks were accepted, but have later manifested themselves due to unforeseen circumstances or delays.
Forgery and Fraud
A mortgage or charge which is not signed by the borrower is void and of no effect. A forged mortgage is absolutely void and will be set aside. .A forged mortgage is a particular risk in the case of estranged spouses. The Council of Mortgage Lenders handbook does not require that the solicitor necessarily sees the borrower signing although there are certain procedures to “red flag” high risk cases.
Mistake
Generally, it is difficult to show that a mortgage is avoided by reason of mistake. Once a legal document has been signed, it is very difficult to have it set aside. It is not enough that the person did not understand the document. A freely signed document can only be set aside on the basis that the person did not understand he was signing a legal document at all or have been entirely misled as to the nature of what they signed.
Generally, the bank will have ensured that the borrower is properly and independently advised, so that the risk of the mortgage being set aside is minimal.
Insolvency set aside
Mortgages and charges can be set aside in certain circumstances under insolvency law, if an individual borrower later becomes bankrupt or if a company borrower later goes into liquidation.
A transaction, including a mortgage, at “undervalue” can be set aside, if the person or company making it becomes insolvent within a certain period. The period is generally two years before commencement of the insolvency proceedings. A transaction is at undervalue, if it is for significantly less value than that provided in return.
Under insolvency law a “preference”, which may include a mortgage or guarantee, given within six months prior to commencement of insolvency proceedings can be set aside if it was entered with the intention of giving a preference to the lender relative to other creditors in a later insolvency. A mortgage given just before insolvency under pressure for a pre-existing debt may be vulnerable to being set aside under these provisions.
A floating charge given in the 12 months before insolvency, other than for full value, will be set aside in certain circumstances. The company must have been insolvent at the time the charge was given or have become insolvent as a result of the charge. Full value means that new advances must have been made proportionate in value to the security. Therefore a floating charge given in the 12 months period prior to commencement of insolvency proceedings for a pre-existing debt or for inadequate new funds is vulnerable to challenge.
Rights of Spouse and Beneficial Owners
A spouse, partner or other person whose name is not on the registered title to the property may have beneficial ownership rights to the mortgaged property, by virtue of having made contributions to the purchase price of the property or to mortgage repayments. He or she may also obtain a beneficial right by making contributions to a family fund which finances mortgage repayments.
Even where a spouse has no ownership rights, certain statutory matrimonial home rights exist in England and Wales. These are deemed to be a charge on the owning party’s share in the matrimonial home. If a non-owning spouse is in occupation, he or she has the right not to be excluded by the other spouse. If the spouse is not an occupation of the house, he or she has a right to enter the house.
A spouse may register his or her rights under the matrimonial home legislation in the Land Registry. This gives notice to the bank and any later mortgagee who does not have priority over the rights. This would undermine a later bank security. If the registration takes place after the registration of an earlier mortgage, it ranks after the mortgage. It may, however, affect subsequent advances under the mortgage.
Statutory matrimonial rights or any spouse or third party beneficial rights from contributions, must be dealt with on a mortgage. It is necessary that the spouse agrees that her statutory charge is subordinated to the mortgage, so that the mortgage ranks in priority.
A spouse or other party with a beneficial right should consent to the mortgage and charge his or her beneficial share. If there are beneficial owners who should have been detected, then the mortgage may not validly mortgage their share of the property, if they do not sign up to it. This could greatly undermine the value of the security.
Where the spouse is in occupation of the property, the bank through the solicitor acting, may have notice of the spouse’s beneficial interest in the property. It would therefore be necessary for the solicitor as part of his certificate of titl,e to ensure that such rights are postponed or brought into the mortgage by way of confirmation
Undue Influence / Pressure
A transaction entered by reason of so-called “undue influence”, may be by a set-aside. The classic situation (historically) is where a wife agrees to join in a mortgage of a jointly owned property as security for her husband’s sole debts. The spouse may later claim she entered the transaction as a result of her husband’s undue influence.
There are two types of undue influence. With the first type, it is necessary for the person alleging undue influence to show that he or she entered the transaction concerned as a result of his or her free will being overborne, usually by the beneficiary of the transaction.
In the second category of cases, the relationship between the parties is such that undue influence is presumed where the weaker party enters a transaction for the benefit of the other. This can happen in the case of certain relationships where it is presumed one person is in a dominant position. Examples include, child and parent, solicitor and client, and doctor and patient. The presumption does not automatically apply to a husband and wife.
In these latter cases, it is easier to have the transaction set aside. Normal bank procedures and the practice and requirements under the Council of Mortgage Lenders Handbook should generally ensure that undue influence is detected and prevented. There is an onus on advisers and other parties to be vigilant for undue influence. There is still a risk that undue influence may occur without any person having any reason to believe that it might be taking place.
A transaction can potentially be set aside on the basis of being unconscionable. Usually there will have been dominant pressure so that the person concerned is no longer acting of his own free will. This may occur for example, where a reluctant spouse or parent mortgages his or her home by way of collateral security because of family or emotional pressures. Pressure itself is not enough to set aside the transaction. If must be shown that the person concerned was left with no free will.
Generally, where there is a risk of undue influence or an unconscionable transaction, independent legal advice should be obtained for the benefit of the person making the transfer. An independent solicitor should advise on the legal and practical implications of the transaction. The seriousness of the risks should be communicated. The independent solicitor should explain that there is a choice and that the choice might call for a discussion of the full financial position. The person giving the advice should be content that the person is acting of their own free will.
