Mortgage Set Aside For Undue Influence But Lender Still Entitled To Possession Pursuant To Its Equitable Charge Ms Clare Stothard, Steven Mills and Beth Lovell

Summary

The recent case of Santander UK PLC v. (1) Ashley Shaun Fletcher and (2) Paula Denise Fletcher [2018] 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.

Background

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 [2002] 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...