Posts Tagged ‘charge’

The limited role of admissible background in the case of registered documents

February 10, 2014

In Cherry Tree Investments Ltd v Landmain Limited ([2012] EWCA Civ 736, CA (Eng)) C had granted a charge of property to D pursuant to the terms of a facility agreement. The facility agreement extended the statutory power of sale in section 101(3) of the Law of Property Act 1925 by providing that the power of sale could be exercised at any time after the execution of the charge. This extension of the statutory power of sale did not appear in the charge. The charge was registered at the Land Registry but the facility agreement was not registered. D sold the property to L in exercise of the power of sale. It could only do so if the statutory power of sale had been extended as set out in the facility agreement. No claim was made for rectification of the charge. The primary question was whether the power of sale implied into the charge could be ‘interpreted’ in such a way as to include the extension found in the facility agreement. The English Court of Appeal decided (Arden LJ dissenting) that the charge could not be so interpreted.

Lewison LJ thought that he was bound to hold that the facility letter was admissible evidence for the purposes of interpreting the charge. But it was still necessary to consider the effect of this: what use could be made of the facility letter ([104] and [128])? The fact that the charge was a document that would be registered at the Land Registry was highly significant. The factual background carries a different weight in such cases than it would in other sorts of contract:

‘The reasonable reader’s background knowledge would, of course, include the knowledge that the charge would be registered in a publicly accessible register upon which third parties might be expected to rely. In other words a publicly registered document is addressed to anyone who wishes to inspect it. His knowledge would include the knowledge that in so far as documents or copy documents were retained by the registrar they were to be taken as containing all material terms, and that a person inspecting the register could not call for originals. The reasonable reader would also understand that the parties had a choice about what they put into the public domain and what they kept private. He would conclude that matters which the parties chose to keep private should not influence the parts of the bargain that they chose to make public.’ ([130])

A little later, Lewison LJ observed:

‘Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include.’ ([132]).

The charge could not be interpreted in such a way as to confer the more expansive power of sale contained in the facility agreement.

Longmore LJ agreed with the conclusion and reasoning of Lewison LJ ([150]).

Michael Lower

Barclays Bank plc v O’Brien: the risk of failing to take steps to ensure informed consent

October 1, 2013

In Barclays Bank plc v O’Brien ([1994] 1 AC 180, HL) a married couple granted the bank a second charge over the family home as security for the overdraft facility of a company in which the husband had an interest. The wife signed the document without reading it; she did so because of her husband’s misrepresentation to the effect that the liability to the bank was limited to GBP60,000 and that the exposure under the arrangement would only last for three weeks. In fact, it was an unlimited guarantee. The bank took no steps to have the documents explained to the wife nor did it suggest that the wife should take independent legal advice.

When the company failed to meet its obligations, the bank sought an order for possession of the home. W sought to set the charge aside on the grounds that it was the result of H’s misrepresentation and undue influence.

Only the misrepresentation defence was relied upon in the House of Lords. Nevertheless, Lord Wilberforce (giving the only full judgment) spoke about undue influence and considered the steps that a lender must take to protect itself from a claim that its agreement with a surety might be set aside in the event that it is entered into as a result of misrepresentation or undue influence.

Lord Wilberforce prefaced his analysis with a reminder that there are policy considerations to be borne in mind in shaping the law. The law needs to strike a balance between the need to protect wives from an abuse of the trust and confidence that they place in their husbands, on the one hand, and the need to avoid the creation of a draconian regime that would render family homes unacceptable as security for loans (at p. 188).

Lord Wilberforce considered the proposition that wives enjoy some special equity and are the object of special tenderness on the part of equity. He accepted that there was a greater risk of undue influence ‘than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual’s will’ (at p. 191). At the same time, with an eye no doubt to the future rational and orderly development of the law, he rejected the broad proposition that wives should be accorded special rights in relation to surety transactions. He rejected then the idea of ‘a special equity applicable only to such persons engaged in such transactions.’ (at p. 195).

The judgment seeks to create a legal environment that properly balances the interests of wives and lenders (described below). It is not only applicable to wives. Towards the end of the judgment, Lord Wilberforce emphasises that the same principles apply ‘to all other cases where there is an emotional relationship between cohabitees.’ (at p. 198). Thus, the principles and procedures set out in the judgment are to be followed ‘if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor’. (at p. 198). Marriage is only one instance of a broader category.

The core of the judgment is its consideration of the circumstances in which lenders will take subject to the prior rights of the person whose consent was procured by undue influence or misrepresentation.

In a case like this, it may sometimes be possible for W to argue that H was the bank’s agent. This would provide a basis upon which H’s undue influence or misrepresentation could be attributed to the bank. An agency analysis of this situation, however, would usually be highly artificial (at p. 194).

Rather, the doctrine of notice provides the key: did the lender have actual or constructive notice of the misrepresentation or undue influence (at pp. 194 – 5)? The question is whether the lender is aware of facts or circumstances that put him on enquiry as to the possibility that the surety might have a right to rescind on the grounds of undue influence or misrepresentation. If the lender is put on enquiry and does not take reasonable steps to satisfy himself that W’s agreement to stand surety has been properly obtained then it will have constructive notice of W’s rights (at p. 196).

When is a lender on enquiry (so that it needs to take further steps)?

‘[A] creditor is put on enquiry 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.’ (at p. 196).

When the lender is on enquiry it must ‘take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice.’ (at p. 196).

The steps that a lender is expected to take are set out in this passage:

‘in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.’ (at . 196)

In exceptional circumstances, where the lender knows of circumstances that make the exercise of undue influence probable rather than merely possible, the lender will need to ensure that the wife is separately advised (at p. 197).

This procedure seeks a fair balance between the wife and the lender, even though it does not guarantee that the wife fully understands the transaction (at p. 197).

As the bank had not taken steps to ensure that Mrs O’Brien had been properly informed of the nature of the transaction, it was fixed with constructive notice of Mr O’Brien’s misrepresentation.

Michael Lower