Conscionable Correction for Lenders

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This recent High Court case considered whether a mortgage that was wrongly discharged by a lender was capable of being rectified by order of the court. It will be of special interest to lenders and their legal representatives as it provides an illustration of how the courts are likely to approach cases of this nature and it highlights the measures that lenders should have in place to guard against the removal of legal charges by mistake.

The court has a statutory power, under the Land Registration Act 2002, to grant an order requiring alteration of the register for specified purposes. The court can exercise this power to correct a mistake [1].

In NRAM [2], the claimant sought to alter the register of a property having removed, in error, a legal charge it had held against the property. For the court to grant the requisite order, the claimant had to show that the removal of the legal charge was a ‘mistake’ in law.

A catalogue of errors…
The defendant borrowers obtained a loan from the claimant in 2004 to assist in the purchase of a property. The loan consisted of a secured element and a smaller unsecured element. The former was duly secured against the property by way of a first legal charge dated 26 November 2004.

A year later, the borrowers wrote to the claimant enquiring as to whether it would be possible to consolidate their various borrowings into a single product. The claimant provided an offer of a further loan which, again, consisted of a secured and an unsecured element.

The borrowers accepted this offer and the 2005 loan redeemed and replaced the 2004 loan. The 2005 loan was given a new mortgage account number. The legal charge dated 26 November 2004 remained secured against the property and no separate charge was registered in respect of the 2005 loan.

The borrowers were each subsequently adjudged bankrupt. The claimant did not prove in either bankruptcy for the secured element of the 2005 loan, which it considered to be secured against the property by virtue of the 2004 charge.

In August 2014, solicitors acting on behalf of the borrowers wrote to the claimant stating that the secured loan taken out in 2004 had been redeemed in 2005, and that the legal charge that secured the 2004 loan should be removed. The letter referred to the 2004 mortgage account number only – no reference was made to the new account number given in respect of the 2005 loan.

The claimant filed an e-DS1 to the Land Registry, and the legal charge dated 26 November 2004 was removed.

The court had to consider the following two key issues: (i) whether the legal charge dated 26 November 2004 secured the loan taken out in 2005; and (ii) whether the discharge of the legal charge by the claimant was a mistake that was capable of rectification.

…but any ‘mistake’?
The High Court held that the 2004 charge did in fact act as security for the loan that was taken out in 2005. The mortgage conditions that were incorporated by the 2004 legal charge stated that the charge was to act as security for the ‘mortgage debt’ – a term which was defined in the conditions to include all of the monies that the borrowers owed to the claimant from time to time under any offer.

The court considered the formulation of mistake, in the context of its equitable jurisdiction to set aside a voluntary disposition, as set out in the cases of Garwood [3] and Futter [4]. The key considerations common to both of those cases include the mistake being of ‘sufficient gravity’ and relating to either the legal effect of the transaction or an existing fact ‘which is basic to the transaction’. Following Futter, the court framed these considerations within the overarching test: whether it would be unconscionable to leave the mistake uncorrected.

The court held that the claimant had made a legal mistake in thinking that the 2004 charge had been redeemed and there was nothing more to secure. The mistake was induced by the solicitors’ letter which did not refer to the 2005 account number. The consequences of releasing the legal charge by e-DS1 were serious and it would be unconscionable for the court to leave the mistake uncorrected, as the borrowers (or the transferees of their respective beneficial interests) would be left with an unencumbered property.

A mistake having been established, the court then considered whether it was able to grant an order to alter the register in accordance with Schedule 4 of the Land Registration Act 2002. As the borrowers were registered proprietors of the property, it had to be shown that they had substantially contributed to the mistake [5]. This requirement was satisfied as the defendants’ solicitors’ letter only referred to the 2004 account number.

WM Comment
The above judgement is of significance to lenders as it exemplifies how the courts are likely to approach cases where legal charges have been removed in error by the chargeholder.

An issue the court was particularly concerned with was whether the lender had implemented sufficient checks and preventative measures, since the removal of the charge, so that charges securing ‘linked’ accounts would not be removed upon redemption of only one of those accounts. As stated in Futter, the lender must be able to show that they did not deliberately run the risk of the voluntary disposition (here, the e-DS1) being wrong.

Finally, the case also serves as an example of the importance of the lender conducting a priority search and/or registering a unilateral notice as soon as an erroneous removal of a legal charge has been identified. This protects the lender’s interest in the property and notifies any prospective purchasers who would otherwise be unaware of the lender’s interest.


[1] s. 65 and Schedule 4 para. 2 (1) (a) Land Registration Act 2002
[2] NRAM Plc v Evans & Another [2015] EWHC 1543 (Ch)
[3] Garwood v Bank of Scotland [2013] EWHC 415 (Ch)
[4] Futter & Another v Revenue and Customs [2013] UKSC 26
[5] Schedule 4 para. 3 (2) (a)