Yorkshire Bank Plc v Tinsley

This is an appeal which raises an undecided point about second or subsequent mortgages given in circumstances when an earlier mortgage is, for some reason, a voidable security. I can gratefully take the facts from the judgment of HHJ Moseley given at Warrington before he made his order of 3rd October 2003.

Facts

Mr Tinsley was a self-employed electrician who also acquired light industrial buildings in the area which he converted into units either renting them out or selling them. Some of these units were at Parkdale and acquired in 1984. In 1988 he acquired a building at the Bridgefoot Business Centre for £210,000 with the help of a loan from Yorkshire Bank Plc (“Yorkshire”). Yorkshire required a mortgage over both the industrial buildings and over Hillcrest. Mr and Mrs Tinsley executed an “all monies” mortgage over Hillcrest on 10th February 1988 which the judge called “the 1988 mortgage”. This was a second mortgage ranking after the Halifax mortgage and constituted security for all Mr Tinsley’s current and future borrowings.

In 1990 Mr Tinsley told Mrs Tinsley that he had a large tax bill to pay and it would be necessary to re-mortgage Hillcrest. A mortgage was procured from the Confederation Bank to secure a loan of £90,000 which sufficed to pay off the Halifax mortgage. The 1988 mortgage with Yorkshire was discharged at the same time and replaced by what the judge called “the 1991 mortgage”. This was, again, a second mortgage and likewise constituted security for all Mr Tinsley’s current and future borrowings.

In 1992 the marriage began to disintegrate. On 21st December 1993 Mrs Tingley discovered that her husband had committed adultery. On 17th March 1994 she consulted Mr Hadfield of Colin Watson & Co who noted that the matrimonial home was on the market. She informed him in May 1994 that the house was mortgaged to the Confederation Bank and on 23rd May she filed a divorce petition. In June 1994 Mr Tinsley left Hillcrest and went to live with friends called Foden at 113 London Road in Stockton Heath, a long leasehold property divided into two flats. On 16th August 1994 Mr Hadfield recorded that Mrs Tinsley had told him that the Bridgefoot units had been bought in 1988 and that the matrimonial home had then been charged. Mr Hadfield communicated with the Confederation Bank and found that they required £101,496.25 to redeem their mortgage on Hillcrest; he also checked with the Land Registry and found that there was a second charge in favour of Yorkshire. On 14th September he told Mrs Tinsley that he had written to Yorkshire to find out the amount needed to repay their charge.

Mrs Tinsley had filed her affidavit of means on 6th September 1994; on 20th September Warrington County Court ordered Mr Tinsley to file his affidavit within 28 days of service of their order so to do. On 17th October Mr Hadfield had to apply for a penal notice as Mr Tinsley had failed to serve his affidavit of means. He never did so; instead he persuaded Mrs Tinsley to deal with the financial aspects of the divorce without further involvement from Colin Watson & Co. What was arranged was that Mr and Mrs Tinsley would exchange Hillcrest for 113 London Road plus about £110,000. Mr Tinsley said this would redeem the mortgage on Hillcrest and that Mrs Tinsley would be able to have 113 London Road free of mortgage. The conveyancing would be in the hands of Mr Jordan of the solicitors Riley & Co who was a golfing partner of Mr Tinsley. This did not appeal to Yorkshire, however; they insisted that they would have to have a mortgage on 113 London Road. It is not clear when or how this insistence was communicated to Mrs Tinsley but it was around the time that the county court issued its decree nisi on 23rd November 1994.

Completion on the exchange transaction took place on 8th and 9th December 1994 when Mrs Tinsley attended the office of Mr Jordan who appears to have been acting for Mr Tinsley, Mrs Tinsley and Yorkshire. Mr Tinsley never told Mr Jordan that he and his wife were getting divorced. Hillcrest was transferred to Mr Brian Foden for £160,000; 113 London Road was transferred to Mrs Tinsley for £45,000. The sum due to the Confederation Bank was paid out of the resulting £115,000 and Mr Tinsley received most of the balance of about £5,000. Mrs Tinsley signed a new mortgage in favour of Yorkshire over 113 London Road; this mortgage was, again, an all monies mortgage securing Mr Tinsley’s current and future liabilities.

When Mrs Tinsley next saw Mr Hadfield and explained all this to him on 29th December 1994 he recorded that Mr Tinsley had told Mrs Tinsley that he intended to purchase his own property and would then transfer the Yorkshire charge to that property. That never happened. Mr Tinsley went into a downward spiral. He left England for Germany but later returned and from time to time according to the Bank’s records occupied the flat at 113 London Road which was not occupied by Mrs Tinsley.

Mr Hadfield tried to rescue the position by asking Yorkshire how much they would require to release their charge on 113 London Road. On 11th October 1995 they said that they required £60,000. But in June 1996 Mrs Tinsley said that everything was fine and that she did not want to rock the boat. Accordingly no order was ever made in the ancillary proceedings for relief in connection with the divorce which had been made absolute in January 1995. In October 1997 Yorkshire required Mr Tinsley to discharge his indebtedness and on 14th January 1998 served a demand for £286,348.29 on both Mr and Mrs Tinsley. In the same month they said they would release the charge on 113 London Road for £75,000. The units were sold for about £216,000 later that year. On 2nd January 2001 Yorkshire (to whom I shall now refer as “the Bank”) began possession proceedings on the basis of a sum of £147,063.98 currently due. Those proceedings have culminated in Judge Moseley’s order for possession of 3rd October 2003.

Issues and the Judge’s Decision

The judge held that the pleas of “non est factum” and misrepresentation in relation to all the mortgages failed on the facts as against Mr Tinsley and as against the Bank which, in any event, had no constructive notice of such matters; he held, however, that the 1988 and 1991 mortgages were voidable as against Mr Tinsley for undue influence and that, since the Bank had constructive notice of that undue influence, they were voidable as against the Bank also. The Bank do not challenge the judge’s decision on this matter which he expressed as follows (para. 15):-

“I have no reason to reject Mrs Tinsley’s case that she reposed trust and confidence in her husband. Moreover the transaction is not readily explicable by the relationship of the parties. Mrs Tinsley had put money of her own into the acquisition of 16 Lumbrook Road and the proceeds of sale of that property were being used in part to finance the purchase of Hillcrest. The mortgage in favour of the bank was in an unlimited amount and was, I infer, created partly to finance the acquisition of the Bridgefoot units which were to be vested in the husband alone. Those facts seem to me to be sufficient to throw the burden of proof on the husband and since there is no evidence to displace that burden in my view a finding of abuse by Mr Tinsley of his position of trust and confidence is justified. Since whenever a wife offers to stand surety for her husband the lender is put on inquiry, the bank was in my view put on inquiry and since there is no evidence at all of any steps which the bank took to satisfy itself that Mrs Tinsley had entered freely into the transaction, I accept that the 1988 mortgage would have been liable to have been set aside as against the Bank for undue influence of which it had constructive knowledge.”

He reached the same conclusion about the 1991 mortgage.

In relation to the third issue, the judge held that Mrs Tinsley’s success on undue influence in relation to the 1988 and 1991 mortgages could not be transferred to the 1994 mortgage which was “on a different property altogether”, viz. 113 London Road, not Hillcrest. This was despite the fact that Mrs Tinsley was unaware of her right to set aside the mortgages of 1988 and 1991. He recorded the admission of Mr Knox for Mrs Tinsley that there was no authority for his proposition that the original invalidity affected the new mortgage and he rejected further arguments based on what Mr Knox said were analogous principles of tracing and a mortgagee being entitled to the fruits of the mortgaged property. He also held that the case was not analogous to the case of a misrepresentation giving a right to avoid not only an original contract but also a contract as varied.

The judge then considered whether the 1994 mortgage was an unconscionable bargain. He set out the requirements of the doctrine by reference to Alec Lobb (Garages) Ltd v Total Oil Great Britain Ltd [1983] 1 WLR 87. Para 7-114 of the current (29th) edition of Chitty on Contracts is in very similar terms. He held that, although Mrs Tinsley was a poor and ignorant person for the purposes of the doctrine, Mr Tinsley had not exploited her in a morally culpable manner in 1994 nor was the transaction itself overreaching or oppressive because it was “the best that could be achieved in the circumstances” (para. 30(3)). He also held that, even if the bargain were unconscionable, the bank had no constructive notice of that unconscionability. He said (para. 29):-

“. . . since the bank in the present case knew that the transaction was a conveyancing transaction in which Mrs Tinsley was represented by a solicitor who had a duty to her to give her appropriate advice, the bank was not bound to receive a report from the solicitor and was entitled to assume that appropriate advice had been given.”

Since it is accepted by the Bank that they had constructive notice of the undue influence affecting the 1988 and 1991 mortgages, it is convenient to go straight to the third (or substitution) issue.

1994 mortgage as substitute for earlier voidable mortgages

Mr Hall Taylor (who did not appear for the Bank below) submitted:-

(1)

the doctrine of constructive notice was artificial at the best of times, see Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 per Lord Nicholls of Birkenhead paras 34-43; it should not be extended beyond its proper bounds;

(2)

it would be intolerable if banks, on applications for every re-mortgage, had to ascertain whether previous mortgages were tainted by undue influence or any other defect;

(3)

this was the case even if it was the same bank who had granted the previous mortgages (perhaps many years earlier);

(4)

in such circumstances a bank granting a subsequent mortgage should only be fixed with notice if it actually (rather than constructively) knew of the relevant vitiating factor;

(5)

the newly-found authorities dealt with affirmation rather than substitution; the 1994 mortgage was a new and different contract not a mere variation of the earlier ones.

As far as I am aware this is the first case in which this court has had to consider the enforceability of a subsequent mortgage in the circumstance of an earlier voidable mortgage. So it is sensible to consider the question as a matter of principle.

Principle

So also, in my judgment, it must be for undue influence. If a mortgage or guarantee is voidable for undue influence as against a husband and against a bank, a replacement mortgage, even if undue influence is not operative at the time of such replacement, will itself be voidable, at any rate if the replacement mortgage is taken out as a condition of discharging an earlier voidable mortgage. This should be the case even if there is a new contract rather than a mere variation of an old contract.

Even if Mr Hall Taylor is right to submit that there is an element of artificiality in the doctrine of constructive notice as applied to banks in Etridge, this principle is not an extension of it. If a bank is deemed to have notice of the voidability of a charge, that notice is deemed to arise when the charge is given. That itself may be a long time ago; whether there is a re-mortgage on the same property, a substitute mortgage on a different property or a single continuing mortgage may be no more than a historical accident (there is, for example, in the present case, no obvious explanation for the replacement of the 1988 mortgage by the 1991 mortgage).

Of course if a replacement or substitute mortgage is made with a different lender, that different lender cannot be deemed to be aware of matters of which the first lender is deemed to be aware. But if the lender is the same there is no reason why the constructive notice should invariably be deemed to have disappeared when the earlier mortgage is discharged. Mr Hall Taylor’s submission that on a remortgage the charge should only be voidable if the bank is actually (rather than constructively) aware of the undue influence has no support in the jurisprudence and such voidability would seldom arise in practice on the facts.

There is no doubt on the facts of this appeal that the Bank did require the 1994 charge on 113 London Road to be granted as a condition of the release of the charge on Hillcrest. The judge recorded Mrs Tinsley’s case before him as being that she was told by her husband that the money raised by the exchange of Hillcrest with 113 London Road would be sufficient to redeem the only mortgage of which she claimed to be aware (viz. the Confederation Bank mortgage) and that she would become the owner of 113 London Road free of mortgage. He continued:-

“Whatever Mrs Tinsley may have understood, there were clearly difficulties in proceeding with the transaction as proposed. Hillcrest was not only subject to the Confederation bank mortgage but also to the Yorkshire Bank mortgage or possibly mortgages (ie the 1988 and 1991 mortgages). The value of Hillcrest, at least as shown in the transfer, was £160,000.00. The debt to Confederation Bank exceeded £100,000.00, and Mr Tinsley’s debts to Yorkshire Bank exceeded the balance. So it was most unlikely that the exchange transaction could proceed without the consent of Yorkshire Bank. That consent was forthcoming, but only on condition that Mrs Tinsley executed a mortgage in the bank’s favour of 113 London Road in substitution for the 1988 and 1991 mortgages on Hillcrest.”

On these findings it seems to me that Mrs Tinsley must, on principle, be entitled to succeed in her defence to the claim for possession, quite apart from authority.

Authority

Finding for Crowe, Lord Thurlow LC doubted whether the word “confirmation” was correctly used but held, in any event, that the 1782 bond could not be such a “confirmation”. He said (page 220):-

“. . . I have attended formerly to the reason of that word “confirmation”; and have been at a loss for the principle, upon which the Courts have spoken of such transactions as these, subsequent to the demand arising, as a confirmation. I know, if a gentleman of honour and fortune feels himself bound in honour by the circumstances of a bargain, however disadvantageous, not to rescind it, and, knowing the case, declares, when of full age, not under the terror of distress, that he thinks proper to give a new bond; the circumstance of an honorary engagement, attended with money actually advanced, is sufficient to maintain the possessor of the new bond. But if a man gives a new bond under an idea, that the old one may be enforced against him, at what time is that a confirmation? . . . What I go upon is, that the second bond was not given freely, but upon a consideration, that in his mind carried with it a value, it ought not, and was derived from a fraudulent consideration.”

So here, the 1994 mortgage was given upon a consideration that in the mind of Mrs Tinsley (and no doubt Mr Jordan) carried with it a value which it ought not, viz. the discharge of the earlier mortgage which was obtained by undue influence.

Kempson v Ashbee (1874) was a case of undue influence exerted by a stepfather on his stepdaughter. Ashbee lent money to Sladden (the stepfather) in 1857 taking a promissory note from Miss Kempson, the stepdaughter, to repay £450 with interest. Miss Kempson was 20 at the time and living with Sladden and her mother; she had initially refused to give such a bond but at length “consented, on account, as she stated, of Sladden’s ungovernable temper, and the many violent scenes . . . which she had to go through”. She signed the bond in the presence of Ashbee’s solicitor who said he had explained the nature of the bond and was not aware that she was under age. In 1859 and now of age she signed a second bond securing the payment of £600 and interest alleged to be due for principal interest and costs in respect of the previous loan. In 1866 Ashbee obtained judgment against Sladden but agreed not to issue execution if he could get Miss Kempson to sign another bond for the whole amount due on the judgment. This time, now 29, she signed a bond for £705 and interest. In 1872 Miss Kempson’s uncle offered to compound the matter but Ashbee refused and sued Miss Kempson, who filed a bill to set aside the bonds of both 1859 and 1866. Bacon V-C declared both bonds fraudulent as against Ashbee and restrained him from further prosecuting his action at law. The Court of Appeal in Chancery upheld that decision. Lord Cairns LC said that the 1859 bond was clearly unenforceable but was prepared to proceed on the assumption that, in the absence of the 1859 bond, the 1866 bond might have been held not to have been given under undue influence. He said this (page 20):-

“The bond was given, as the Plaintiff’s evidence shews, under clear pressure. Here was a creditor saying he would insist on his rights against her and her step-father unless there was a new bond for the sum already due, with arrears of interest, and she was ignorant of the fact that she had only to apply to this Court to get the previous bond declared mere waste paper. Is it possible that this can be held to be a confirmation of the first bond? To constitute a confirmation there must be knowledge of the invalidity of the document. But here there was no knowledge of the invalidity. This bond was inseparably connected with the bond of 1859 . . . and therefore those who are interested under the bond of 1866 are unable to hold it.”

James and Mellish LJJ agreed.

In the present case the 1994 mortgage is likewise inseparable from the 1991 (and the 1988) mortgage and since the Bank is fixed with constructive notice of the invalidity of those mortgages so must it be fixed with notice of the comparable invalidity of the 1994 mortgage.

The judge was not referred to these authorities. Mr Hall Taylor submitted in his skeleton argument that they could be distinguished because in both cases the unconscionability or the undue influence was still operative at the time of the bond sued upon. I do not so read the cases. Lord Cairns’ statement that the bond was given under clear pressure was a statement of fact not a conclusion leading to the legal consequence that the bond could be set aside for that reason. That would be contrary to the earlier part of his judgment in which he proceeds on the basis that, on its own, the 1866 bond might not have been held to be given under undue influence. The cases do not appear to have received much attention in the text books but Spencer Bower and Turner, Actionable Non-Disclosure 2nd edition (1990), para 22.24 note 1 regards Kempson v Ashbee as a case which decided that advice about the invalidity of the prior agreement should have been given.

I would, therefore, allow this appeal on the substitution issue and discharge the order for possession granted to the Bank.

Unconscionable Bargain

The primary and, in the event, the determinative issue on this appeal, the substitution issue, arises from the following facts found by the judge:

(1)

Mr. and Mrs. Tinsley purchased Hillcrest in 1988 in their joint names (para. 2(3) of the judgment).

(2)

They mortgaged Hillcrest in 1988 and 1991 to Yorkshire Bank plc (“the Bank”) to secure Mr. Tinley’s business debts (paras. 2(3) and 3).

(3)

Each of those mortgages was procured from Mrs. Tinsley by an abuse by Mr. Tinsley of his position of trust and confidence amounting to undue influence (para. 15).

(4)

The Bank was put on inquiry but took no steps to satisfy itself that Mrs. Tinsley entered freely into the 1988 mortgage transaction (para. 15).

(5)

The same applied to the 1991 mortgage (para. 16).

(6)

In 1994 the Bank required, as a condition of its consent to the exchange transaction, that Mrs. Tinsley execute a mortgage to it of 113 London Road in substitution for the 1988 and 1991 mortgages, the new mortgage again securing Mr. Tinsley’s business debts (paras. 5, 22 and 30(2)).

It is not in dispute on this appeal that on those facts Mrs. Tinsley had the right to set aside the 1988 and 1991 mortgages while they subsisted. Nor is it in dispute that neither Mrs. Tinsley nor the Bank in fact knew that she had that right. Had she known, she could have required payment to herself of half the proceeds of sale of Hillcrest free of any mortgage to the Bank and that would have been enough to purchase 113 London Road without granting a mortgage to the Bank. Had the Bank known that the mortgages were voidable, it would not have been in a position to insist on Mrs. Tinsley granting a mortgage to it of 113 London Road.

Is the 1994 mortgage liable to be set aside because of its connection with the voidable mortgages? The conscience of the Bank had been affected while the 1988 and 1991 mortgages subsisted because it had constructive notice of the equitable wrong done by Mr. Tinsley to Mrs. Tinsley. Why should the Bank’s conscience not continue to be affected when it had made its consent to the exchange transaction conditional on Mrs. Tinsley giving the Bank a mortgage of 113 London Road in substitution for the voidable mortgages? The Bank insisted on the substitution and thereby it connected inseparably the new mortgage to the earlier mortgages.

Mr. Hall Taylor for the Bank submitted that to hold that the 1994 mortgage was voidable on that account was unsupported by authority and an unjustifiable over-extension of equitable principles. He pointed to the practical difficulties facing a lender if it was put on inquiry in relation to a prior transaction about which it may know nothing and which it may be unable to investigate.

As Longmore L.J. has pointed out, there is some authority in Crowe v Ballard and Kempson v Ashbee which supports the submission of Mr. Knox for Mrs. Tinsley that in circumstances such as the present an inseparable connection between an earlier invalid transaction and a later transaction will invalidate the latter. Here, as Mr. Knox says, the mortgage of 113 London Road is inseparably connected with the earlier mortgages and so with the undue influence of which the Bank is taken to have notice.

I would be reluctant to reach a decision which would cause significant practical difficulties for lenders in property transactions, but I am not persuaded that we are doing any such thing in allowing this appeal. It is rightly not suggested that a lender should be put on inquiry about previous transactions to which the lender is not a party. But if the same lender was the mortgagee in the prior voidable mortgage and requires the discharge of the prior mortgage and the grant to it of a new mortgage, I can see no sufficient objection to holding the new mortgage taken in substitution for the earlier mortgage also to be voidable. The lender should know from its own records whether or not it protected itself in the earlier mortgage transaction. If for some reason it does not know I do not see why it should not be able to protect itself in much the same way as the law now requires lenders to do in order to avoid being on constructive notice of an equitable wrong to a wife by taking steps to ensure that the wife receives independent advice on the transaction into which she is to enter with the lender: see Barclays Bank plc v O’Brien [1994] 1 AC 180 and Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773. That transaction in a case such as the present necessarily includes the discharge of the prior mortgage, and it will be for the independent adviser to give advice about that.

In the present case the Bank knew that a solicitor, Mr. Jordan, had been retained to act for Mrs. Tinsley. Let me assume that despite Mr. Jordan’s connection with Mr. Tinsley Mr. Jordan was acting as an independent adviser for Mrs. Tinsley. If the Bank had ascertained that Mr. Jordan had been retained to advise her on the 1994 transaction, it would have been entitled to assume that she had been competently advised by her solicitor. However, I cannot accept the judge’s view that it is implicit in a case where a solicitor is retained to act for a wife in a conveyancing transaction that the retainer of the solicitor extends to advising the wife about the practical implications of the proposed transaction. With respect to the judge, Lord Scott’s speech in Etridge lends no support to that view. Lord Scott makes clear that the lender requires “confirmation that the solicitor’s instructions do extend to advising her about the nature and effect of the transaction” (para. 117). He went on to say that subject to that confirmation the lender is entitled to believe that the solicitor will have advised adequately. Without that confirmation, the lender is not justified in assuming that the solicitor’s instructions extend to advising the wife about the nature and effect of the transaction. I am also unable to accept that the judge correctly distinguished this court’s decision in UCB Corporate Services v Williams [2002] EWCA Civ 555.

For these as well as the reasons given by Longmore L.J. I too would allow this appeal.

I agree with the judgments of both Longmore LJ and Peter Gibson LJ.

In particular, I would underline the points that the 1994 mortgage was inseparably connected with the 1988 and 1991 mortgages and that there was nothing to render the past abuse by Mr Tinsley amounting to undue influence, of which the Bank had constructive notice, cease to be operative in connection with the 1994 mortgage. As a result, the mere fact that there was no new and additional inequity in relation to the 1994 mortgage is not determinative, for the inequity of the earlier transactions had not been cured: as Crowe v Ballard and Kempson v Ashbee illustrate.