Edwards v Lloyds TSB Bank Plc

In this judgment I refer to the claimant as ‘Mrs Edwards’, to her former husband as ‘the husband’, to the defendant (and counter-claimant), Lloyds TSB, as ‘the bank’, and to the underlying subject matter of the case as ‘the house’.

The house is 40 Meads Lane, Seven Kings, Ilford, Essex. It is a small terrace house where Mrs Edwards lives with her two children. There is a claim and a counterclaim. The issue on the claim is whether the bank has an equitable charge over a 50% undivided share in the house as security for a debt which is undoubtedly owed to it by the husband. He is not a party to this action, and indeed neither Mrs Edwards nor the bank knows where he is. On behalf of Mrs Edwards it is submitted by Mr Woolf that the bank does not have an equitable charge, but in my judgment it does.

The issue on the counterclaim is whether I should make an order for the sale of the house so that the bank can satisfy, out of 50% of the net proceeds of sale, the debt which is owed to it by the husband. My decision is that I should make an order for sale, but that I should postpone the operation of the order for a basic period of five years, and subject to certain detailed provisions which I shall describe later at the end of this judgment.

Mrs Edwards and the husband were married in 1987. They bought the house in 1988. They were registered as joint proprietors at the Land Registry, and although there have been changes since then as regards the beneficial interests in the house, the Land Registry still shows them as the joint proprietors of the legal estate. They appear to have borrowed £60,000 from a building society. I do not have full details of the history of that, but I do know that now the legal estate is mortgaged to the Alliance & Leicester Building Society to secure a debt of £60,000.

Mrs Edwards and the husband separated in March of 1996. The husband moved out of the house, and Mrs Edwards has had no contact with him for some time. They were divorced, on Mrs Edwards’s petition, in December 2000. They had two children, a son now aged 15 and a daughter now aged 13. Both children are in full time education. They live with their mother in the house.

It appears from documents (there being no live evidence from anyone who has any personal knowledge) that in about May of 1996, shortly after the husband had left the house, he approached the bank about an overdraft facility for a company which he owned, called Elderberry Promotions Ltd. The company was already overdrawn by about £4,000, and I assume that the husband wished to have a larger facility. I have not seen a formal letter from the bank granting an increased facility, but the bank certainly allowed the overdraft to rise. However, the bank must have insisted that the husband should give a personal guarantee of the company’s overdraft. He signed a standard form of guarantee on 23 May 1996. His liability was limited to £15,000 plus interest and costs incurred by the bank in attempted enforcement. And, critically for the present case, the husband purported also to grant to the bank a second mortgage of the house (the first mortgage being the pre-existing one to the Alliance & Leicester) to secure his personal guarantee. I can only surmise, as did counsel for both parties in the case, that the husband had falsely represented to the bank that he was the sole owner of the house. There is a depressingly large number of reported cases in which separated husbands have done that sort of thing.

The bank appears to have provided a standard form of mortgage deed for the husband to complete and execute. The first page of the deed, as completed by or on behalf of the husband, says that the mortgage is given by the husband, and his address is given as the house. The deed is stated to be a mortgage of ‘the freehold/leasehold property known as 40 Meads Lane’, etc. The first page is consistent with the husband giving a legal mortgage of the entire interest in a property of which he was the sole owner, subject only to any prior mortgages. In fact the husband was not the sole owner of the house, either as respects the legal title or as respects the beneficial interest, because Mrs Edwards was a joint holder of the legal title and was also a beneficial joint tenant or tenant in common. The case has proceeded on the basis that the husband dishonestly concealed that true state of affairs from the bank, and also on the basis that Mrs Edwards had no idea of what he was doing.

Moving from the first page of the deed to the last page, that is the page which requires to be signed by the grantor or grantors of the mortgage. Consistently with what had appeared on the front page one might have expected the last page to be signed solely by the husband. It is signed by him, but it also bears a forged signature which purports to be the signature of ‘Suzanne Edwards (Wife)’. Both signatures are witnessed by a solicitor. Mrs Edwards says that she did not sign the document, and that is accepted by the bank. The inference has to be that the husband and an unknown woman, pretending to be Mrs Edwards, went to the solicitor’s office and signed the document. The deed is not dated, but it must have come into the possession of the bank, with the true signature of the husband and the forged signature of Mrs Edwards, in the later part of May 1996. Mrs Edwards knew nothing about any of this.

The unexpected appearance of a signature for Mrs Edwards on the last page might have caused the bank to make enquiries, but it appears that no enquiries were made. The husband’s company was allowed to run up the overdraft. The company’s bank statements are included in the documents before me. The account was quite active over the months of May, June and July 1996, no doubt reflecting trading, but unsuccessful trading, by the company. By mid-July the overdraft had risen to over £15,000. Trading seems to have tailed off around then. The company obviously failed, and the bank is still owed money. I assume that there has never been any prospect of recovering anything from the company itself. The husband is liable on his personal guarantee (subject to the limit of £15,000 plus interest and costs), but he cannot be traced and any claim against him based on his personal covenant is presumed to be worthless. That leaves the bank with whatever rights against the house which it may have under the mortgage deed. This case is in essence brought in order to ascertain what those rights are.

The bank never attempted to register its mortgage in the Charges Register section of the Land Registry entries for the house. However, on 6 November 1997 it sought to protect itself to an extent by placing a caution on the Register.

I have already recorded that Mrs Edwards was divorced from the husband in December 2000. The decree absolute was made in Ilford County Court on the 15^th of the month. Some three months later there was another order in the divorce proceedings. It was made by the District Judge at Ilford. It ordered the husband to transfer to Mrs Edwards ‘all his legal estate and beneficial interests in [the house] subject to the mortgage secured thereon in favour of the Alliance & Leicester’. The order also provided that, in default of the signing of a transfer deed by the husband, a District Judge of Ilford County Court should sign a transfer in his place. The husband has not signed a transfer deed. Nor, so I was told, has a District Judge signed a deed in his place. The result is that the legal title to the house is still registered in the joint names of the husband and Mrs Edwards. However, it is clear that the husband no longer has any beneficial interest in the house. Mrs Edwards is the sole beneficial owner, but subject to mortgages and charges. Undoubtedly her ownership is subject to the mortgage in favour of the Alliance & Leicester. The question in the present case is: to what extent, if any, is it also subject to a mortgage or charge in favour of the bank?

The house is a two bedroom terrace house in a residential part of Ilford. Mrs Edwards has said in her witness statement that the house, free from all mortgages and with vacant possession, would in her broad estimate be worth around £200,000. That is in no sense a professional valuation, but the bank does not question that Mrs Edwards has put the figure forward in good faith. The discussion in the case has proceeded on the basis that the value of the house should be assumed to be around £200,000, which means that, after allowing for the mortgage debt of £60,000 to the Alliance & Leicester, the equity value of the entirety would be £140,000, and the equity value of a 50% undivided share (ignoring any discount for the limited marketability of an undivided share valued by itself) would be £70,000. If market values rise or fall the equity values would rise correspondingly. As I understand it Mrs Edwards is able to service the Alliance & Leicester mortgage, so that remains a constant liability of £60,000.

Although Mrs Edwards is able to service the Alliance & Leicester mortgage, it should not be supposed that she is in a comfortable financial position. She receives nothing from her former husband. She works part time, earning approximately £1,000 a month. In addition she receives child benefit of £112.12 a month. Out of those items of income she has to support herself and her two children, to service the Alliance & Leicester mortgage, and generally to meet the costs of running the house.

The claim takes the form of an application by Mrs Edwards for an order that the caution which the bank has placed on the Land Register be vacated. In substance the question of principle is whether or not the bank has any form of security interest in the house.

The first point to make is not controversial. Although the mortgage deed purported to grant to the bank a mortgage of the entire legal estate in the house (subject only to the prior mortgage in favour of the Alliance & Leicester), it did not succeed in doing that. The reason is that Mrs Edwards did not execute the mortgage and had not consented to it. Nor did she agree with it when she found out about it, and even if she had I apprehend that a new mortgage deed would have been required. From almost as soon as the bank discovered that the signature of Mrs Edwards had been forged, it (the bank) has accepted that it does not have the full mortgage which it had wished to obtain, and which the deed would have granted if Mrs Edwards had signed it.

However, the bank contends that although the mortgage deed was not effective as between itself on the one hand and the husband and Mrs Edwards on the other as respects the entire ownership of the house, the deed was effective between itself and the husband as respects the interest in the house which belonged to the husband: that is as respects his 50% beneficial interest. In my judgment the bank’s argument in that respect is correct in principle, and is amply supported by authority. As a matter of principle it would be extraordinary if the husband, having induced the bank to give continued credit to his company on the basis of a mortgage which the husband had said that he could grant, could then turn round and say that, not merely did the Bank not obtain the mortgage interest in the entirety of the house which he (the husband) had told it it would obtain, but also it could not have the lesser mortgage interest in the one half undivided share in the house which he could grant to it. I agree entirely with the way in which it was expressed in Mr Levy’s skeleton:

“It has been held in numerous cases that where the signature to a mortgage of one co-owner is ineffective, the mortgage remains good against those who signed.”

I might be inclined to add the words ‘to the extent of their beneficial interests’, but those words are in any event implicit in Mr Levy’s formulation, since a mortgage can only be good against a person to the extent that he had a property interest capable of being mortgaged. The cases have based the conclusion partly on general principle and partly on s.63 of the Law of Property Act 1925. The correct position is that, although the deed did not create a legal mortgage of the entire ownership interest in the house, it did create an equitable mortgage of the husband’s 50% beneficial (or equitable) interest in the house.

Mr Levy cited several cases to me in support of his proposition. In my view they did support it, not surprisingly given that the proposition is exactly what, as a matter of principle, one would expect. The cases were: First National Securities Ltd v Hegerty [1985] QB 850 and 854A; Ahmed v Kendrick [1988] 2 FLR 22; Bowers v Bowers (Hoffman J, unreported, 3 February 1997); First National Bank plc v Achampong [2003] EWCA 487. I will not refer to the cases at length, since the proposition is, in my view, well established. Indeed, Mr Woolf, who throughout the hearing meticulously did not attempt to dispute on behalf of Mrs Edwards propositions which were evidently correct even though adverse to his client, came close to conceding this proposition also. There are, however, three points which he makes on this part of the case with which I should deal.

First, he submitted that, because the deed which purported to be a mortgage of the house was a forgery, it was a nullity, and could not bind anyone. In my judgment that cannot be right. The position must surely be that the deed would not bind any person whose signature to it had been forged (that is in this case, Mrs Edwards), but it would continue to bind the person who had forged it, in so far as it affected any property interest which that person owned. One cannot suppose that the forger could, by relying on the illegality of his own conduct, escape the liability which by his own deed he purported to impose on himself. Moreover, the proposition that he cannot do that is in any event supported by authority. For example, in First National Securities Ltd v Hegerty (supra) a husband had executed a deed of charge of the house owned by himself and his wife. He signed his own name and forged his wife’s signature. The deed was held to be effective as regards the husband’s interest. Further, I quote a few sentences from the judgment of Hoffman J in Bowers v Bowers (also supra; see page 7 of the transcript):

Second, Mr Woolf relied on the decision of HH Judge Kolbert, sitting as a High Court judge, in Penn v Bristol and West Building Society [1995] 2 FLR 938. A husband entered into a collusive sale of the family house to a Mr Wilson. The husband signed the transfer himself and forged the wife’s signature. Mr Wilson knew exactly what was going on and went along with it. He raised a mortgage from the building society, purporting to grant a legal charge of the house. The wife succeeded in setting aside the purported transfer to Mr Wilson, since her signature was required and, to Mr Wilson’s knowledge, she had not signed the document. The transfer was a sham and therefore was a nullity. As regards the building society, since Mr Wilson acquired no title to the property, he could not grant a mortgage to the society. Therefore the society did not acquire a mortgage of the house. The judge was also of the opinion that the society could not obtain an equitable charge over the husband’s beneficial interest in the house, because the whole transaction was a sham. I agree with the judge’s view that the society did not obtain an equitable charge over the husband’s interest, although I might have been inclined to base that conclusion on the ground that the husband was not a party to the purported mortgage deed with the society rather than on the ground which the judge gave. However, the case is plainly distinguishable from the present case, where the bank (the nearest equivalent of Mr Wilson in that case) was certainly not a joint conspirator with Mrs Edwards’ husband. The proposition that Mr Wilson could not obtain any form of ownership interest in that case does not mean that the bank could not obtain any form of security interest in this case. I add for completeness that in Penn v Bristol and West Building Society the inability of Mr Wilson to transfer any form of security interest to the society does not appear in the end to have mattered, because the society was held to have a good claim against a firm of solicitors for breach of warranty of authority.

Third, Mr Woolf suggests that the bank was at fault in some way in not making enquiries when it noticed that the mortgage deed unexpectedly bore (or so it appeared) the signature of Mrs Edwards. He says that, if the bank had made enquiries, it could quickly have discovered that Mrs Edwards was a joint owner of the house and had not signed the mortgage deed. It could then have refused to allow the husband’s company to increase its overdraft. That could be true, but I do not agree with the next step in the argument, which is that the bank’s omission to make enquiries somehow disqualified it from obtaining an equitable charge over the dishonest husband’s equitable interest. No authority is cited for that proposition, and in my judgment it is not correct.

I should mention before I move on that it was contended in the pleadings that, because the deed was not signed by the bank, s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 meant that it could not have any effect. However, the contention was not persevered with by Mr Woolf, since the deed is not relied on as an agreement for an interest in land to be created in future, but rather as an instrument which of itself imposed an immediate equitable charge over the husband’s beneficial interest. Section 2 renders certain contracts unenforceable. It does not render ineffective an instrument which, s.2 apart, is effective to create an immediate legal or equitable property interest of some kind.

The result of my analysis so far is that, when the husband signed the deed and his company’s overdraft thereafter rose to a level above the £15,000 limit on his personal guarantee, his beneficial interest in the house was in equity charged to the bank to secure his guarantee (including accruing interest on £15,000 plus costs of enforcement). I now move forward in time to the order of Barnet County Court which required the husband’s beneficial interest in the house to be transferred to Mrs Edwards. The question is whether that order made any difference to the position that the husband’s beneficial interest was subject to an equitable charge in favour of the bank. The answer, in my opinion, is: no. The husband’s beneficial interest became Mrs Edwards’ beneficial interest, but, as respects that beneficial interest, Mrs Edwards held it subject to the bank’s equitable charge.

The order required the husband to transfer to Mrs Edwards ‘all his legal estate and beneficial interests in’ the house. If he did not do that a District Judge was to sign a transfer in his place. On analysis there were two separate elements in the order. First, the husband, who was a joint holder with Mrs Edwards of the legal title, was to transfer his interest in the legal title to Mrs Edwards, so that she would become the sole holder of the legal title. (That has not been done, and, as I have recorded earlier, no transfer has yet been made by a District Judge in place of a transfer by the husband.) Second, the husband was to transfer his beneficial interest in the house to Mrs Edwards. It is this second element in the order which is relevant to the present issue. Although neither the husband nor a District Judge has executed any document to give effect to it, I consider that in this respect the order took immediate effect, so that in equity Mrs Edwards became entitled to the beneficial interest which the husband had previously owned.

Immediately before the court order was made the position as respects the beneficial ownership was that the husband owned a 50% interest subject to the Alliance & Leicester’s mortgage and subject to the bank’s equitable charge, and that Mrs Edwards owned the other 50% interest subject to the Alliance & Leicester’s mortgage but free from any charge in favour of the bank. After the court order Mrs Edwards was and still is entitled to 100% of the beneficial interest, but that 100% is made up of the 50% which was originally owned by the husband and the 50% which Mrs Edwards has owned all along. The first of those 50% interests is, in my opinion, still subject to the Alliance & Leicester’s mortgage and (the point which matters for this case) still subject to the bank’s equitable charge. The second of those 50% interests is still subject to the Alliance & Leicester’s mortgage and is still not subject to the bank’s equitable charge. The critical point is that the beneficial interest which the husband owned was subject to the bank’s equitable charge, and in my judgment the court order could not and did not cause it to cease to be subject to the bank’s equitable charge when it was transferred to Mrs Edwards. In principle the husband could not transfer to Mrs Edwards anything greater than he owned. The District Judge who made the order was not told of the bank’s caution, and therefore knew nothing of the interest in the husband’s equitable interest which the bank claimed (correctly in my view) that it had. If he had known of the bank’s claim I am confident (and Mr Woolf fairly accepts) that he would have worded his order so as to preserve such interest as the bank had. The order was not worded in that way, but that makes no difference. If, as I believe, the husband’s 50% beneficial interest was subject to an equitable charge in favour of the bank, that 50% interest, having now passed into the ownership of Mrs Edwards, is still subject to that same equitable charge.

One final point. In argument mention was made of s.2(l)(iv) of the Law of Property Act 1925, under which in certain circumstances a conveyance of a legal estate made under an order of a court will overreach an equitable interest which affects the legal estate. However, after discussion Mr Woolf accepted that that provision could not apply in this case. It only applies to a conveyance of a legal interest, whereas, although the court order does refer to the husband’s legal estate in the house, the relevant part of the order for present purposes is the part which refers to the husband’s beneficial interest. Further, s.2(l)(iv) can only overreach an equitable interest which affects the legal estate. The equitable charge which the bank had at the time of the court order was an equitable interest which did not affect the legal interest in the house: it affected only the husband’s beneficial interest, which was an equitable interest, not a legal interest.

Therefore my conclusion on Mrs Edwards’ claim that the bank’s caution should be removed from the Land Register is that it fails. The bank does have an equitable charge over the part of Mrs Edwards’ beneficial interest in the house which was originally the 50% interest of the husband. The claim for the removal of the caution was based on the proposition that the bank had no such interest. Since in my judgment the bank does have the interest which it asserts I dismiss the claim.

By the counterclaim the bank seeks an order that that the house be sold. I should first point out that this is not a simple instance of a secured creditor seeking to enforce its security. The bank is not seeking an order for the sale of the 50% interest in the house which Mrs Edwards now holds but which was originally held by her former husband. The bank wants an order for the entire legal and beneficial interest in the freehold house to be sold. Thus the jurisdiction which it seeks to invoke is not the jurisdiction which a court has to order a sale of a mortgaged item of property. Rather it is the court’s jurisdiction where a property is owned in undivided shares to order, upon an application by one of the joint owners, the sale of the entirety. The bank is not itself the owner of a 50% undivided share in the house, but it has an equitable charge over a 50% undivided share, and it seeks an order for the entirety to be sold.

Applications of this sort used to arise under s.30 of the Law of Property Act 1925. Since property owned in undivided shares was held on trust for sale the apparent position was that a beneficiary of the trust who wished to have it executed by a sale was entitled to an order to that effect. However, the court had power to postpone sale. The position is now different, and the matter is governed by ss. 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996. Section 14 provides that ‘any person who .. has an interest in a property subject to a trust of land may make an application to the court for an order under this section'. In my judgment the bank is a person who has such an interest, and as such it is entitled to make the application which it has made by its counterclaim. If the application succeeds and the house is sold, the bank will, out of 50% of the net proceeds of sale, recover the debt owed to it by the husband under his personal guarantee. The balance of that 50% will belong to Mrs Edwards, as will the whole of the other 50%. (It will be appreciated that the net proceeds will have been reduced by the repayment of the Alliance & Leicester mortgage.)

It is common ground that one of the orders which the court can make is an order for the house to be sold, but it is no longer the case that, because the house is held on trust for sale, the law begins with a presumption that an order for sale should be made unless the court directs a postponement. Section 15(1) sets out a non-exclusive list of four factors to which the court is to have regard in determining an application under s.14. They include ((a) and (b)) the intentions and purposes of the persons who created the trust, and the purposes for which the property subject to the trust (the house) is held. By way of comment on those factors, the original intention was no doubt to provide a matrimonial home for the husband, Mrs Edwards and their children. In part that purpose has gone, because the marriage is over and the husband is no longer living in the house, but in part the purpose still survives, because the house is still the home for Mrs Edwards and the two children of the former marriage. A further factor, (c), is the welfare of any minor who occupies the property as his home. The two children are still minors, and they live in the house, so this factor is certainly relevant. Factor (d) is also relevant: ‘the interests of any secured creditor of any beneficiary’. That brings into the evaluation the interests of the bank. Subsection (3) states that the court is also to have regard to the circumstances and wishes of any beneficiary of full age entitled to an interest in possession in the property. In this case that means that the court is to have regard to the circumstances and wishes of Mrs Edwards. Her wish is that the house should not be sold.

I was referred to three recent decisions which considered the application of ss.14 and 15 in cases having some similarities to the case before me: The Mortgage Corporation v Shaire [2000] 1 WLR 973; Bank of Ireland Home Mortgages Ltd v Bell [2001] 2 FLR 809; and First National Bank plc v Achampong [2003] EWCA 487. In the first of those cases Neuberger J said that, in his opinion, ss.14 and 15 had to some extent changed the law. The court has a greater flexibility as to how it exercises its jurisdiction on an application for an order for sale. Having taken into account the factors identified in ss.15 and such other factors as arose, ‘it is a matter for the court as to what weight to give to each factor in a particular case’. All three cases bring out the point that, if there is a creditor of a husband or wife and the creditor’s interest is to be taken into account (as the bank’s interest is in this case), it is unsatisfactory for the court simply to say that it declines to make any order for sale. In the Bank of Ireland case the Court of Appeal, reversing the decision of the first instance judge, said:

In this case the bank has applied for an order for sale, and Mrs Edwards has opposed the application. I must weigh up the various factors which are relevant and do the best I can to reach a balanced conclusion. I mention now two particular points on the facts of this case which were (I believe) not present in any of the three cases to which I was referred. First, if the house was sold now it is hard to see how Mrs Edwards could find the money to buy another smaller one. In the other cases it appears to have been different. For example in The Mortgage Corporation v Shaire (supra) Neuberger J said that if the house was sold Mrs Shaire would still have a substantial sum which she could put towards a smaller home. In the present case, in contrast, the house is a two-bedroom house in which Mrs Edwards already has to share a bedroom with her daughter. The house is obviously at the lower end of the range of prices for houses in the area where she lives. If there was a sale and the husband’s debt to the bank was taken out of half of the net proceeds before the balance was available to Mrs Edwards, I very much doubt that she would be able to find another house which she could afford to buy and which would be adequate to accommodate her and her children.

Second, whereas in the other three cases it appears that the debt owed to the bank already exceeded the value of the interest over which the bank had an equitable charge, in the present case that is not so. On the figures which I gave in paragraph 12 above the value of the bank’s security (a 50% interest in the house) would be (if the entirety were sold) about £70,000. The husband’s debt to the bank (£15,000 plus interest plus costs) is unlikely at present to be more than £40,000. It is true that interest is not currently being paid to the bank on the debt owed to it, but interest continues to accrue on the debt, and now and for some time to come the security will be sufficient to cover the increasing amount of the debt.

In the circumstances I do not want to order an immediate sale, because I believe that that would be unacceptably severe in its consequences upon Mrs Edwards and her children. But equally I believe that I should make some order which, admittedly later rather than sooner, should enable the bank to recover its debt with accrued interest upon it. I intend to make an order along the following lines.

I believe that I have now covered all the matters with which I need to deal in this judgment, and I have no other observations to make.