Santander UK Plc v Fletcher & Anor

Ashley Fletcher was convicted of fraud. His victim was his mother, the appellant, Mrs Paula Fletcher. As a result of the fraud Mrs Fletcher’s home was mortgaged to the bank (Santander, the respondent) for a much larger loan than Ashley had led his mother to believe. He represented to his mother than the loan was for a sum in the region of £32,000 whereas in fact it was for about £120,000. The loan has not been repaid. The debt stood at about £160,000 in May 2017 and has continued to increase. The bank brought a mortgage possession claim. At trial the judge accepted Mrs Fletcher’s case that the mortgage should be set aside for undue influence of which the bank had sufficient notice to be on inquiry (see RBS v Etridge [2002] 2 AC 773). He held that provided she paid back to the bank the sum she had thought the mortgage was for (i.e. £31,250), the bank could not enforce the mortgage against her. However she still stands to lose her home as a result of a further point which I shall explain. The judge Mr Recorder Gardner QC felt he was constrained to decide the point against Mrs Fletcher. Nevertheless he gave permission to appeal because he was troubled by it.

On appeal Mrs Fletcher changed counsel. Mr Adams now argues the case on her behalf. He abandoned the point on which the judge gave permission to appeal, recognising that the judge was right to decide the particular point he did decide in the way he did. However Mr Adams argued that the ultimate conclusion was wrong for a different reason. That argument was first raised in Mr Adams skeleton argument served (late) less than a week before the appeal hearing. When the appeal was called on the first question to decide was what to do about the new argument. Mr Gatty for the respondent argued that it was a new point, not taken before the judge, was raised far too late and that Mrs Fletcher needed permission to amend the grounds of appeal to argue it, which should be refused. Mr Adams argued that the new point was simply a different reason why the way the judge decided the case was wrong. The original grounds of appeal already challenged that way of deciding the case and so the new argument was within the grounds of appeal. He denied that it raised new facts and contended that even if it did need permission, that permission should be given in the circumstances of this case. In a judgment given during the hearing I decided that an amendment to the grounds of appeal was required but that in the circumstances the best approach in the interests of justice was to allow the amendment and hear the new argument, on the footing that if the facts and evidence were sufficient then assuming the new argument was well founded it would succeed but if not, or if the evidence was not sufficient to support it, then it would fail. The case was not one to be remitted.

Mrs Fletcher’s problem arises from the fact that before she signed the mortgage application, she made her son a joint owner of her home. In the relevant standard form (a TR1) which conveyed the house from Mrs Fletcher’s sole name into the joint names of Mrs Fletcher and her son, Mrs Fletcher ticked the first box in section 10. That section is entitled “Declaration of trust” and by ticking the first box the relevant words were “The transferee is more than one person and they are to hold the property on trust for themselves as joint tenants”. There is not (now) any dispute that as an express declaration of trust this would take effect in such a way that in the relevant circumstances of this case (which involve a severance of the joint tenancy) Ashley Fletcher and Mrs Fletcher each hold 50% of the beneficial title. Accordingly the bank argued that although the mortgage was not enforceable against Mrs Fletcher, subject to her paying £31,250, the bank separately had an equitable charge over Ashley Fletcher’s beneficial interest in the house which arises even if the legal charge under the mortgage is ineffective. The judge held that the declaration of trust was conclusive (citing Stack v Dowden [2007] AC 432, Goodman v Gallant [1986] Fam 106 and Pankhania v Chandegra [2012] EWCA Civ 1438). Thus Ashley did indeed have a 50% beneficial interest. There was no dispute that if Ashley did have a beneficial interest then the bank had an equitable charge over it. Accordingly the house has to be sold and half the proceeds used to pay off Ashley’s indebtedness to the bank. That is why Mrs Fletcher stands to lose her home.

The argument on which the judge gave permission to appeal was whether the declaration of trust would convey to a layman that the property would be held in equal shares since it does not use those words (unlike the second box in section 10). If it was right that the conveyance could be found to be insufficiently clear to reach a conclusion of 50/50 beneficial ownership then one could look at other evidence of Mrs Fletcher’s actual intentions. It is said on Mrs Fletcher’s behalf that the other evidence showed clearly that Mrs Fletcher did not intend her son to have any beneficial interest at all. The argument about construction of the words on the TR1 is the one which was not pursued by Mr Adams on appeal.

The new argument is set out below. Before doing so there is a preliminary point to get out of the way. This is whether the TR1 is to be regarded as a voluntary settlement or a declaration of trust. The significance of the difference between the two is about whose intention matters. If the property is regarded as being conveyed to Mrs Fletcher and her son in law and then they both, as legal owners, declared a trust then the relevant intentions are of the two people. If the trust is regarded as being created by the voluntary settlement of the original owner Mrs Fletcher then only her intention matters. Mr Adams submitted it was a voluntary settlement and Mr Gatty was content to argue this point on the same basis. Therefore I do not need to get into that question any further. Nevertheless I will refer to the relevant part of the TR1 as a “declaration of trust” for the rest of the judgment, simply because that is the terminology both sides used in argument.

The steps in the appellant’s new argument are as follows:

Mr Adams submits that as a result of these points, the only relief Mrs Fletcher needs is a declaration, which she is entitled to, that Ashley does not hold any beneficial interest in the property. On that basis the bank has no right to seek possession and sale of the property. If necessary Mrs Fletcher has a good claim for an order setting aside or rectifying the TR1 to reflect her true intentions. The reason counsel puts this as “if necessary” is because no claim to set aside, rescind or rectify the TR1 was pleaded on behalf of Mrs Fletcher before the judge. The submission is that the fact no such claim was pleaded is not a bar to relief. What matters is whether she has a good claim.

Mr Gatty for the bank argues to the contrary. He starts by submitting that one must take care to look at what actually happened and to distinguish between the conveyance from Mrs Fletcher to the joint names and the later mortgage. The judgment was focussed (rightly) on whether the mortgage was tainted by undue influence, whether the bank was on notice of that and consequential issues. It does not follow from the fact that the legal mortgage was set aside as a result of the undue influence that the bank had any relevant notice undermining the earlier declaration of trust in the TR1. Nor is it established that the TR1 was procured by fraud. The bank is also a victim of Ashley Fletcher’s fraud. The judge did not make a clear finding about what Mrs Fletcher’s subjective intentions were, aside from the terms of the TR1, but even if he had and they were what is now contended for on appeal, the most which Mrs Fletcher could have now as a result was a right to seek to set aside, rescind or rectify the declaration. There is no difference in this case between these three remedies. However on conventional principles that right can be lost if third parties have relied on the unrectified instrument. In this case the bank is a relevant third party. It gave good consideration. Although the legal mortgage has been set aside, the bank also had an equitable charge over Ashley’s beneficial interest which arose before any notice undermining the declaration of trust was given to the bank. Thus even if she ever had it, Mrs Fletcher has lost the right to rescind or rectify the declaration of trust. Mr Gatty characterised Mr Adams’ argument as based on a broad and unprincipled plea to unconscionability and reminded the court of the warning given by Lord Walker in Cobbe v Yeoman’s Row [2008] UKHL 55 that equitable principles (in that case proprietary estoppel) must be formulated and applied in a disciplined and principled way.

A point arose on the position of Ashley in these proceedings. He was a party to the claim, although as Mr Gatty points out, not to the counterclaim. He did not file a defence and wrote to the court stating that he agreed to be bound by any decision about his beneficial ownership of the property. In the circumstances of this case it seems to me that the issues relating to Ashley’s beneficial interest can be decided even though he is not before the court.

I start with the undisputed facts. Mrs Fletcher was the sole owner of the property, at 88 Seymour Road, Plymouth. On 24^th November 2011 the TR1 was signed and the property was transferred into the joint names of her and her son. Also on 24^th November Mrs Fletcher signed an “Agreement statement” document drafted by Ashley. This contains a representation that he wanted to raise an Enterprise Finance Loan of £125,000 under a government scheme and this required 25% to be secured, so he needed to secure £31,250 on the property. It refers to having to put his name on the deeds and asserts that the loan will be paid off in full within one month.

It is not clear exactly when the bank was approached. Although the judge held (paragraph 20) that the bank had produced a mortgage illustration on 22^nd November Mr Gatty submitted before me that the bank only really became involved after transfer into joint names. Mr Adams did not seek to argue otherwise and I will proceed on that basis.

The mortgage application in the names of both mother and son was dated 15^th December 2011. The mortgage offer was made and completion took place on 16^th January 2012. £120,995 was advanced by the bank. The money was paid to Ashley’s sole account. When the loan was not repaid, these proceedings began.

Turning to the judgment, the judge recorded Mrs Fletcher’s evidence as follows:

“5.

Mrs Fletcher said that she believed him, and so was willing to go down to the Land Registry and have the property put into joint names. She realized that, by doing this, if she died in the short period before the loan was repaid, her son would become the sole legal owner, but otherwise it would revert to her alone. She never intended that her son should have any beneficial interest in the property. She denied that she was aware that the Claimant had advanced £120,995 secured against the property, until its mortgage field agent called to inform her of mortgage payment arrears.”

At paragraph 6 the judge records that the parties gave him an agreed set of five issues he had to decide. The first four related to the question of undue influence. The first question is “(a) Did Mrs Fletcher enter into the mortgage deed because of her son’s undue influence?” This question is clearly (and correctly) focussed on whether the mortgage deed was tainted by undue influence. The four questions were not concerned with the earlier TR1.

The judgment starts dealing with question (a) at paragraph 7 and addresses the cross-examination of Mrs Fletcher. Having been through the evidence and in reaching his conclusion on question (a) the judge said (at paragraph 14) that:

“I am quite satisfied that Ashley took advantage of his relationship as his mother’s son, and the fact that at the time she was emotionally vulnerable, to persuade her that she should help him financially to the extent of securing a loan against her home, on the basis that it was only £31,250, which would be quickly redeemed. This fraudulent misrepresentation induced her to act to her detriment and persuaded her to put her son on the Property Register.”

He then went on to address how Ashley dealt with his mother, reminded himself of RBS v Etridge and finally concluded at paragraph 16:

“I answer question (a) in the affirmative”

The reason I have set all this out is because on appeal it is submitted that the judge made a finding that the execution of the TR1 by the appellant was induced by fraud and of course that is what the words quoted from paragraph 14 say. However these words appear in a section of the judgment where the question was not about the TR1, it was about the mortgage deed. If the crucial words in paragraph are read as referring to the TR1 rather than the mortgage deed, then the judge did not make a finding about the deed at all. That makes no sense. Reading paragraph 14 in the context of the judgment as a whole, the paragraph was not drafted to draw a distinction between the mortgage deed and the TR1. The way the case was put to him did not require him to make a finding about the TR1. The finding the judge was seeking to make was about the mortgage deed. That must be what the judge was referring to in paragraph 14. I reject the submission that the judge found that the execution of the TR1 by the appellant was induced by fraud. It may have been but that is another matter.

Next the judge answered the other three questions concerning undue influence and the mortgage deed in the way I have already explained.

He then turned to the fifth question (e). The question put to the judge was:

“(e)

Finally, if the legal mortgage is to be set aside by reason of undue influence, does Ashley have a 50% beneficial interest in the property over which the claimant has an equitable charge?”

The judge addressed it in paragraphs 28 to 35. Paragraphs 28 to 32 deal with the law and the parties’ submissions. Paragraph 32 contains a reference to “Mrs Fletcher’s clear evidence that she never intended Ashley to have any beneficial interest”. That sentence is part of the judge’s setting out of counsel’s submission. It is not a finding. In paragraph 33 the judge referred to the Agreement Statement. He said “This would constitute important evidence as to the parties’ intentions as to their beneficial interests, if it was permissible to consider such.” However he then went on in paragraph 34 to find (to his regret) that the express declaration of trust in the TR1 was conclusive. The significance of this section of the judgment is that it shows, contrary to another submission by the appellant on appeal, that the judge did not positively make a finding about what Mrs Fletcher’s intentions actually were. He clearly thought there was a good case to reach a conclusion that she did not intend Ashley to have a beneficial interest but he did not actually go ahead and decide the matter.

Listening to Mr Adams submissions on Mrs Fletcher’s behalf it is impossible not to feel sympathy for the position Mrs Fletcher has found herself in but in the end in my judgment this appeal must be dismissed. This is for the following reasons.

First, it is well established that in cases in which 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 the bank may still have an equitable charge over the beneficial interest of the other party. That is what happened in First National Bank v Achampong [2003] EWCA Civ 487 paragraphs 53-54, when Mrs Achampong was found not to be bound by the legal charge on her jointly held house because the bank was on inquiry as to undue influence, but the bank did have an equitable charge over the husband’s beneficial interest (and the beneficial joint tenancy was severed). The same thing happened in Suzanne Edwards v Lloyds TSB [2004] EWHC 1745 (Ch) Park J where Mrs Edwards was found not to be bound by the legal mortgage which had been obtained over the property in her and her husband’s joint names by her husband forging her signature, but again this did not stop the bank from obtaining an equitable charge over the dishonest husband’s beneficial interest (paragraph 20).

This principle is no doubt the reason why the parties before the judge put the fifth question in the manner they did. There was no claim to set aside, rescind or rectify the declaration of trust in the TR1. Thus the only question was whether Ashley had a beneficial interest in the property (put as a 50% interest). If he did then the principle described would apply.

On appeal Mr Adams submits that, applying Day v Day and Pitt v Holt, the declaration of trust can be treated as set aside because it does not reflect Mrs Fletcher’s true subjective intentions. However even if Mrs Fletcher’s intentions were what is submitted, they could only justify an action founded on mistake and the most this could achieve would be to give Mrs Fletcher a claim for rescission of the declaration of trust or to set aside or rectify it (see e.g. Pitt v Holt para 114 and see Day v Day generally, which was a claim for rectification). In other words the unilateral mistake of Mrs Fletcher (if established) could only render the declaration of trust voidable, not void. And the problem for Mrs Fletcher is that a right to rescission can be barred. And one bar to rescission is, as Mr Gatty submitted, when a third party has acquired rights without notice of the right to rescind. In my judgment this is the correct way of analysing the problem on this appeal. Mr Adams submitted that equity will not disregard the reality of the situation simply because certain relief that a party might be entitled to is not claimed (appellant’s skeleton paragraph 17). I will accept the submission that it was not absolutely necessary for Mrs Fletcher to have pleaded a claim for rescission to succeed, but it would still be necessary for her to establish such a right.

Looked at in this way, Mrs Fletcher’s new argument on appeal must fail. The fact that bank was on inquiry in relation to undue influence affecting the mortgage deed it was entering into with Mrs Fletcher and her son does not carry with it the necessary consequence that it was on notice of any taint affecting the conveyance. The conveyance was a separate and earlier transaction to which the bank was not a party. The judge simply did not decide the question of notice relating to the conveyance because he was not required to by the way the arguments were put. So the latter issue has not been decided.

There is a difference between this case and the facts of First National Bank v Achampong and Suzanne Edwards v Lloyds TSB. In those cases the transaction which put the property into joint names was clearly separate from the mortgage, whereas here it is clear that the conveyance into joint names was, from the point of view of Mrs Fletcher, part of the same arrangement with her son. The principled approach is to ask whether the bank had constructive or actual notice of the putative mistake by Mrs Fletcher, despite the clear words of the declaration of trust in the TR1 form. The only relevant factor is the same timing point which the judge relied on as putting the bank on inquiry as to undue influence. This is the fact that the mortgage deed was less than six months after the TR1 form was signed. In my judgment that is not enough to fix the bank with constructive notice of a right held by Mrs Fletcher (or anyone else) to rescind the declaration of trust in the TR1.

Mr Adams also sought to argue that the burden would have been on the bank to establish a right to bar rescission and that they failed to do so. I reject that way of looking at it. If a claim for rescission had been part of Mrs Fletcher’s case before trial and if the bank had pleaded a bar to rescission in response then I am prepared to assume a burden may have rested with the bank in those circumstances, however that is not what has happened. Given the manner in which the case was pleaded in the statements of case, the evidence called and the arguments below and the way this point has arisen on appeal, the bank cannot be criticised for not advancing such a case before the judge. The bank clearly did rely on the TR1 in entering into the mortgage in joint names and lending the money. At the time they did so the TR1 had not been rescinded and Ashley had a beneficial interest in the property. Therefore the bank acquired an equitable charge over Ashley’s beneficial interest even if the legal charge was set aside.

I will add that, while it is not necessary to decide the point, I doubt it would be possible to find on appeal that Mrs Fletcher made a mistake so grave as to justify rescinding or rectifying the declaration of trust in the TR1 and replacing it with an arrangement whereby Ashley received no beneficial interest in the property. A case founded on mistake was simply not explored properly at trial. Mrs Fletcher did intend to put the property into joint names when she executed the TR1 and at that time, she understood that there would then be a mortgage to secure borrowing of about £32,000. It is not clear what her intentions were relating to the period before the mortgage was paid back. However, as I say, it is not necessary to decide this issue.

A further submission advanced by Mr Adams was that since Ashley could not rely on the declaration of trust against his mother because it was produced by fraud, then the bank, taking through Ashley, could not do so either. That is a different point but in my judgment it must fail on this appeal. As I have explained the judge was not required to make a finding about whether the declaration of trust itself (or the TR1 as a whole) was procured by fraud and despite the words in paragraph 14, I do not believe he did. The TR1, as opposed to the mortgage deed, might have been procured by fraud but I am not satisfied there is a sufficient basis on which to make such a finding on appeal about the instrument itself, rather than the later mortgage deed. A distinction between the TR1 and the legal mortgage and an examination of whether the former as opposed to the latter was procured by fraud was simply not properly explored at trial because it was not relevant to the way the case was put at that stage.

Overall, despite the submissions made on Mrs Fletcher’s behalf, I am not persuaded that it would be unconscionable for the bank to enforce its equitable charge over Ashley’s beneficial interest in the property.

The appeal is dismissed.