Defending Claims that the Charge Upon a Mortgaged Property is Defective
There has been a recent proliferation of claims made by borrowers to the effect that the charge upon their mortgaged property is defective. Many of the claims have been fuelled by internet forum sites which set out the alleged legal basis upon which it is argued that the charge is defective.
A number of these cases have come before the Property Chamber First-tier Tribunal, Land Registration Division and on 20th January 2014 Judge Ann McAllister heard two co-joined cases, Mr & Mrs Sinclair v Accord Mortgages Limited and Mr & Mrs Overson v Southern Pacific Mortgage Ltd t/a London Mortgage Co, as test cases for the numerous other cases awaiting hearing.
Lightfoots LLP acted for Southern Pacific through their in-house barrister, Stephen Ellis-Jones, who specialises in acting for lenders.
As stressed in the Judgment, both loans and mortgages were straightforward transactions, whereby the borrowers had made applications for loans to the two lenders, where offers were made, the borrowers signed standard form Deeds and the money was advanced to the borrowers’ solicitors and ultimately on to the borrowers. In both instances, and using very similar terminology in both pleadings and skeleton arguments, the borrowers sought to argue that the charges, registered with the Land Registry against the borrowers Titles, were invalid.
Judge McAllister, having stated that she found the arguments put forward by the borrowers difficult to follow, summarised them as follows:-
“…firstly, it is said that the Applicants have no power to create mortgages ‘by demise’: secondly it is alleged that the charges are invalid for want of compliance with statutory formalities, including he assertions that the charges were no ‘delivered, and thirdly it is said that the effect of securitisation of their loans somehow renders the charges invalid.”
The Demise Point
A mortgage by demise is now an almost obsolete form of mortgage, whereby the property is actually conveyed to the lender, usually under a very long lease and is then conveyed back to the borrower upon redemption. Although not expressly stated in the judgment, it is probably correct that a mortgage by demise is no longer permissible, in that it is specifically excluded as a means of disposition under the Owners’ powers as derived from s.23(1) of the Land Registration Act 2002. However, the effect of ss. 51 & 132 of the 2002 Act is that whether the mortgage is created by the usual method of executing a charge by deed by way of legal mortgage or by charging the estate with payment of money, on completion by registration the charge takes effect as a charge by way of legal mortgage, albeit that it only takes effect when registered (s.27).
Both the mortgage Deeds in this case are expressed to be charges by way of legal mortgages and they were not and did not purport to be mortgages by demise. The assertion that the charges were invalid because they were mortgages by demise was therefore held to be simply unsustainable.
The Statutory Formalties Point
The borrowers both sought to attack the validity of the charge by stating that the Deed which created it was not valid because it had not been signed by the lender, was not delivered and was in fact a contract for a Deed and not a Deed itself because of the ‘gap’ between execution and registration.
Although many lenders use their own standard form of wording for a Deed or the Land Registry’s form CH1, there is no statutory prescribed form for creating a charge. The statutory formalities for creating a charge are therefore limited to it being created by Deed and that for the Deed to be valid it must be signed, attested and delivered by the person creating the Deed. It is by its very nature a unilateral act and does not therefore need to be signed by the lender. Neither does delivery mean ‘handing over’ the document but rather that the transaction to which the Deed relates is irreversible, so that it is also a unilateral action by the creator of the Deed showing that he intends to be bound by it. The Judge held that in these two transactions, as in every other similar and unremarkable transaction, the borrowers plainly intended to be bound by their Deeds, in that they accepted mortgage offers conditional upon charges being granted over their Properties, handed the Deeds to their solicitors who in turn passed them to the lenders and accepted the loans.
It was therefore held that the charges were properly executed as Deeds by the borrowers and that there was no merit whatsoever in the points taken.
The Securitisation Point
This point was dealt with very shortly. The fact that the equitable interest in the loan may have transferred to a securitisation company was found to be irrelevant. There was no evidence that the sale had been perfected by the transfer of the legal title and the lender remained the registered proprietor of the mortgage and as such entitled to enforce it. Although not referred to in the Judgment, this follows the findings of the Court of Appeal in Paragon Finance Plc v Pender  EWCA Civ 760.
In dismissing both applications (and presumably now the other applications pending in the First-tier Tribunal) the Judge ordered that the Applicants should pay the costs. Although this may not necessarily deter other borrowers from bringing specious and unmeritorious claims seeking to challenge the validity of their mortgages, it is hoped that it will be a salutary lesson that such applications do come at a cost. The real harm however would seem to be the proliferation of internet sites that propagate challenges based on legal ‘jargon’ that is difficult for even High Court Judges to follow and which beguile borrowers into believing that they can make these challenges. Lenders need to be robust in defending these challenges and protecting their security.