Statutory Law of UK Mortgages

Law of Property (Miscellaneous Provisions) Act 1989

The Section 1(3) Argument and the Estoppel Issue

Section 1 (3) of the Law of Property (Miscellaneous Provisions) Act 1989 provides  that: “An instrument is validly executed as a deed by an individual if, and only if, (a) it is signed – (i) by him in the presence of a witness who attests his signature.”

It was affirmed by the Adjudicator in Garguilo v Jon Howard Gershinson & Anr [2012] EWLandRA 2011_0377 (06 January 2012), that the word it in this section must refer back to the deed; in other words, the entire document and not merely the execution pages or any other page, as per the rules regarding the strict formalities for the execution and delivery of deeds described by Underhill J in R [Mercury Tax Group] v HMRC [2008].

By section 52(1) Law of Property Act 1925, all conveyances of land are void for the purpose of creating a legal estate in land unless they are properly made by deed. In accordance with the judgment in Mercury, in which a purported deed was void as it was not properly made and delivered as a deed; on the basis that it does not comply with section 1(3) of the 1989 Act, the claimant submits that the purported charge operating as a deed by way of Legal Mortgage over Asquorn House is unquestionably illegal and void on the same ground.

In Garguilo, Mr and Mrs Garguilo submitted that even if the signatory pages of a disputed lease purportedly operating as a deed were, as found, executed separately and inserted into the lease at a later date, this invalidates the instrument as a matter of law. The point had already been considered by Underhill J in Mercury, in which the claimants sought judicial review of the decision of HMRC to seek warrants to search their offices and the decision of the Crown Court to grant the warrants.

HMRC’s case was that the scheme (trust deed) in question was flawed and that the claimants sought dishonestly to conceal the flaws. The judge therefore had to consider whether the purported deed was flawed, as there were differences between the drafts and the final versions. The court considered as an additional factor that each of the three key documents was intended to be a deed. Noting section 1(3) Underhill J said: “Mr Bird submitted, and I agree, that that language necessarily involves that the signature and attestation must form part of the same physical document (the ‘it’) referred to at (a) which constitutes the deed.” [40].

He also stated: “I accept that the flaws on which HMRC rely are essentially formal. But I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. The entire raison d’être is to create – and demonstrably to create – a series of formal legal relationships: if they do not do that, they do nothing.”

The Adjudicator in Garguilo therefore found that section 1(3) clearly provides that the signature and attestation must form part of the physical instrument at the moment of signing. The policy argument is that the signature should reflect the proper agreement at the time of execution. It was therefore held that if the signature is obtained separately from the attestation and/or from other documents that purportedly make up the deed, the maker of a disposition cannot be sure of the terms of the deed and the risk of fraud or mistake remains.

The question must always be whether a valid signature page and other relevant pages formed part of the same complete physical document at the moment of execution. That will be a question of fact in each case. The issue of estoppel was raised by the respondents in opposition to these points. However, it was held that the lack of a (valid) signature could not be cured by raising the issue of estoppel.

This point is confirmed by principles at the heart of the judgment of Lady Justice Arden in Herbert -v- Doyle (October 2010): “… In my judgment, there is a common thread running through the speeches of Lord Scott and Lord Walker. Applying what Lord Walker said in relation to proprietary estoppel also to constructive trust, that common thread is that, if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property … neither party can rely on constructive trust as a means of enforcing their original agreement. In other words, at least in those situations, if their agreement (which does not comply with section 2(1)) is incomplete, they cannot utilise the doctrine of proprietary estoppel or the doctrine of constructive trust to make their agreement binding on the other party by virtue of section 2(5) of the 1989 Act …” (para #57).

 

The Section 2 Argument

“2 Contracts for sale etc of land to be made by signed writing
(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.”

In the absence of a single document containing all of its terms and the signatures of both parties, the above provisions of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 render void and unenforceable any and all legal charges granted by a mortgagor to a mortgagee, save for the exceptions of those which have arisen through proprietary estoppel or constructive trust. By way of a compelling authority in support of this assertion, we rely [without limitation] upon the learned Gibson LJ in Court of Appeal 3 WLR 372 United Bank Kuwait Plc v Sahib:” The effect of section 2 is, therefore, that a contract for a mortgage of or charge on any interest in land or in the proceeds of sale of land can only be made in writing and only if the written document incorporates all the terms which the parties have expressly agreed and is signed by or on behalf of each party. […] In the present case, for the reasons given, it seems to me clear that the deposit of title deeds takes effect as a contract for a mortgage and as such falls within s.2 […] I therefore conclude that by reason of s.2, the mere deposit of title deeds by way of security cannot any longer create a mortgage or charge.”

In addition, Cousins Law of Mortgage (2010) 3rd Edition affirms that: “… Where a purported contract for the grant of a mortgage on or after September 26, 1989 fails to comply with the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, no mortgage will be created and, notwithstanding any oral agreement or deposit of title deeds, the creditor will have no interest in or rights over the debtor’s land […] It follows that the failure to comply with section 2 will provide a defence to any claim for possession pursuant to a mortgage.” (page 610-611).

Furthermore, Chitty (2008) 30th edition, page 417, clearly states: “iii. The effect of failure to comply with formal requirements – Effect of non-compliance…any agreement not complying with the requirements of s2 of the 1989 Act is a nullity.” It has also been held that the effect of non-compliance with section 2 applies, but not exclusively, to executory contracts, including [without limitation] those mortgage contracts which were entered into when neither the mortgagor nor the mortgagee has a proprietory interest in the property concerned, which appears to be the case in the vast majority of the legal mortgages registered by the Bank.

Proprietary estoppel and constructive trust cannot be reasonably claimed under such circumstances, as is confirmed by principles at the heart of the judgment of Lady Justice Arden (October 2010) Court of Appeal EWCA Civ 1095 in Herbert v Doyle:

“… In my judgment, there is a common thread running through the speeches of Lord Scott and Lord Walker. Applying what Lord Walker said in relation to proprietary estoppel also to constructive trust, that common thread is that, if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property … neither party can rely on constructive trust as a means of enforcing their original agreement. In other words, at least in those situations, if their agreement (which does not comply with section 2(1)) is incomplete, they cannot utilise the doctrine of proprietary estoppel or the doctrine of constructive trust to make their agreement binding on the other party by virtue of section 2(5) of the 1989 Act …” (para #57)

It was clearly the intention of Parliament, upon the recommendations of the Law Commission, when it was considering the scope of section 2, that it would apply to all mortgages, on the basis that an equitable mortgage necessarily arises with every valid legal mortgage, notwithstanding the fact that there is no mention of statutory mortgages in section 2 of the 1989 Act. However, the inevitable effects of the legislation, whether express of implied, were that the deposit of title deeds was no longer sufficient to support a claim for possession and the doctrine of part performance has been effectively abolished, as was diligently considered by the Court of Appeal in Sahib:

“Section 2 of the 1989 Act was enacted to give effect to the substance of that part of the Law Commission’s Report, Transfer of Land: Formalities for Contracts for Sale etc of Land (1987) (Law Com No 164), which recommended the repeal of s 40 of the Law of Property Act 1925 and the abolition of the doctrine of part performance and proposed new requirements for the making of a contract for the sale or other disposition of an interest in land.”

 

The Companies Act 2006

“44 Execution of documents.

(1) Under the law of England and Wales or Northern Ireland a document is executed by a company—(a) by the affixing of its common seal, or (b) by signature in accordance with the following provisions. (2) A document is validly executed by a company if it is signed on behalf of the company— (a) by two authorised signatories, or (b) by a director of the company in the presence of a witness who attests the signature. (4) A document signed in accordance with subsection (2) and expressed in whatever words, to be executed by the company, has the same effect as if executed under the common seal of the company.”

The legal effect of the statute is that documents and deeds must be signed on behalf of the company by a director in the presence of a witness, or by two authorised signatories. Without adherence to these provisions no mortgage contracts can be considered duly executed by a company and their terms are therefore legally unenforceable, as was clearly implied when the Court of Appeal endorsed the view of Lewison J in the case of Williams v Redcard Ltd [2011]:

“For a document to be executed by a company, it must either bear the company’s seal, or it must comply with s.44 (4) in order to take effect as if it had been executed under seal. Subsection (4) requires that the document must not only be made on behalf of the company by complying with one of the two alternative requirements for signature in s.44 (2): it must also be “expressed, in whatever words, to be executed by the company. That means that the document must purport to have been signed by persons held out as authorised signatories and held out to be signing on the company’s behalf. It must be apparent from the face of the document that the people signing it are doing something more than signing it on the company’s behalf. It must be apparent that they are signing it on the company’s behalf in such a way that the document is to be treated as having been executed “by” the company for the purposes of subsection (4), and not merely by an agent “for” the company.”

 

Unfair Terms in Consumer Contracts Regulations 1999

“5 (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. (2) A term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term. […] (5) Schedule 2 to these Regulations contains an indicative and non-exhaustive list of the terms which may be regarded as unfair.”

The 1999 Regulations apply to unfair terms in contracts concluded between a seller or a supplier and a consumer. The Regulations apply to contracts relating to land. Charges are therefore caught by the Regulations if they are entered into between a seller/supplier and a consumer. The Regulations apply to contractual terms which have not been individually negotiated. A seller or supplier means any natural or legal person who, in contracts covered by the Regulations, is acting for purposes relating to his trade, business or profession.

For the purposes of these regulations, consumer means any natural person acting for purposes outside his trade, business or profession. Since virtually all mortgagors are acting as natural persons acting outside of their trade, business or profession, by participating, whether knowingly or unknowingly, in the business of banking and mortgage-backed securities, the 1999 Regulations apply to the charges which arose out any purported mortgage contract with a mortgagee.

In Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 at 494, [2001] 2 All ER (Comm) 1000, Lord Bingham of Cornhill referred to the regulations in these terms:

. . . The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by granting to the supplier of a beneficial option or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty . . . . The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position, or any other factor listed in or analogous to those listed in Schedule 2 to the Regulations . . . . It looks to good standards of commercial morality and practice.”

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Posted in Banksterbusters.