Fraud doesn't always trump all - mortgagee can still enforce its equitable charge

Fraud doesnt always trump all - mortgagee still gets to enforce its equitable charge

Mention the concept of a “trust” to your average lawyer, and many will recall some dark times during law school finals and search for a cold towel. And yet it was the transfer of a property into a trust which was at the heart of a recent case concerning a mother, her dishonest son and an unpaid property loan. Here we comment on the case and its relevance to property lenders.

The facts

Ashley Fletcher, a convicted fraudster, mortgaged his mother’s home at 88 Seymour Road, Plymouth to Santander for a much larger sum (£120k) than he had led his mother to believe (approximately £32k). Mr Fletcher failed to repay the loan and the bank commenced mortgage possession proceedings.

There seems to have been no dispute that Mrs Fletcher was a victim of undue influence and that the bank had notice of this. However problems arose for Mrs Fletcher since, before the mortgage was finalised, she declared a trust over the property as a result of which the property was put into the joint names of her and her son.

On appeal, the High Court concluded that whilst the bank was on inquiry in relation to undue influence affecting the mortgage deed, it did not necessarily follow that it was also therefore on notice of undue influence affecting the earlier property conveyance.

In practice, this meant that whilst the legal mortgage was unenforceable against Mrs Fletcher (and prevented the bank from having a legal charge for the entirety of the debt over the property), the bank still had the benefit of an equitable charge over Ashley Fletcher’s half of the beneficial interest in the property. This equitable charge conferred upon the bank the power to sell the property and the High Court dismissed Mrs Fletcher’s attempt to prevent the bank from enforcing its interest. 

Insight

The outcome of this case all sounds terribly unfair for Mrs Fletcher as she now risks losing her home, but it is a stark reminder of the potential hazards associated with the transfer of property interests for nil consideration.

For property lenders, the case illustrates the importance of understanding the ownership history of the property in question. Lenders need to be alive to the risk that property transfers made in the run-up to a proposed financing might be tainted by undue influence. Lenders will be well aware of such risks in certain transactions such as when taking personal guarantees. Here, such risks were less obvious but had the case been pursued differently, the outcome for the lender might have been worse.

In particular, at first instance Mrs Fletcher and her counsel failed to explore whether the original property transfer was procured by mistake and as a result the High Court felt unable to consider whether she had any right to rescind the declaration of trust that put the property into the joint names of her and her son.  

Readers interested in reading the full transcript of this case can access this by clicking here.

Contact our experts for further advice

View profile for Matthew PadianMatthew Padian, View profile for Jonathan PorteousJonathan Porteous

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