Can a chargor be estopped from challenging the validity of an incorrectly executed legal charge?

What does the recent case of Bank of Scotland Plc v Waugh [2014] EWHC 2117 (Ch) tell us about the court's approach to incorrectly executed legal charges?

What were the facts in this case?

Bank of Scotland plc provided a number of banking facilities to the Nelson Trust. This particular case concerned a charge granted over Asquorn House in August 2003 (the charge) and monies due under a facility letter dated 18 July 2007 (the facility letter) which was addressed to, and signed by the trustees.

The charge was signed by the three trustees but none of the signatures were witnessed as is required by the Law of Property (Miscellaneous Provisions) Act 1989, s 1(3) (LP(MP)A 1989) for execution as a deed by an individual.

The Bank of Scotland appointed a receiver to enforce the charge. The trustees applied to the Land Registry in March 2013 for cancellation of the charge and rectification of the register on the grounds that the charge had not been properly attested. Their application had been stayed pending the outcome of these proceedings.

What was the Bank of Scotland's position?

In these proceedings, the Bank of Scotland sought:

  • summary judgment against the trustees in relation to the sums due under the facility letter
  • a declaration that the trustees/Nelson Trust be estopped from denying the validity of the charge
  • as a fall back, a declaration that the charge was effective as an equitable mortgage and/or that it was entitled to perfect the charge, or require the Nelson Trust to do so, pursuant to its standard terms and conditions

What did the trustees argue?

The trustees contended there should be no summary judgment in relation to the sums due under the facility letter. The trustees put forward various arguments for this, including that the Bank of Scotland had stated in a letter that it accepted that the trustees had no personal liability for the debt in the name of the trust and the trustees had made decisions based on this statement. The trustees claimed that the Bank of Scotland should therefore be estopped from claiming the sums due under the facility letter.

In relation to the charge, the trustees claimed that it was invalid and that as a result, actions carried out by the Bank of Scotland (such as the appointment of a receiver) were void.

What did the court decide?

Did the trustees have to pay the sums due under the facility letter?

The court upheld the claim for summary judgment on the sums due in the facility letter on the basis that none of the arguments put forward by the trustees had any merit. In relation to the statement by the bank that the trustees had no personal liability, it was noted that the letter post-dated the facility letter, demand and some of the proceedings. The trustees had not altered their position on the basis of the statement and there were therefore no grounds for estoppel.

Was the charge invalid?

In relation to the validity of the charge, the judgment contains a useful reminder of the law surrounding execution of charges over property. The court referred to:

  • Law of Property Act 1925, s 25 which states that all conveyances of land or any interest therein are void for the purpose of conveying or creating a legal estate unless made by deed
  • LP(MP)A 1989, s 1(3) which states that an instrument is validly executed as a deed by an individual only if it is signed in the presence of a witness who attests his signature
  • Land Registration Act 2002, s 51 which states that on completion of the relevant registration requirements, a charge created by means of a registrable disposition of a registered estate has effect, if it would not otherwise do so, as a charge by deed by way of legal mortgage

Although the charge was not validly executed as a deed and therefore prima facie void for the purpose of conveying or creating a legal estate, the effect of registration of the charge was to create a charge by way of legal mortgage. This meant that the Bank of Scotland was entitled to rely on the effect of registration of the charge and its appointment of a receiver was not void. The trustees were nevertheless entitled to apply for rectification of the register but any rectification would only operate for the future.

Were the trustees estopped from denying the validity of the charge

In relation to the question of estoppel, the court considered the case of Shah v Shah [2001] EWCA Civ 527. In this case the defendants were estopped from challenging the validity of a deed they had signed, even though the witness had not been present at the time of signature. The court distinguished this case from the current one on the basis that the document in the case of Shah did at least appear to have been correctly executed.

The court also referred to the case of Briggs v Gleeds (Head Office) [2014] EWHC 1178 (Ch), where it was held that the members of a pension scheme could not be estopped from denying the validity of certain deeds where their signatures had not been witnessed. The judge in the case stated 'I have concluded that estoppel cannot be invoked where a document does not even appear to comply with the 1989 Act on its face...' and discussed a number of policy reasons why estoppel should not be available where it was clear that a deed had not been validly executed.

The court in this case held that the situation was the same as that in Briggs and held that estoppel should not be available.

Could the charge take effect as an equitable mortgage?

In relation to whether the charge could take effect as an equitable mortgage, the court referred to the legal principle that a document which, for some defect of form (but which is otherwise valid) fails to take effect as a legal mortgage will, subject to compliance with LP(MP)A 1989, s 2 be a good equitable mortgage. The charge in the current case fulfilled the requirements of LP(MP)A 1989, s 2 as it incorporated all relevant terms and was signed by both chargor and chargee. The court therefore held that even though the trustees could rely on the defects in the execution of the charge to stop it taking effect as a legal charge, it would still take effect as an equitable mortgage.

On the question of whether the trustees should be obliged to execute any documents necessary for perfecting the charge, the court stated that it saw the force of the Bank of Scotland's submissions, but decided to deal with the issue when the matter was re-listed as the trustees had not had an opportunity to respond to the Bank of Scotland's arguments.

Why is this case interesting?

This case provides an interesting reminder that the remedy of estoppel may be open to a chargee who is party to an incorrectly executed legal charge but it will only be available in certain situations. If it is obvious on the face of it that the legal charge has not been validly executed then it is unlikely that any application for estoppel will succeed. The policy arguments set out in detail in the case provide a good insight into the basis for the decision and will be helpful to any practitioners considering making a similar application in the future.

The case also provides a reassuring reminder to practitioners that an incorrectly executed legal charge can still take effect as an equitable mortgage giving the chargee all the ordinary remedies of the equitable mortgagor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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