Court saves bank from accidental mortgage discharge—NRAM v Evans

Property analysis: When will the court order rectification of an accidental mortgage discharge?

Original news

NRAM v Evans [2015] EWHC 1543 (Ch)

The dispute related to whether a loan advanced by a bank, to Mr and Mrs Evans, was secured on their property.

The bank argued that it was secured by virtue of a mortgage deed entered into in 2004 (the charge). It acknowledged that it had cancelled the registered charge in respect of the deed, by way of an e-DS1, but that this was done as a result of a mistake by the bank.

Mr and Mr Evans argued that the deed only applied to the initial loan advanced in 2004, which had been redeemed, and not to further advances - so the e-DS1 was correct.

The High Court agreed with the bank.

What were the facts of the case?

Original loan

The charge was executed by Mr and Mr Evans to secure a loan to purchase their property. A further, smaller, loan was made as an unsecured loan under the Consumer Credit Act 1974. It was unsecured as there was insufficient equity in the property to secure the entire loan. The entire loan (the 2004 loan) was, however, given one mortgage account number.

The charge provided that it secured further advances and that it would not be released until the debt was paid in full.

2005 loan - consolidation

In 2005, Mr and Mrs Evans consolidated the 2004 loan and various other borrowings with the bank by obtaining a new loan (the 2005 loan), from which the 2004 loan was redeemed. The 2005 loan was given a new account number. No further entry was made at the Land Registry.

Mr Evans accepted that he understood at the time of the 2005 loan that it was intended to be secured on the property.

Insolvency

Both Mr and Mrs Evans subsequently entered into individual voluntary arrangements (IVA). The bank did not accept the proposal for Mrs Evans' IVA. It obtained judgments and final charging orders against her beneficial interest in the property for the unsecured borrowing for which she was jointly liable with Mr Evans. These were protected by restrictions on the registered title of the property.

Subsequently, on advice, Mr and Mrs Evans executed assignments of their respective beneficial interests in the property, to their respective mothers, for the sum of £1.

Mr Evans' IVA then came to an end, because of default and he filed for bankruptcy. In the statement of affairs which accompanied the petition Mr Evans included the bank as a creditor for the secured and unsecured borrowing, giving the account number for the 2005 loan. Mrs Evans subsequently presented her own petition on the same basis and was also made bankrupt.

The bank did not prove in either bankruptcy for that part of the 2005 loan which it maintained was secured on the property and the Official Receiver treated the bank as a secured creditor in that regard. He also decided that as the property held negative equity, because the 2005 loan was secured against it, the transfers to the mothers were for value. Therefore, he did not seek to set them aside. He informed the bank that he had no interest in the property. Subsequently both Mr and Mrs Evans were discharged from bankruptcy.

Subsequent events - accidental discharge

Repayments in respect of the 2005 loan continued to be made for the next six years.

In 2014, Mr and Mrs Evans' solicitor wrote to the bank, referring only to the mortgage account number of the 2004 loan (which had been redeemed on payment of the 2005 loan). The letter said that the charge had been redeemed in 2005 and yet the registered charge was still registered against the property's title and asked for the entry to be removed.

The letter was processed by an individual in the bank's administrative office. Unfortunately, the system showed the 2004 loan having been redeemed in 2005, but did not show the 2005 loan. Therefore, the individual provided the Land Registry with an e-DS1 (an electronic form of discharge used by institutional lenders where they contact the Land Registry directly through their IT system--they are not generally used in commercial transactions).

The mistake came to light when the solicitors' letter was subsequently passed to the bank's unsecured department. There, the two restrictions, in respect of the unsecured lending, registered in 2007 were noted and a further search was carried out which revealed the 2005 loan.

The bank contacted Mr and Mrs Evans' solicitors to explain that the e-DS1 should not have been issued and was told that they were not aware of the 2005 loan. The bank registered a unilateral notice on the title to the property to protect its interest.

What is the law in this area?

Land Registration Act 2002, s 65, Sch 4, paras 2-7

The Land Registration Act 2002 (LRA 2002) makes provision for 'alteration' of the register on a number of grounds and employs a narrower concept of 'rectification' than under Land Registration Act 1925 (LRA 1925). Rectification is defined as a particular form of alteration directly linked to the circumstances in which an indemnity is payable.

'Rectification' means an alteration which involves the correction of a mistake and prejudicially affects the title of a registered proprietor.

Although the word 'mistake' is used in relation to alteration and rectification of the register, it is not defined in the legislation. Case law and the Law Commission report leading to LRA 2002 show that it encompasses:

  • error on the part of Land Registry staff
  • mistake by the parties themselves (eg double conveyancing)
  • mistake by wrong application whether fraudulent or not
  • the registration of a forged or otherwise void transfer

The court can order that the register is rectified or altered to correct a mistake even if it prejudicially affects the title of a registered proprietor. If the proprietor is in possession, then there is a presumption against rectification, at least without his consent, but it is rebuttable if:

  • he has by fraud or lack of proper care caused or substantially contributed to the mistake, or
  • it would be unjust for any other reason for the alteration not to be made

What did the court decide?

Did the charge secure the 2005 loan?

It was clear that the charge secured the 2005 loan.  It said so on its face.

In addition, the conditions incorporated into the charge specified that it was to secure the mortgage debt, which was defined to include all of the money which Mr and Mrs Evans owed to the bank from time to time under 'any offer'. That was sufficiently wide and clear to include the offer under which the 2005 loan was made. Mr Evans argued that this did not amount to an 'all monies' clause. However, the wording was clear enough.

On the bankruptcy of Mr and then Mrs Evans, his and her estate vested in the Official Receiver as trustee, subject to the bank's charge. Insolvency Act 1986, s 283(5), 306(1)

Was the issue of the e-DS1 a mistake?

The issue of the e-DS1 by the bank was a mistake—Futter & Anor v Revenue and Customs [2013] UKSC 26

The Supreme Court, in Futter, confirmed that:

  • forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it could lead to a false belief or assumption which the law will recognise as a mistake
  • it does not matter if the mistake is due to carelessness on the part of the person making a voluntary disposition, unless he deliberately ran the risk, or must be taken to have run the risk, of being wrong
  • nor need the mistake be known to (still less induced by) the person or persons taking a benefit under the disposition
  • the true requirement is simply for there to be a causative mistake of sufficient gravity--the test will normally be satisfied only when there is a mistake either as to the legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction
  • the court must consider in the round the existence of a distinct mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of its consequences and decide whether it would be unconscionable, or unjust, to leave the mistake uncorrected--the court must form a judgment about the justice of the case

In issuing the e-DS1 to the Land Registry, the bank made a distinct mistake. It thought it was obliged to do so because the 2004 loan had been redeemed and there was nothing more to secure. It was not mere inadvertence. The mistake was induced because of the terms of the solicitors' letter which referred to the 2004 loan account number and not the 2005 loan account number. It was careless of the bank not to link the two before issuing the e-DS1. That mistake, however, was central to the issue of the e-DS1. Had the bank realised that the 2005 loan was still secured on the property it would not have issued the e-DS1.

The consequences of the mistake were serious. The bank would lose its security for the 2005 loan. Mr and Mrs Evans, having taken that loan thinking it would be secured on their property and having dealt with it as such in their respective bankruptcies would (or their respective mothers now would) be left with an unencumbered property. It would be unconscionable to leave the mistake uncorrected.

Was the bank entitled to rectification?

The bank was entitled to be re-registered as proprietor of the charge which secured the 2005 loan.

As Mr and Mrs Evans were in possession as registered proprietors, rectification of the register could only take place if they had contributed to the error by lack of proper care. They had done so as their solicitors' letter had referred only to the 2004 loan and not the 2005 loan.

What are the implications of the decision?

Banks who use the electronic discharge process should ensure their internal procedures are robust enough to avoid mistakes such as these as while, on the facts, the bank was entitled to rectification, they had to resort to court proceedings.

The court confirmed that, as a result of this case, the bank have amended their systems, so that the link with the 2005 loan would now be clear.

UPDATE: An application for permission to appeal to the Court of Appeal in this case has been made, with the hearing of that application listed between 12 August and 26 October 2015.

Joanna Bhatia, solicitor in the Lexis®PSL Property team.

First published on Lexis PSL Property 

Relevant Articles
Area of Interest