Voidable prior charge


Yorkshire Bank v Tinsley [2004] 3 All ER 463, [2004] EWCA Civ 816, Court of Appeal



The novel point for determination by the Court of Appeal in this case was whether a second or subsequent mortgage could be set aside if the earlier mortgage was a voidable security.


Mr and Mrs Tinsley purchased a property known as Hillcrest, in Grappenhall, Cheshire, in 1988 in their joint names. They mortgaged Hillcrest to Yorkshire Bank in both 1988 and 1991 to secure Mr Tinsley's business debts. Mrs Tinsley placed trust and confidence in her husband in the management of her financial affairs.


Neither the 1988 nor the 1991 mortgage were readily explicable by the relationship between the parties. Conse-quently, Mr Tinsley was held to have obtained both mortgages by undue influence. The bank was put on inquiry but took no steps to satisfy itself that Mrs Tinsley freely entered into both mortgages. Therefore, the bank was fixed with constructive notice and Mrs Tinsley was in theory entitled to set aside both the 1988 and the 1991 mortgages.


After marital difficulties, Mr and Mrs Tinsley entered into a separation agreement in 1994. As part of the agreement, Hillcrest was transferred to a third party in return for a sum of money. In exchange, another property, 113 London Road, in Stockton Heath, Cheshire, was conveyed to Mrs Tinsley.


As a condition of granting its consent to this exchange transaction, the bank required Mrs Tinsley to execute a mortgage in their favour over 113 London Road in substitution for the earlier mortgages in their favour over Hillcrest. Both Mr and Mrs Tinsley were represented by a solicitor in the exchange transaction and in late 1994 Mrs Tinsley executed a replacement mortgage over 113 London Road in favour of the bank.


The bank subsequently brought proceedings under the 1994 mortgage to recover possession of 113 London Road. At first instance, the judge made an order for possession. The main issue to be determined on appeal was whether the 1994 mortgage was voidable because it was a replacement mortgage for the two earlier and voidable mortgages of 1988 and 1991.


The Court of Appeal held that if 'a mortgage or guarantee is voidable for undue influence as against a husband and as against a bank, a replacement mortgage, even if undue influence is not operative at the time of such replacement, will itself be voidable, at any rate if the replacement mortgage is taken out as a condition of discharging an earlier voidable mortgage'. Consequently, the appeal was allowed and the order for possession discharged.


It is not thought that this decision is likely to cause significant practical difficulties to lenders. The decision does not apply to a lender providing the replacement or substitute mortgage if that lender was not the lender fixed with constructive notice of the earlier voidable transaction. If the replacement lender was the mortgagee in the prior transaction then it will be able to look at its earlier records to see whether it is at risk. If this is not possible, the replacement lender may be able to protect itself by ensuring that the wife receives independent advice on the transaction into which she is to enter into, such advice to extend to the discharge of the earlier mortgage.


Therefore, banks should seek and obtain confirmation from an independent solicitor that the advice given relates not only to the subsequent or replacement charge, but also in respect of earlier transactions. Solicitors would also do well to ensure that the advice they give covers both the prior and the subsequent charges.


By Simon Sugar, barrister, 36 Bedford Row, London