Bank of Scotland plc v Waugh and others  EWHC 2117 (Ch)
A charge that had been signed by the bank and trustees but where the execution of the trustees had not been witnessed was held not to be effective at law but nevertheless created valid equitable security over a property. So when carrying out a security review there may still be a ‘Plan B’ if a charge has been wrongly executed.
The trustees were the trustees of a trust that engaged in property development. By a facility letter dated July 2007 they were offered a working capital facility of £3,000,000 by Bank of Scotland plc (the ‘Bank’). The facility letter was secured by a charge that had been granted over a property called Asquorn House. Although the charge was signed by the trustees it was plain on the face of the document that the trustees' signatures were not attested. Accordingly it had not been executed as a deed. It is possible that the draughtsman wrongly thought that the trustees were an incorporated entity as he attributed to them a registered office. Notwithstanding that, the charge was registered as a registered charge at the Land Registry.
In July 2010 the Bank made a formal demand on the trustees to repay immediately the sum of £2,486,034.69. As a result of the errors in the charge the trustees made an application to the Land Registry for its cancellation and rectification of the register. The Bank sought a declaration that the trustees were estopped from denying the validity of the charge. As a fall back they sought a declaration that the charge was effective as an equitable mortgage.
Judge Behrens (sitting in the Chancery Division) held:
- Whilst in the past signatories had been held to be estopped from denying their own execution that was not the case here and estoppel was not available. The reason was that the defect was quite clear on the face of the document.
- A document, which for some defect of form (but which is otherwise valid) fails to take effect as a legal mortgage, will (subject to s 2 of the Law of Property (Miscellaneous Provisions) Act 1989) be a good equitable mortgage. The basis of this is the court's power specifically to perform a contract to create a legal interest in land. It seemed to the judge that the above principles applied directly to the charge. It was not executed as a deed and so did not take effect as a legal charge. However fortunately for the Bank it was signed by all parties and did contain all the terms that had been agreed as required by s 2 and so took effect as an equitable mortgage.
Failure to ensure that a charge of registered land is executed as a deed rather than merely under hand will mean that:
- it will not take effect in law and cannot be substantively registered at the Land Registry as a registered charge;
- the power of attorney will not work; and
- it may be necessary to get the court to assist in any sale of the property as there will be no statutory power of sale or power to overreach subsequent interests.
But the charge may not be totally ineffective and its priority can be protected against subsequent dispositions by the registration of a unilateral notice at the Land Registry (although the unilateral notice will not protect the charge against any earlier interests).
In this case the Bank hoped to compel the trustees to perfect it by court order, and this was dealt with later in the day when Judge Behrens ordered the trustees to execute a fresh mortgage within a specified number of days, under the further assurance provisions of the original mortgage. If they failed to do so, then the court authorised a district judge of the Leeds District Registry to execute it.