In a recent case the High Court decided that a lender was entitled to rely on the equitable doctrine of mistake to set aside the discharge of a mortgage and undo the cancellation of a registered charge over borrowers' property.
The case name is NRAM plc v Paul Morgan Evans and Susannah Jane Evans and the facts are outlined below.
During 2004 the Evans took out a loan which was secured over their property by an 'all monies' legal charge. In 2005 they took out a new loan which redeemed the loan they had taken out in 2004.
In August 2014, the Evans' solicitor wrote to the lender and requested that the 2004 charge should be removed from the register of the property because it had been redeemed. The letter did not refer to the 2005 loan and quoted only the mortgage number for the 2004 loan.
On this basis, the bank checked the information it had about the 2004 loan and provided an E-DS1 - an electronic form of discharge which has the effect of discharging a charge and applying to the Land Registry to remove the charge from the registered title to the property.
When the lender realised that the discharge should not have been given it applied to court for the discharge to be set aside for mistake and the register rectified.
The Evans alleged that the charge created as a result of the 2004 loan was not intended to secure the 2005 loan. However, the court disagreed - it was clear that the 2004 charge was an 'all monies' charge.
The court confirmed that it had the jurisdiction to set aside a voluntary disposition for mistake and found that the lender did not intend to release the only security it held for the 2005 loan and had made a mistake in providing the e-DS1.
The bank thought that it was obliged to discharge the charge because the 2004 loan had been redeemed and there was no other lending to secure. This mistake was induced by the letter from the Evans' solicitor which did not mention the 2005 loan.
The consequences of issuing the e-DS1 were serious: the lender lost its security for the 2005 loan and the Evans' gained an unencumbered freehold property. Accordingly, in the circumstances it would be unconscionable not to correct the mistake. The court allowed the e-DS1 to be set aside.
As the Evans were in possession as registered proprietors, rectification of the register could only take place if they had contributed to the error by a lack of proper care. The court found that by referring only to the 2004 loan and not the 2005 loan in their solicitor's letter, this was the case and so the register would be rectified and the registration of the charge reinstated.
Whilst providing some comfort to lenders it is essential to bear in mind that this decision was based on its facts. Lenders should ensure that their systems are correctly set up to show any further loans secured by 'all monies' charges in order to avoid similar scenarios from arising.
Solicitors acting for borrowers should ensure that they have requested all relevant mortgage account numbers from their clients and quote these account numbers in their correspondence with a lender in relation to the discharge of a registered charge.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.