Yorkshire Bank Plc v Tinsley

A mortgage obtained through undue influence and voidable against a lender with constructive notice may also invalidate a replacement mortgage granted to the same lender. This applies where the lender requires the replacement as a condition of releasing the earlier security and the transactions are inseparably connected. The result does not depend on fresh undue influence operating when the replacement is executed.

A different lender does not inherit the first lender’s constructive notice. Where the lender is unchanged, however, that notice does not invariably disappear merely because the original security is discharged or replaced by security over different property.

A bank obtained two mortgages over a matrimonial home to secure the husband’s business debts. The county court held that both were voidable for the husband’s undue influence, of which the bank had constructive notice. The bank did not challenge that conclusion.

When the home was exchanged for another property, the bank required the wife to mortgage the replacement property as a condition of releasing the earlier security. The county court nevertheless enforced the new mortgage and ordered possession. The wife appealed, principally contending that the new mortgage was inseparably connected with, and therefore affected by, the invalidity of the earlier mortgages.

1. Appeal allowed unanimously. The replacement mortgage was voidable and was set aside. The bank’s possession claim was dismissed, judgment was entered for the wife on her counterclaim, and rectification of the Land Register was ordered.

2. Where an obligation is legally ineffective, a new obligation arising from its release will ordinarily be similarly ineffective if it is a true substitute. In the case of a voidable transaction, the position may differ where a third party has relied on the transaction or where the later factual context shows that the new agreement is not a true substitute. The question is partly one of construing the later agreement.

3. A mortgage voidable for undue influence against both the principal wrongdoer and a lender may infect its replacement even though no fresh undue influence operates when the replacement is executed. That consequence follows where the replacement is required as a condition of discharging the earlier security. It applies whether the arrangement is documented as a new contract or as a variation.

4. The bank had required the mortgage over the replacement property as the condition for releasing the earlier mortgages. The transactions were therefore inseparably connected. The bank’s constructive notice of the earlier equitable wrong did not cease merely because the security was transferred to different property. Crowe v Ballard and Kempson v Ashbee supported that conclusion.

5. The rule does not place a different lender on notice of matters known or constructively known to the original lender. Where the lender remains the same, it can consult its own records and take appropriate protective steps.

6. Knowledge that a solicitor has been retained for a wife in a conveyancing transaction is not, without more, sufficient. The lender requires confirmation that the solicitor’s instructions extend to advice about the nature and effect of the transaction. The principles in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 did not support an assumption that a general conveyancing retainer necessarily included such advice.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The possession orders were discharged, the bank’s claim was dismissed, judgment was entered for the appellant on her counterclaim, and the 1994 mortgage was set aside.

2. Warrington County Court: His Honour Judge Moseley QC held that the 1988 and 1991 mortgages were voidable for undue influence of which the bank had constructive notice. He held that this invalidity did not affect the 1994 replacement mortgage and made an order for possession on 3 October 2003.