Edwards v Lloyds TSB Bank Plc

A mortgage deed forged by one co-owner remains effective as an equitable mortgage over that co-owner’s beneficial interest, although it cannot bind the co-owner whose signature was forged. The charge continues to affect that interest after its transfer to another beneficiary. A court considering sale of trust property must balance the statutory factors, including the purposes for which the property is held, the welfare of minor occupiers, the circumstances and wishes of adult beneficiaries, and secured creditors’ interests. The court has flexibility to postpone sale where an immediate sale would impose disproportionate hardship, but should make an order providing a realistic prospect of eventual recovery.

The claimant and her former husband were registered as joint proprietors of their former matrimonial home. After separation, the husband forged the claimant’s signature on a mortgage deed securing his guarantee of a company overdraft. The bank did not obtain a legal mortgage of the whole property but claimed an equitable charge over the husband’s beneficial share.

Following divorce proceedings, the husband’s beneficial interest was transferred to the claimant. The claimant sought removal of the bank’s caution from the register. The bank counterclaimed for sale of the house. The issues were whether the bank had an equitable charge and, if so, whether the court should order an immediate or postponed sale.

1. The claimant’s signature had been forged and she had not consented to the mortgage. The deed therefore did not create a legal mortgage over the entire ownership of the house.

2. Nevertheless, the deed was effective against the husband, who had signed it, to the extent of his own beneficial interest. Applying the principle reflected in First National Securities Ltd v Hegerty [1985] QB 850 and Bowers v Bowers, the bank acquired an equitable mortgage over the husband’s 50% beneficial interest. The forgery did not allow the husband to escape liability under his own deed.

3. Penn v Bristol and West Building Society [1995] 2 FLR 938 was distinguishable. That case involved a collusive sham transaction, whereas the bank here was not a conspirator. The bank’s failure to investigate the unexpected signature did not disqualify it from obtaining the equitable charge.

4. The transfer of the husband’s beneficial interest pursuant to the divorce order took immediate effect in equity, but the claimant acquired no better interest than the husband had owned. The transferred 50% remained subject to the bank’s equitable charge. Section 2(1)(iv) of the Law of Property Act 1925 did not overreach the charge because the relevant order concerned a beneficial, rather than legal, interest.

5. Under sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996, the bank was entitled to apply for sale. The court had to weigh the statutory factors, including the children’s welfare, the claimant’s circumstances and wishes, and the bank’s secured interest. An immediate sale would be disproportionate, but refusing any order would leave the bank without a realistic prospect of recovery. The claim was dismissed and a sale was ordered after five years, subject to review and variation if circumstances changed.