A legal charge may be invalid if it is not properly executed but a lender can still rely on it as equitable security

22nd January 2015

In the recent case of Bank of Scotland v Waugh [1], the High Court considered the execution of a legal charge and the impact of signatures on the document not having been witnessed in accordance with the statutory provisions which are required to make an effective deed set out in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989.

Trustees executed what was intended to be a legal charge to secure monies that were lent by the Bank.

It was clear from the legal charge document that the signatures had not been witnessed; in fact, there was no provision made in the document for the attestation of any signatures. There was also a further error in that the charge ascribed the trust to a registered office, when the trust was not actually a registered corporation and the trustees were individuals.

Despite the flaws, the legal charge was successfully registered on the title to the property that was being secured at Land Registry.

However, as a result of the errors, the trustees sought a declaration that the charge was invalid and for the cancellation of the charge and rectification of the title register at Land Registry.

The trustees argued that the Bank had confirmed to them that they would not be personally liable for the debt and further that, because the charge had not been witnessed, it was void and could not be relied upon by the Bank.

The Bank argued that the trustees were estopped from denying the validity of the charge as it had relied upon representations from the trustees’ solicitor that the document had been duly executed when lending funds. In the alternative, the Bank sought confirmation that the charge would take effect as an equitable mortgage to preserve their interest in the property.

The court held that the individuals were liable as trustees, so their submission that assurances made by the Bank as to the trustees’ lack of personal liability would not render the charge invalid.

Secondly, the court held that in accordance with section 52 of the Law of Property Act 1925, any conveyance of land or interest therein must be made by a deed. To create an effective deed, the signature of each individual signatory must be witnessed [2].

The court held that in the absence of the formality specified in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989, the charge did not create a legal charge. However it did satisfy the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 so, although it failed as a legal charge, it could still take effect as an equitable mortgage and was capable of registration at Land Registry as such.

It was confirmed that the Bank may apply to court to enforce the equitable mortgage or for the trustees to be compelled to perfect the security by executing a legal charge which complies with the statutory necessities for creating a deed.

Estoppel was not relevant as the charge did not even appear to be correctly executed as a deed; it was clear on its face that it had not been witnessed as it did not even make provision for an attestation. There were public policy reasons why estoppel claims of this nature should fail. The Bank or its solicitor should have spotted the error that the signatures had not been witnessed, however as it was signed by the parties and contained all the terms that had been agreed it was successful in creating an equitable mortgage.

[1] [2014] EWHC 2117 (Ch)
[2] Section 1(3) Law of Property (Miscellaneous Provisions) Act 1989