An esoteric area of law has, in recent times, been utilised by mortgage lenders in more than one reported case to save them from the consequences of administrative errors resulting in the loss of their security. In a world of increasing automation of process, such errors may become increasingly commonplace. But are the legal principles lying behind the grant of relief for such lenders being applied consistently and correctly?
2013: BOS v Garwood
In Bank of Scotland plc v Garwood  EWHC 415 (Ch), Norris J (on appeal from the (then) Adjudicator to HM Land Registry) dismissed (overall) the appeal of a trustee in bankruptcy (G) who had applied to cancel a unilateral notice registered against the bankrupt’s (F) property.
The facts are complex, but for these purposes the key facts are: F had bought a property in 2003 and subdivided it into two flats (A and B) though no leaseholds were created, the bankrupt simply remaining the freeholder of the whole property. The predecessor of Bank of Scotland (BOS) had lent £96,725 in June 2004 (the June 2004 Loan) in relation to Flat B; and £97,701 in July 2004 (the July 2004 Loan) in relation to Flat A; both Loans resulting from misrepresentations by F as to his acquisition of long leases of Flats A and B. In July 2004 F executed an all monies charge (the Charge) which referred to the June 2004 Loan transaction number but the address of Flat B and the freehold title number. £134,049 of the Loans were used to redeem a prior charge over the freehold. In November 2009 BOS received funds to discharge the June 2004 Loan (re: Flat B) but applied (using an e-DS1 form of discharge) to cancel the register entries for the Charge. Also in November 2009 a long leasehold of Flat A was created in favour of Mr Akeem. In 2010 F was made bankrupt.
Norris J agreed with the appellant trustee that, for complex factual reasons, BOS was not subrogated to the prior charge as it had (albeit unintentionally) received the Charge over the whole freehold. He also agreed that the e-DS1 acted as a discharge in law of the Charge (per rules 114 and 115 Land Registration Rules 2003) so that it ceased to exist both in law and equity.
Thus, BOS’ only remedy lay in seeking rescission (or rectification) of the e-DS1 under the equitable doctrine of mistake. It was held that the e-DS1 was a unilateral disposition and thus the principles in Pitt v Holt  EWCA Civ 197 applied (Pitt v Holt was reversed in part in the Supreme Court  UKSC 26; but in a way which does not affect the rationale in BOS v Garwood). The mistake could be one of fact or law and had to be of sufficiently serious character to render it unjust not to correct it. Norris J found that BOS’ administrative error was such a mistake; though he based his decision in part on the mistake being sufficiently serious because “in one sense it was induced by the person who derived the benefit followed [sic] the voluntary disposition, namely, the Borrower himself” being the underlying misrepresentation about whether there were separate securities granted for each Loan (though it has be to noted that it would not have taken a great deal of investigation for BOS to have realised that; indeed, it should have been apparent from the title information document they would have received on completion of the original Loans).
Thus not only was BOS entitled to the unilateral notice but Norris J found that the register should be altered, pursuant to s65 LRA 2002, to give effect to a resurrected Charge in favour of BOS over the freehold. It is worth noting that Norris J found that Mr Akeem’s leasehold title to be unaffected, presumably on the basis that the disposition to him was not fraudulent and otherwise satisfied the requirements of s29 LRA 2002, though that is not expressly set out in the judgment.
2015: NRAM v Evans
The same principles were applied very recently by HHJ Milwyn Jarman QC (sitting as a s9 judge) in NRAM plc v Evans  EWHC 1543 (Ch) where NRAM discharged its 2004 Charge as a result of a request, by the borrower Evans’ solicitors to do so, made in 2014. There had been a re-organisation of Evans’ accounts with NRAM in 2005 which had replaced the loan originally secured under the 2004 Charge, and other loan, with a consolidated product. The aforementioned request suggested that because of that the 2004 Loan (and therefore the 2004 Charge) should be discharged. This, the judge confirmed, was incorrect because the 2004 Charge was an all monies charge which included reference to future loans including the 2005 Loan. Whilst NRAM had been careless in agreeing to discharge the 2004 Charge, it had been induced by the erroneous request from Evans’ solicitors. The judge also referred to Pitt v Holt (this time, in the Supreme Court) as well as BOS v Garwood, in deciding to allow rectification.
However, in NRAM v Evans the judge went further and, the author would respectfully suggest, unnecessarily far: he considered that it was necessary, in deciding whether to grant relief, to refer to the principles of Land Registry rectification (i.e. under Schedule 4 LRA 2002 paragraphs 1, 2(1)(a) and 3). He found that rectification (of the Land Registry kind) could be ordered because the borrowers had by their lack of care (given the erroneous nature of the 2014 request) substantially contributed to the mistake. This further analysis and finding was, in author’s view, unnecessary and appears to have resulted from a conflation in the judge’s mind of rectification (or rescission) of the fundamental and equitable kind (as analysed by the Supreme Court in Pitt v Holt) with the narrower procedural form of rectification under LRA 2002 (which we will here call ‘Land Registry Rectification’). As noted by Norris J in BOS v Garwood (see para. 73 in the judgment), the effect of rescission or rectification of a discharge under the equitable doctrine is to give rise to a need to bring the register up to date. Pursuant to LRA 2002 Sched 4 paragraphs 1(a) and 2(1)(b), bringing the register up to date does not give rise to consideration of Land Registry Rectification. Thus, the additional criteria in paragraph 3 Sched 4 LRA 2002 are, it is submitted, not relevant where the Court is considering whether to rescind or rectify a discharge (in the fundamental equitable sense of rectification).
Other scenarios and issues
Of course, rescission and rectification on the basis of mistake are equitable remedies. Whilst the above two cases demonstrate a relatively lenient approach from the judiciary towards lenders, there must be circumstances in which the lender’s error(s) are considered so gross as to make it inequitable for the relief sought to be granted.
What if the Borrower does nothing to induce the mistake at all, and the lender discharges the charge simply because of its own administrative error (e.g. by including a wrong title number in a discharge of a book of mortgages)? Pitt v Holt suggests that the focus should be on the gravity of the consequences of the mistake, and whether it would be unconscionable not to reverse it; and that inducement of the mistaken disponor is not necessary (provided the disponor did not deliberately run the risk)- see Lord Walker’s views at paragraph 114  UKSC 26). Accordingly, whilst in both BOS v Garwood and NRAM v Evans there was an element of inducement, it will not normally be necessary to show inducement and the mere fact of the borrower(s) receiving a windfall by discharge of the mortgage should be sufficient; unless the lender has clearly been reckless.
Furthermore, what if the property has been transferred to a third party following the erroneous discharge of the mortgage? In those circumstances, s29 of the Land Registration Act 2002 will (in the case of registered land) govern whether the lender has lost priority (even if its registered charge might otherwise be capable of ‘resurrection’ via the rectification or rescission of the erroneous discharge). It seems that this must have been Norris J’s rationale in relation to Mr Akeem’s leasehold title in BOS v Garwood. S29 LRA 2002 provides that if a registrable disposition or a registered estate is made for valuable consideration, registration of the disposition postpones the priority of any unprotected interest (i.e. primarily, any interest not protected by registration, by notice or under schedule 3 LRA 2002 (overriding interests)).
In practice, transferees may have little difficulty in demonstrating (by reference to conveyancing documents) that valuable consideration (of whatever amount that is more than merely nominal) has passed and, if such consideration is proved, the lender may have great difficulty in proving any fraudulent conspiracy by the transferees such as might vitiate the effect of the transfer and/or give the lender a remedy directly against those transferees. Furthermore, even transferees for no consideration may not go quietly: the author is currently dealing with a case where the transfer to the new registered proprietors was expressed to be for nil consideration and yet those proprietors, with some evidential support for their position, seek to go behind that transfer; the matter awaits a trial.
The equitable doctrine of mistake, and the consequent remedies of rescission and rectification are potentially powerful tools for the lender whose carelessness (or whose agent’s carelessness, e.g. in the case of servicers or solicitors for the lender effecting the discharge) might, at first blush, be thought to expose them to irrecoverable loss of security. However, the application of the doctrine is fact-sensitive and where the lender is reckless and the borrower entirely innocent, relief may be refused; and those taking a transfer of the property, for value and prior to the mistake being discovered, are in a powerful position.