As in the case of any other contract, the meaning and effect of a mortgage depends on its terms. The terms on which a borrower contracts with a lender may include provisions set out in a separate facility letter or loan agreement or in the lender’s mortgage offer and/or standard conditions, which are included by specific reference in the mortgage deed.
What is the position if a mortgage document refers to a non-existing document? In Helden v Strathmore Ltd [2011] EWCA Civ 452; [2011] PLSCS 124, a borrower executed a legal charge stipulating that he would repay “the Debt”. Unfortunately, the charge was defective, because it identified the amount of the debt and the rate of interest that it was to carry by reference to “the offer letter”, which, because of an oversight, had not been written. None thel ess, the parties had agreed orally that the loan would be in the sum of £1m and that the rate of interest would be 7.5% pa.
As in the case of any other contract, the meaning and effect of a mortgage depends on its terms. The terms on which a borrower contracts with a lender may include provisions set out in a separate facility letter or loan agreement or in the lender’s mortgage offer and/or standard conditions, which are included by specific reference in the mortgage deed.
What is the position if a mortgage document refers to a non-existing document? In Helden v Strathmore Ltd [2011] EWCA Civ 452; [2011] PLSCS 124, a borrower executed a legal charge stipulating that he would repay “the Debt”. Unfortunately, the charge was defective, because it identified the amount of the debt and the rate of interest that it was to carry by reference to “the offer letter”, which, because of an oversight, had not been written. None thel ess, the parties had agreed orally that the loan would be in the sum of £1m and that the rate of interest would be 7.5% pa.
The borrower attacked the validity of the charge. He relied on section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, which imposes strict formalities when making contracts for the creation or disposition of interests in land. All such contracts must be in writing and must be signed by or on behalf of the parties. They must also incorporate all the terms expressly agreed by the parties, either because they are set out in the contract or because they are contained in another document that is referred to in the contract.
The borrower tried to persuade the Court of Appeal that it was not possible to fill the gaps in the legal charge by reference to the oral agreement between the parties. Their lordships disagreed. Section 2 is concerned with contracts for the creation or sale of legal estates or interests in land – and not with documents that actually create or transfer such estates or interests.
There was no doubt that the parties had proceeded on the basis of a shared assumption that the charge secured the money advanced by the lender. Consequently, the parties were bound by an estoppel by convention: see Amalgamated Investment & Property Co Ltd (in liquidation) v Texas Commerce International Bank Ltd [1982] QB 84. The court indicated that a similar outcome could have been achieve by rectification. Aafter rejecting other challenges to its enforceability, it upheld the charge.
The decision highlights a fundamental – but apparently common – misunderstanding of the reach and purpose of section 2. A contract to transfer a freehold or leasehold interest, to grant a lease or to create a mortgage will fall within the ambit of the section (if the contract relates to land). By contrast, an actual transfer, conveyance, assignment, lease or mortgage over land do not fall within the scope of section 2.
Allyson Colby is a property law consultant
