As with any other contract, misrepresentation is a vitiating ground for setting aside a mortgage. But what happens if the injured party subsequently affirms the mortgage, for example by making proposals to try to clear the debt? What should the court do, and what are the principles?
The bank brought mortgage possession proceedings to enforce a legal charge given by the defendant, Mrs Tufail, as security for the debts of a company, Tufco, which was owned and run by her son, Basharat. The judge held that the mortgage had been procured by misrepresentation by the son, and the bank admitted that it had constructive notice of the misrepresentation.
The judge also held that the defendant had affirmed the mortgage with knowledge of the relevant facts but that it would not be inequitable to allow the Defendant to assert her right to have the transaction set aside. The bank appealed on this point.
The principal act of affirmation relied on by the bank was that for a period of over a year, the defendant retained solicitors who corresponded with the bank “with a view to the sale of the property and to the mortgage being paid off out of the proceeds of sale”, and that in reliance, the bank had held off.
As to the legal basis of the debate, the case was not put forward as one of contractual affirmation by a party having a right to rescind for misrepresentation and with the necessary knowledge of the facts and her rights, but as one of conduct amounting to estoppel or acquiescence (per Goldsworthy v Brickell  Ch 378) with, in particular, the overriding requirement that it must be inequitable to allow the influenced party to set aside the transaction (per Parker LJ at p 416-7).
It was accepted therefore that the bank could not rely on the statements made on behalf of the defendant, without more. The bank had to show that the circumstances were such that it would be inequitable for the defendant to rely on her right to have the transaction set aside for misrepresentation. In effect it had to show that, in reliance on the defendant’s conduct, it acted in reliance to its detriment.
As to the burden of proof, it was for the defendant to establish the misrepresentation and that if the bank wished to deny her right to rely on that on equitable grounds, it must prove the necessary facts.
The judge had held that the bank did not alter its position to its disadvantage in reliance on the representations made on the defendant’s behalf.
It was argued that the bank had stayed its hand in 3 respects:
(1) By taking proceedings later than it otherwise would have done in the hope of a voluntary sale, and that more interest had accrued and remained unpaid; Having regard to the chronology of events, there was nothing in the third point. As to points (1) and (2), the judge held that the bank had not acted to its detriment for two main reasons – first, it had been very inactive in pursuing its rights and remedies, and second because he was not satisfied that it had actually altered its position to its disadvantage.
(2) By holding off from enforcing its other securities; and
(3) By allowing time for Basharat to leave the country and evade judgment.
Having considered the evidence in detail, the Court of Appeal agreed.
This is a useful case on the closely related principles of affirmation, laches, acquiescence and estoppel. The main points to note are as follows:
(1) Having raised a vitiating ground (in this case misrepresentation), the burden of proof is on the mortgagee to prove affirmation;The real practical problem facing lenders in this situation, particularly members of the Council of Mortgage Lenders, and having regard to MCOB (Mortgage: Conduct of Business Rules) is whether they can and should take a less conciliatory approach. Perhaps the solution is that in a clear case of affirmation, the lender should proceed to take enforcement action but show some flexibility in entering into a suspended possession order at court, should it get that far.Habib Bank Ltd v Tufail  EWCA Civ 374
(2) Proof of affirmation, without more, is insufficient. The mortgagee also has to prove the overriding requirement that it must be inequitable to allow the injured party to set the transaction aside;
(3) The inequity here means, in effect, that the mortgagee had changed its position by acting in reliance to its detriment;
(4) Whether it has or not is a question of fact to be determined on the evidence;
(5) Delay, per se, is not enough. Although there is very little in the leading judgment of Lloyd LJ to indicate what the bank in this case could and should have done, the real stumbling block appears to be that the bank did not actually manoeuvre itself into a position whereby it could have taken enforcement action much sooner.
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