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Warning for secured lenders – do you sign mortgage deeds?
22 August 2013 | in Property
by Dan Marland, Professional Support Lawyer
Optima Legal has dealt with a number of cases recently where the borrower has alleged that the mortgage deed is void and unenforceable because the lender has not signed it.
Usual practice is that lenders do not sign mortgage deeds. If these claims were to succeed, they would have an enormous impact on the entire secured lending industry.
The claims stem from section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (“LP(MP)A”), which provides:
“(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.”
Subsection (6) states that a “disposition” has the same meaning as in section 205 of the Law of Property Act 1925, which confirms that a mortgage or charge is a disposition. Consequently, borrowers have argued that a mortgage is a contract for the disposition of an interest in land and, therefore, requires the signature of all the parties in accordance with section 2 of the LP(MP)A.
The correct position
This argument is wrong, and misunderstands the nature of a mortgage. A mortgage is an actual disposition and not an agreement for a disposition. Section 2 of the LP(MP)A clearly applies to a contract for the disposition of an interest in land. It does not apply to the actual disposition itself. Section 2 applies to contracts but not to deeds.
The agreement for the lender to make a loan advance, in return for which the borrower will grant a charge over the property, is made up of the lender’s mortgage offer and the borrower’s acceptance of that offer. It follows that this agreement for mortgage must be in writing and signed by the parties.
However, the mortgage deed itself is simply the granting of the security by the borrower to the lender. This is the disposition of the interest in the property. It is a unilateral set of obligations entered into by the borrower, executed as a deed, not a contract. As a result, section 2 does not apply. As long as the mortgage deed was validly executed by the borrower the lender can enforce the obligations it contains, including any mortgage conditions incorporated by reference.
What have the courts said?
The relationship between a deed and section 2 of the LP(MA)A was considered by Lord Justice Mummery in the Court of Appeal, in an application for permission to appeal. The case was Eagle Star Insurance Company Ltd v Green & Challis  EWCA Civ 1389.
Mr Green stated that, in accordance with section 2 of the LP(MA)A, the mortgage required the signature of all parties to it as it was a contract for the disposition of an interest in land.
Mummery LJ stated:
“This is not a case of a contract: it is a case of a deed…a distinction is drawn between the formal requirements affecting the execution of the deed and the formal requirements governing contracts.”
He went on to confirm that:
“Section 2 does not apply to deeds; it applies to contracts. It may be a contract for the sale of land, it may be a contract for some other kind of disposition of an interest in land… A deed is a different kind of instrument from an ordinary contract; and it is not a requirement of the execution of a deed that it should comply with the requirements of section 2 of the LP(MA)A. That is clear. Section 1 refers throughout to deeds, section 2 refers throughout to contracts, clearly recognising that they are two different legal concepts.”
Mr Green relied upon the case of United Bank of Kuwait plc v Sahib  3 All ER 251, which confirmed that there had to be a single written document incorporating all the terms and signed by the parties and not merely a deposit of title deeds by way of security in order to create a mortgage or charge. Mr Green claimed that if the mortgage in the United Bank of Kuwait case was governed by section 2 of the LP(MA)A, so should his mortgage. The United Bank of Kuwait case was relied upon because Mr Green claimed that within the mortgage deed, there was a contract by him in the form of the covenant to repay. There were also contractual provisions or covenants by Eagle Star.
Mummery LJ did not believe that the United Bank of Kuwait case assisted Mr Green because it was a case where there was no deed. It was a case of a purely informal equitable mortgage by deposit of deeds.
Formalities for deeds
In accordance with sections 85, 86 and 87 of the Law of Property Act 1925, a legal mortgage or charge by way of legal mortgage over land can only be created by deed. Therefore, section 2 of the LP(MA)A cannot apply to the legal mortgage itself, as it must always have been created by deed.
For the deed to be valid it must be executed in accordance with section 1 of the LP(MA)A, which states:
“(2) An instrument shall not be a deed unless:
(a) it makes it clear on its face that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise); and
(b) it is validly executed as a deed:
(i) by that person or a person authorised to execute it in the name or on behalf of that person, or
(ii) by one or more of those parties or a person authorised to execute it in the name or on behalf of one or more of those parties
(2A) For the purposes of subsection (2)(a) above, an instrument shall not be taken to make it clear on its face that it is intended to be a deed merely because it is executed under seal.
(3) An instrument is validly executed as a deed by an individual if, and only if:
(a) it is signed:
(i) by him in the presence of a witness who attests the signature; or
(ii) at his direction and in his presence and the presence of two witnesses who each attest the signature; and
(b) it is delivered as a deed.”
There is no requirement for the deed to be executed by the lender. Unlike a contract, a deed is generally enforceable despite a lack of consideration; therefore, as the lender is not entering into any obligations, it is not necessary for it to execute the deed.
The deed operates to grant security for the mortgage loan provided by the lender by way of legal charge against the property. That security is and can only be given by the borrower. As the only party having obligations under the deed is the borrower, it is not necessary for the lender to sign the deed.