COURT OF APPEAL HALIFAX MORTGAGE SERVICES LTD v STEPSKY [1996] Ch. 207 Editor’s comments in red. MORRITT LJ: On 19 July 1990 the plaintiff (the lender) advanced £128,215 to Mr and Mrs Stepsky (the husband and the wife respectively) on the security of a first charge over their home … of which they were registered in HM Land Registry as the joint proprietors. Of the moneys so advanced, after paying the costs involved, £104,139 was paid to the Guardian Building Society in redemption of their pre-existing first charge and the balance of £23,200 was paid to the credit of the account of the husband. On 27 January 1992, default having occurred in making the repayments due under the legal charge, the lender [sought] an order for possession of the property … On 9 October 1994 the wife made an affirmation in support of her appeal to the judge in which she affirmed: ‘2. On or about mid 1990 I, together with my husband the First Defendant, applied for a mortgage with the Plaintiff. As far as I am aware the solicitors acting for lender and borrowers were Roiter Zucker. 3. My husband told me that the purpose of the loan was for home improvements and to purchase carpets for the home, as well as redeeming the original mortgage with Guardian Building Society, in the amount of approximately £85,000. When I signed the mortgage application form, I did not read it and relied completely upon my husband, as I usually do and have always done. 4. I have now discovered that in reality the funds obtained from the Plaintiff were used to pay off my husband’s various business debts. Indeed my husband instructed Roiter Zucker to pay Bank Leumi and other creditors, to whom he owed substantial sums without my knowledge. I am advised that as Roiter Zucker were acting for the lenders, their knowledge is imputed to the Plaintiff. Accordingly the Plaintiff had constructive knowledge that I was a surety. In those
circumstances I was not independently advised as to the true purpose of the loan, which was manifestly disadvantageous to me. Had I known of the true purpose of the application to the Plaintiff’s [sic] I would not have agreed to execute the mortgage.’ In a further affirmation made by her on 3 February 1995 she stated in relation to the execution of the charge: ‘I attended the firm Roiter Zucker together with my husband and my brother in law and his wife who were also executing their Mortgage at the same time. I was not explained or advised as to the affect [sic] or consequences of executing the Legal Charge. I was simply told to sign in the appropriate place, which I did. The whole episode lasted no longer than 3 or 4 minutes.’ … The details of the transaction can be seen clearly from the documents in the possession of the lender and those in the possession of the solicitors … Thus, on 7 May 1990 the husband and the wife completed a mortgage application form seeking a loan by way of re-mortgage of their home in the sum of £128,000. They stated that it was charged to the Guardian Building Society to secure a debt then amounting to £99,000. They indicated that they wished to instruct the solicitors to act on their behalf. Their personal details, as completed, revealed that for 28 years the husband had been employed by Ashley & Sons Ltd, a company carrying on the business of soft furnishers and decorators, in which he held 50% of the shares, and that the wife was employed as a salesperson by a different company carrying on the business of ladies fashions. The purpose of the re-mortgage further advance was stated to be ‘to buy family shares in business’. The form concluded with a declaration, which each signatory was invited to read carefully before signing, that ‘the information given in this application is true and complete to the best of my knowledge and belief’. At the end of the form both husband and wife signed and dated it. On 12 June 1990 the husband instructed the solicitors on the telephone. The solicitors’ attendance note of that conversation reads as follows: ‘JS [Mr Stepsky] telephoned DF [Mr Franks of the solicitors]. He is expecting an offer of re-mortgage through BMP [sic] and Scottish Life for £128,000. His existing mortgage is with the Guardian Building Society for £99,000. Of the difference of £29,000 approximately £20,000 to £22,000 will have to go to Bank Leumi and the balance to him which
will be re-invested into the Company out of which we will be able to recover our costs on the outstanding company matters.’ Bank Leumi were bankers to Ashley & Sons Ltd. On 13 June 1990 the lender made a written offer to the husband and wife of loans in the aggregate sum of £128,000 on the terms set out in the offer. The purpose of the loans was expressed to be ‘Purchase of Shares’, but the lender’s solicitors were ‘to be advised’. The duplicate offers were, as requested therein, duly counter-signed, indicating their acceptance by both the husband and the wife, and returned to the lender. … After carrying out the normal conveyancing steps appropriate to a transaction of this sort, on 12 July Mr Franks of the solicitors attended at the home of the husband and wife to obtain their signatures to the mortgage documents. His contemporary handwritten note records: ‘12/7. DF attg Mr and Mrs Stepsky at their home. Went over mortgage terms/redemption arrangements/policies. Problem with Guardian. DF to consider this. JS to give details for payment of residue of mortgage advance - NOT to Banker - get snaffled - Wayne present and signed consent. Discussed business problems. Egd 1 hrs.’ On 13 July … the husband instructed the solicitors on the telephone to pay the balance of the mortgage advance into his account with Abbey National plc. Completion took place on 19 July 1990. The advance was paid to the solicitors and they disbursed it in the payments to which I referred earlier. It is not disputed that the sum paid to the husband was used by him in payment of creditors of his business or otherwise for his own purposes and not in payment for home improvements or in the purchase of carpets. … On this appeal the wife contended…that as between the lender and the solicitors there was a paramount duty owed by the latter to disclose the true purpose of the loan to the former … [and] there was no conflict [of interest] because the husband was contractually bound to inform the lender of the true purpose of the loan. In either event, so the argument ran, the knowledge of the solicitors was to be imputed to the lender. Neither party’s…argument made any reference to s 199 of the [Law of Property] 1925 Act and it seems that that section was not drawn to the
attention of the judge either. So far as relevant it provides: ‘(1) A purchaser [which includes a mortgagee i.e. the bank in this case] shall not be prejudicially affected by notice of … (ii) … any fact … unless…(b) … it has come to the knowledge of his … solicitor …’ … In my view the section has to be applied in accordance with its terms to the facts of this case. There is no doubt that the information as to the true purpose of the re-mortgage loan imparted by the husband came to the knowledge of the solicitors on 12 June 1990 as the solicitors for the husband and wife alone, for they were not instructed to act for the lender until 19 June at the earliest. That knowledge once acquired remained with the solicitors and cannot be treated as coming to them again when they were instructed on behalf of the lender … The conclusion seems to me to be inescapable: namely, that knowledge of the relevant … facts … did not come to the solicitors as the solicitors for the lender ... It was not disputed that the lender is a purchaser … Consequently s 199(1)(ii)(b) of that Act precludes the solicitors’ knowledge of the relevant matters or facts being imputed to the lender. Moreover, it seems to me that the wife faces a dilemma. If the section does not apply, so that the knowledge of the solicitors is to be imputed to the lender, it is difficult to see why, on the same basis, the same knowledge should not be imputed to the wife as well. I do not accept the suggestion that the solicitors were instructed on behalf of the wife in some lesser or ministerial capacity when compared with their position as the solicitors for either the lender or the husband. The wife was a joint owner of the property and jointly liable for the mortgage being redeemed and for that by which it was to be replaced. In those circumstances it is at least arguable that she would have no claim to set aside the transaction as against the husband … In my judgment the wife’s appeal fails because, on the plain wording of s 199(1)(ii)(b) of the 1925 Act, the knowledge possessed by the solicitors as to the use to which the surplus moneys available in consequence of the re-mortgage were to be applied is not, on the facts of this case, to be imputed to the lender. I would dismiss this appeal.