Lord Stubborn and Baroness Whinge
Lord Stubborn and Baroness Whinge were not parties to the original covenant in the conveyance between Annemarie and Michael. Accordingly, Lord Stubborn's legal position vis-ŕ-vis Baroness Whinge will depend on the nature of the covenants and whether the conditions required by law and equity for covenants becoming attached to and running with the land have been satisfied in order to be enforceable against Lord Stubborn.
The enforceability of covenants against successors will initially depend on the nature of the covenant. The original covenant between Annemarie and Michael included both positive and negative obligations and in the case of Haywood v Brunswick Permanent Benefit BS it was determined that only negative covenants could be enforced against a successor. Furthermore, in the case of London & South Western Railway, Jessell MR affirmed this principle on the grounds that "the doctrine of [Tulk v Moxhay], rightly considered appears to be either an extension in equity of the doctrine in Spencer's Case to another line of cases, or else, an extension of the doctrine of negative easements."
Moreover, the House of Lords affirmed previous case law distinguishing between the enforceability of positive and negative covenants in the case of Rhone v Stephens, asserting that where a restrictive covenant imposed both positive and negative obligations, the restrictive element would be enforceable distinct from the positive obligation.
If we apply this by analogy to Lord Stubborn's position, whilst phrased in positive terms, the obligation to maintain the boundary inherently involves incurring expenditure and as such, will point towards being a negative obligation and as such, potentially enforceable against Lord Stubborn. Furthermore, the prohibition on keeping pigs and use of the property for any profession or business will potentially impact Lord Stubborn's legal position regarding use of the Property.
In order for the covenant to be enforceable against Lord Stubborn as a successor to the original covenantee, it will be necessary to establish whether the benefit and the burden of the covenants have passed to Baroness Whinge and Lord Stubborn respectively. The common law prescribes the following four conditions for determining whether the benefit of a covenant "runs-with or becomes attached to the land":
- The original covenantee had title to the legal estate at the time the covenants were created;
- The party seeking to enforce the covenant has legal title to the land;
- The covenants must touch and concern the dominant land; and
- At the time the covenants were entered into, there must have been a clear intention that the benefit of the covenant was to run with the land.
If we consider these principles in context of the current factual scenario, Annemarie had legal title to the Property at the time of the conveyance of the property (the Property) to Michael containing the covenants. Furthermore, the sale of the Property to Baroness Whinge transferred the legal title to her the Property, thereby satisfying the second requirement.
With regard to the third requirement that the covenants must "touch and concern" the dominant tenement, this is ultimately a question of fact with no hard and fast rules. This is evidenced by the case of Martin v Flight Refuelling Limited where it was stated that that the courts will generally defer to the assertions of a covenantee that the land is benefited without further investigation if the opinion is not unreasonably held.
If we consider the nature of the covenants, the benefit to the Property is arguably derived from the restrictions on keeping pigs and running a trade or profession in reducing nuisance and pollution, which is further bolstered by the obligation to maintain the boundary fence, which also protects against trespass. As such, if Baroness Whinge argues that the covenants benefit the Property, the third requirement will most likely be satisfied.
With regard to the fourth requirement, it has been commented that the intention element is usually satisfied if the wording of the covenant refers to "successors in title and assigns". We are not aware of the exact wording of the covenants in the original conveyance between Michael and Annemarie, however the presumption in favour of such intention is provided by Section 78 of the Law of Property Act 1925 (LPA). Section 78 implies the requisite intention that the benefit of the covenant was intended to pass if such wording is excluded in the original conveyance (subject to unequivocal evidence to the contrary). Accordingly, subject to any express evidence to the contrary, there will be an implied presumption that the covenant in the original conveyance was intended to pass.
Notwithstanding the compliance with these conditions at law, the decision in the case of Austerberry v Corporation of Oldham created a distinction between enforceability of covenants at common law and in equity. In this case, it was determined that the burden of a restrictive covenant will not run with the land in common law. As such, whilst the circumstances clearly point towards the benefit of the covenant being attached to the Property, Lord Stubborn will only be bound by the burden of the covenant under the rules of equity, which I shall now consider.
Equity prescribes two rules for enforceability of restrictive covenants. Under the first rule, Baroness Whinge could enforce any breach of the covenants by Lord Stubborn directly against Michael under the "chain of indemnity" rule set out in the Austerberry case. This principle entitles a successor to the original covenantee to sue the original covenantor irrespective of whether the breach of covenant is in fact caused by a successor covenator. If we apply this to the current scenario, in the event that Baroness Whinge sued Michael, Lord Stubborn would then be potentially liable to indemnify Michael under the chain of indemnity principle for any compensation Michael had to pay to Baroness Whinge as a direct result of Lord Stubborn's breach.
Under the second requirement, the doctrine established in Halsall v Brizell would entitle Baroness Whinge to enforce the covenant on the basis that rights granted in a conveyance are subject to the maxim that "he who takes the benefit also takes the burden".
In this respect, equity sets out four pre-conditions to establish the running of the benefit of a covenant. The first three pre-requisites are the same as for the common law. The fourth requirement specifies three methods of transfer in order for the benefit of a restrictive covenant to run as follows:
- Annexation; or
- Building Scheme.
Moreover, the case of Miles v Easter set out five conditions for determining the validity of an equitable assignment:
- the covenant must be for the benefit of the covenantee;
- the land must identified and ascertainable with certainty;
- the dominant land must be owned by the plaintiff;
- the dominant land must be capable of benefiting from the covenant; and
- the assignment of the covenant and conveyance must both be contemporaneous.
In the current scenario we are not aware of the actual wording of the conveyance, however in the absence of any evidence to the contrary, this analysis will continue on the presumption that the Miles v Easter conditions have been satisfied.
With regard to identification, in the case of Newton Abbot Co-operative Society Ltd v Williamson & Treadgold Ltd, it was held that if the benefited land could be identified with sufficient certainty from reference to extrinsic evidence, then the assignment could be held to have passed the benefit of the covenant to a successor. Applied to Lord Stubborn's position, the contemporaneous nature of the transfer and the covenants included in the conveyance will point to the benefit of the covenant passing to Baroness Whinge.
With regard to annexation on the other hand, this operates to "link" the covenant to the dominant land. This was evidenced in the case of Rogers v Hosegood, via the court's interpretation of the covenant's phrasing, which it was asserted must display a clear intention that the benefit of the covenant was intended to pass. Furthermore, section 78(1) of the LPA enables statutory annexation of a covenant and Smith comments that the application of section 78 in light of the decision in Federated Homes case operates to create automatic annexation. However, it is likely that the original conveyance would primarily be relied upon in the current scenario to demonstrate that the benefit of the covenant has passed.
The leading case of Tulk v Moxhay established five conditions which must satisfied in order for the burden of the covenants to run in equity; namely:
- The covenant itself must be negative;
- There must be an identifiable piece of "dominant" land;
- The covenant must touch and concern the dominant land;
- There must have been intention that the benefit was to run with the land;
- The burden of the restrictive covenant will not run unless registered.
If we apply this by analogy to the current scenario, the first three requirements are satisfied and Section 79 of the LPA will imply the fourth requirement subject to express intention to the contrary. However, as the Property is unregistered, the covenant should have been registered as a Class D (ii) land charge in order to be enforceable against Lord Stubborn.
In summary, the factual scenario clearly points to a conclusion that the benefit and burden of the covenants created in the original conveyance have run with the land to be enforceable against Lord Stubborn by Baroness Whinge in equity. Furthermore, Lord Stubborn could potentially be liable to indemnify Michael under the chain of indemnity principle if Baroness Whinge brings a claim against Michael as original covenantor. However, Lord Stubborn will not be liable for breach of the covenants if the covenant was not registered as a Class D (ii) land charge.
Legal commentators have observed the legal uncertainty that has been perpetuated by ad hoc decisions regarding cases of undue influence in the context of mortgages, which have arguably placed mortgagees in an ambiguous position regarding their rights and obligations. This is further evidenced by the two principal methods relied on to challenge mortgage validity. The first method discussed by Smith is the premise that a mortgagee owes a direct duty of care towards a mortgagor. However, as Smith comments, this assertion has seldom been upheld and Lord Denning's proposition of a principle of "inequality of bargaining power" in such cases was rebuffed by the House of Lords in National Westminster Bank plc v Morgan.
Moreover, the House of Lords further rejected any notion of a "special equity theory" as propounded by Lord Denning. This is arguably necessary in preserving certainty in applications and avoiding floodgate claims challenging mortgage validity on grounds of unequal bargaining power, which intrinsically operates in the mortgagor's favour. Indeed in the case of Cornish v Midland Bank plc, it was stated that the validity of a mortgage could not be undermined notwithstanding the gross negligence of a mortgage advisor (who would nevertheless be personally liable in damages to a claimant).
However, cases involving undue influence are a different animal and as such, it has been necessary to develop some legal protectionist mechanisms in the mortgage context. As such, the second most common method of attacking the validity of a mortgage is through applying a presumption that a mortgagee is in some way complicit in the undue influence of a mortgagor. If this presumption can be satisfied in the affirmative, the mortgage itself will be declared invalid.
For example, Lindley J presiding in the case of Allcard v Skinner stated that the doctrine of undue influence was rooted in the premise that "it is right and expedient to save (persons) from being victimised by other people." However, this assertion has been criticised for creating ambiguity due to the fact that determining undue influence is intrinsically a question of fact determined by the specific circumstances of every individual case. Whilst necessary to ensure equality of arms before the law, this creates uncertainty as to the exact parameters of the applicability of undue influence. Indeed it has been commented that "there is precisely no defined law setting limits to the equitable jurisdiction of……..undue influence."
In the case of Bank of Credit & Commercial International SA v Aboody, the Court of Appeal set out the following two separate categories of undue influence:
- Actual undue influence; and
- Presumed undue influence.
Presumed undue influence further covers two distinct headings; namely, presumption of undue influence by virtue of certain relationships between plaintiff and defendant and secondly, that the relationships between the parties demonstrated by the facts of the case clearly point towards a presumption of undue influence.
With regard to the first category, the types of relationship where presumed undue influence will operate involve the operation of trust and confidence, which is generally of a fiduciary nature and will not include familial relationships such as that of husband and wife. This is evidenced in the case of Lloyds Bank Limited v Bundy, where the defendant and plaintiff were banker and customer respectively, and as such, the courts found in favour of presumed undue influence in light of the plaintiff's reliance on the defendant as a regular customer for many years.
The second category of presumed undue influence requires the plaintiff to demonstrate that the nature of the relationship with the defendant and the facts of the case involve reliance whereby undue influence can be presumed. This head of presumed undue influence has been most troublesome for mortgagees, which is evidenced by the Bundy case. In this decision, Lord Hoffman commented that the relevant consideration was whether the plaintiff "had surrendered relevant decision making…… and there exists a trust and confidence, which leads one party to rely solely on the other party".
Ultimately, the burden of proof under this category lies with the plaintiff, however the scope of relationships covered is very wide as evidenced by the decision in Aboody which held that presumed undue influence could exist between husband and wife.
However, the potentially broad range of relationships covered by presumed undue influence has been compounded by the issue as to whether the transaction itself must also be "manifestly disadvantageous" as was suggested by the House of Lords in the case of National Westminster Bank plc v Morgan. This issue has continued to exercise the courts and in the case of CIBC Mortgages plc v Pitt the House of Lords obfuscated the matter by stating that this requirement was not applicable to actual undue influence, but failed to clarify the boundaries of its application to presumed undue influence.
The issue of "manifest disadvantage" was again considered in the case of Barclays Bank plc v Coleman where Nourse LJ questioned its relevance in cases of presumed undue influence. Nourse LJ's comments were further welcome in calling for the House of Lords to clarify the parameters of the manifest disadvantage requirement and in any event not to extend its application.
Indeed, the House of Lords reconsidered the requirement in the case of Bank of Scotland v Etridge, attacking the manifest disadvantage requirement. Moreover, the House of Lords asserted that once the facts of the case pointed to a relationship of trust and confidence, coupled with reliance on this trust, it was not necessary to demonstrate a manifest disadvantage, and to do so would result in reversal of proof incorporated through the back door.
The House of Lords decision was clearly welcome in clarifying the position which in turn facilitates legal certainty. Furthermore, the manifest disadvantage requirement would effectively result in a presumption in favour of mortgagee operating against the equitable objective of undue influence as a protection mechanism. However, conversely, the mortgagee is arguably placed in a difficult position further compounded by the decision in Barclays Bank v O'Brien asserting the principle of constructive notice in such cases.
The Barclays decision further implemented a presumption of undue influence where there is a marital relationship, highlighting the difficulty of effectively addressing conflicting interests in such cases. As such, the best practice that mortgagee's must adopt consistently to ensure maximum protection of its interests in cases involving potential undue influence is to interview parties to a mortgage application separately, explaining the risks involved and encourage both parties to seek independent legal advice.