Mortgage — Mortgagee’s power of leasing — Possession — Whether lease by first mortgagee binds second mortgagee — Whether second mortgagee entitled to order for possession — Proper terms of possession order
On a date not later than 1 September 1992, the
first defendant granted a tenancy of a property he owned to Mr and Mrs B, the
second defendants. Prior to that date the first defendant had mortgaged the
property by a first mortgage to Nationwide Building Society and by a second
mortgage on 14 August 1990; the second mortgage was later assigned to the
plaintiff. The second mortgage prohibited the grant of any tenancy without the
plaintiff’s prior consent. In an earlier action by the first defendant to
recover possession of the property from Mr and Mrs B, the judge found that a
new tenancy of the property had been granted by Nationwide to Mr
from 30 June 1993. Following the failure of the first defendant to pay mortgage
instalments, the plaintiff brought proceedings claiming possession. Those
proceedings were dismissed by the county court judge on the ground that an
order for possession could not be made in favour of a second mortgagee having
regard to the tenancy held by Mr and Mrs B, it not being clear whether they
were tenants of the first defendant or in possession as agents of Nationwide.
The plaintiff appealed.
Held: The appeal
was allowed. A mortgagee in possession, such as Nationwide, must be able to
grant tenancies both at common law and in accordance with section 99(2) of the
Law of Property Act 1925, binding the plaintiff as second mortgagee. An order
for possession could be made subject to the rights of Nationwide and subject to
any rights derived by Mr and Mrs B from the exercise by Nationwide of its
powers as mortgagee to grant a lease.
The following cases are
referred to in this report.
Mexborough Urban District Council v Harrison [1964] 1 WLR 733; [1964] 2
JP 317; 108 SJ 218
Noyes v Pollock
(1886) 32 ChD 53
Universal Showcards & Display
Manufacturing v Brunt (1984) 128 SJ 581;
(1984) 81 LSG 1603, CA
This was an appeal by the
plaintiff, Berkshire Capital Funding Ltd, in possession proceedings by the
plaintiff against the first, second and third defendants, Dennis Street, Mr and
Mrs Barker and Nationwide Building Society respectively.
Richard Southall (instructed by Davis & Co, of
Harrow) appeared for the appellant; Edward Bartley Jones QC and Julie Case
(instructed by Gwynfor Jones, of Pwlhelli) appeared for the second respondents;
Cristina Michalos (instructed by the solicitor to Nationwide Building Society)
represented the third respondent; the first respondent did not appear and was
not represented.
Giving the judgment of the court, PETER GIBSON LJ said: This is an
appeal brought with the leave of the single lord justice, Laws LJ, who
considered the application for leave on paper from the order of Judge Elystan
Morgan on 24 November 1998, sitting in the Caernarfon County Court. Thereby,
the judge dismissed the appeal by the plaintiff, Berkshire Capital Funding Ltd,
from that part of the order of District Judge Hughes on 24 September 1998 that
directed that Mr and Mrs Barker be joined as second defendants and gave
directions consequent on that joinder.
The background facts are these. The first
defendant, Mr Street, is the owner of the freehold property, Blaenau Canol,
Lithfaen, Pwlhelli. He granted a tenancy of the property to Mr and Mrs Barker
on a date not later than 1
home. Prior to then, Mr Street had taken out two mortgages on the property: a
first mortgage to Nationwide Building Society (Nationwide), which was joined as
the third defendant by the judge, and a second mortgage on 14
to Premier Portfolio which, on 30 April 1996, by its administrative receiver,
assigned its interest to the plaintiff. The second mortgage was to secure a
loan of £20,000 plus interest. The second mortgage prohibited any tenancy of
the property without the plaintiff’s prior consent. No consent to the tenancy
to Mr and Mrs Barker was ever given by the plaintiff or its predecessor.
Mr Street fell into arrears on his mortgages and
three sets of proceedings were commenced. By one, Mr Street brought proceedings
for possession in Porthmadog County Court against Mr and Mrs Barker. That
action was dismissed by Deputy District Judge HE Jones. In his judgment, he
found that by February 1993 Mr Street had ‘washed his hands of the property’,
and that in May 1993 a representative of Nationwide visited the property and,
by her actions, created a new tenancy between Nationwide and Mr and Mrs Barker,
that tenancy being at a rent of £50 per week from 30 June 1993. In that action
neither of the two mortgagees was a party.
Second, Nationwide, as mortgagee, brought proceedings
in Porthmadog County Court against Mr
added as defendants. Those proceedings stand adjourned.
Third, the plaintiff, in May 1998, brought the
proceedings with which this appeal is concerned. Initially, the only defendant
was Mr
arrears of nearly £37,000. We have not been supplied with a note of the
district judge’s judgment, but it appears from the judge’s judgment that the
district judge, when declining to make a possession order, stated that he was
of the view that he had no jurisdiction to make such an order and that, once a
superior mortgagee was in possession of premises, no order for possession in
favour of a second mortgagee could be made. That reasoning was challenged by
the plaintiff on appeal to the judge. The judge said:
I find this a difficult matter to determine
because, on the one hand, it seems clear to me that it is probably unlikely
that the continued occupancy of Mr and Mrs
remain as against the second mortgagees. They have never been party to that
tenancy. I am not aware of any allegation of estoppel against them. It would
seem, on the face of it, therefore, that the only remedy that Mr
Barker unfortunately must have is to resort to a monetary one vis-à-vis
Nationwide…
The judge went on to say the situation was not
entirely clear. He referred to Fisher and Lightwood’s Law of Mortgage
10th ed (1998) p176 where, under the heading of ‘Remedies of second mortgagee’
the following is said:
A second mortgagee has all the remedies of a
first mortgagee, but save for an action on the personal covenant he will not
generally be able to exercise his remedies while the first mortgagee is
exercising the same remedies. So he cannot take possession if the first
mortgagee is already in possession or has appointed a receiver…
To that statement there is a footnote (p):
However the existence of an order for possession
in favour of a prior mortgagee does not prevent a court ordering possession in
favour of a subsequent mortgagee Universal Showcards & Display
Manufacturing v Brunt (1984) Times, 26 March, CA.
In Universal Showcards & Display
Manufacturing v Brunt* the plaintiff, the second mortgagee, brought
proceedings claiming possession. But when the particulars of claim were served
it was found that the first mortgagee had already taken possession. The county
court judge held that he could not make an order in favour of the plaintiff,
the second mortgagee, because of the possession taken by the first mortgagee.
This court held that the judge had jurisdiction to make an order for possession
in favour of the second mortgagee, subject to the rights of the prior
mortgagee. Waller LJ said, after referring to the county court judge’s
conclusion that he had no jurisdiction:
In my opinion the learned judge was in error in
coming to that conclusion. The plaintiffs were mortgagees; the Abbey National
Building Society were in possession but by the time of the judgment, the
defendants might have paid off the Abbey National Building Society, or the
Society might have gone out of possession for some other reason. But even if
they were still in possession, it might have been open to the learned judge to
give judgment to the plaintiffs, against the defendants for possession —
subject to the rights of prior mortgagees.
*Editor’s note: Reported at (1984) 128 SJ 581
He went on to say that jurisdiction had to be
determined at the time the proceedings were brought. Lord Oliver agreed. He
said:
What is said is that the claim for possession made
in this case was totally misconceived because there was already a prior
mortgagee in possession.
I confess, for the reasons my Lord has given, I
have considerable reservations about that, and I am not (speaking for myself)
entirely convinced that I can see any reason why an order for possession
between mortgagee and mortgagor should not be made or expressed to be subject
to the rights of a prior encumbrancer.
Purchas LJ agreed.
In the present case the judge in his judgment
referred to what was said by this court in Universal Showcards, and
continued by saying that the position was not entirely clear as to whether Mr
and Mrs Barker were in occupation as tenants of Mr Street, acknowledged by
Nationwide; or in possession as agents of Nationwide; or both. He therefore
supported the district judge’s order. He also ordered that Nationwide should be
joined.
The plaintiff now appeals. Mr Richard Southall
submits that the plaintiff is not bound by the tenancy entered into by Mr and
Mrs Barker whether as tenants of Mr Street or of Nationwide. He referred us to
what was said in Fisher and Lightwood at pp331-332:
A second or subsequent mortgagee is similarly
entitled to possession, except as against prior mortgagees.
To that statement there is a note (h)
referring to Universal Showcards and saying:
The order may be made subject to the rights of
the prior incumbrancer or alternatively there may be a declaration of
entitlement to possession with liberty to apply.
Mr Southall submits that section 99(2) of the Law
of Property Act 1925 clearly shows that, while a mortgagee in possession may
grant a lease, such lease only binds the prior incumbrancers and does not bind
any subsequent mortgagee. Section 99(2) reads:
A mortgagee of land while in possession shall, as
against all prior incumbrancers, if any, and as against the mortgagor, have
power to make from time to time any such lease as aforesaid.
The lease that may be made is the lease authorised
by section 99(1) and (3) and it includes an occupation lease for any term not
exceeding 21 years: section 99(3)(i). Mr
possession subject to the rights of Nationwide.
Mr Edward Bartley Jones QC, for Mr and
Mrs
rate in relation to the position of Mr
under a tenancy adopted by Nationwide or granted by Nationwide. He has pointed
out that the mortgagee’s right of possession derives from the legal term of
years that the mortgagee had or is deemed to have under a legal charge, and
that the term of years that a second mortgagee has or is deemed to have is
subject to the term of years taken or deemed to have been taken by the prior
incumbrancer. He does not dispute that, in so far as Mr and Mrs
were tenants only under the tenancy granted by Mr
a tenancy not adopted by Nationwide, they cannot withstand an order for
possession in favour of the plaintiff, whose consent was never obtained for the
tenancy. He further submits that a
of the management powers that such mortgagee enjoys in right of his mortgage.
He submits that the mortgagee has that right to grant a tenancy at common law,
and has referred us to Emmet on Title 19th ed para 26.079, which makes
good that proposition. He further submits that, under section 99(2) also, the
mortgagee has the right to grant a lease authorised by that section. He points
out that the very act of granting a tenancy made Nationwide a mortgagee in
possession: see Mexborough Urban District Council v Harrison
[1964] 1 WLR 733 at pp736-737, following Noyes v Pollock (1886)
32 ChD 53. He submits that the plaintiff cannot obtain possession to destroy a
tenancy validly granted by the prior mortgagee, Nationwide.
It seems to me that those submissions are plainly
correct. A mortgagee in possession must be able to exercise powers of
management over the property charged in his favour and that must include the
ability to grant tenancies, both at common law and in accordance with section
99(2). It would, as Mr Bartley Jones submitted, be an astounding proposition
that a second legal mortgagee, while in possession, could create statutory
leases binding the first legal mortgagee and the mortgagor, but the first legal
mortgagee while in possession could only create leases binding the mortgagor
and himself, but not the second legal mortgagee. I agree that that could not
have been the true intention of section 99. Indeed, it seems to me that section
99 is drafted on the basis that a subsequent incumbrancer could not do anything
to affect adversely the interests of the prior mortgagees, and that must
include the interests of the prior mortgagee as landlord in respect of a lease
granted by that prior mortgagee to a tenant in accordance with the section. It
was unnecessary to spell out in section 99(2) that, where there was a
subsequent mortgagee, that was the effect of the valid grant of a lease by a
prior mortgagee. It is, in my view, probable that Mr Bartley Jones is right in
saying that if Nationwide is bound by a tenancy granted to Mr and Mrs Barker,
it is because a new tenancy was created by Nationwide, but it is unnecessary to
decide that. It is, in my judgment, clear that any order for possession made by
the court in favour of a second mortgagee must respect the interests of the
prior mortgagee including, as I have said, its interests as landlord in respect
of a tenancy validly granted by it.
There was some debate before us as to whether it
is appropriate to make an order for possession in favour of a subsequent
incumbrancer subject to the rights of the prior incumbrancer. It was pointed
out by Mr
whom it is issued to evict any person found at the premises, and he argued that
it would be inappropriate to grant an order for possession in favour of the
plaintiff in the present case.
However, I do not think that if an order for
possession were made subject to the rights of Nationwide, including any rights derived
by Mr
mortgagee, it would entitle the plaintiff to obtain a warrant of possession.
That is because under Ord 26 r
desiring a warrant of possession to be issued has to certify that the land has
not been vacated in accordance with the judgment order for the recovery of the
land. In any event, Mr Southall has made clear that the plaintiff has no
intention of seeking a warrant of possession if an order is made in the form
suggested. That would include the words that are intended to make clear that
tenants of Nationwide may remain in possession. Mr Southall has told us that
there is no question of a warrant of possession being sought as against Mr and
Mrs Barker until such time as their rights have been determined.
For my part, therefore, I would allow the appeal
to the limited extent of making such an order for possession; but I would not
interfere with any of the other orders that were made by the district judge
relating to the joinder of Mr and Mrs Barker as second defendants or the
consequential directions. Thus the appeal is only successful to that limited
extent.
BLOFELD J agreed and did not add anything.
Appeal allowed.
