Refinancing agreement — Lender obtaining equitable mortgage only — Judge granting possession order to lender — Whether lender subrogated to rights of first chargee — Appeal dismissed
The appellants were the registered proprietors of a house that had been purchased with a building society loan, secured by a registered first charge over the property. A second charge was subsequently registered in favour of a bank, BCCI, in respect of debts belonging to the first appellant’s company. The BCCI charge contained a provision that no further charges were to be registered against the property without its consent.
The first appellant later entered into a refinancing agreement with the respondent. The appellants duly executed a mortgage in favour of the respondent, and cheques were paid to the building society and to BCCI for the amounts owing to them.
On the same day, provisional liquidators were appointed in respect of BCCI. BCCI, through its liquidators, refused to acknowledge receipt of the cheque or to accept that the relevant sum had been paid. It refused to supply the respondent with confirmation that the BCCI charge had been discharged, or to give its consent to the registration of the respondent’s mortgage. As a result, the respondent was able to register only an equitable mortgage.
The appellants made no payments to the respondent, which subsequently sought a possession order on the basis that it was subrogated to the building society’s rights as first chargee. The appellants argued that the respondent’s mortgage was voidable because the second appellant had executed it under duress. The judge, determining certain preliminary issues, found that the respondent was subrogated to the rights of the building society and granted a possession order. Meanwhile, BCCI had accepted that the respondent’s mortgage should have priority over its own and had agreed to give its consent to the respondent’s mortgage. The respondent’s charge was subsequently registered.
The appellants appealed. They contended that the respondent was prevented from being subrogated to the building society’s rights because it had: (i) received a valid contractual security, in the form of the mortgage executed in its favour, even though that mortgage was not registrable; and (ii) perfected its security as a result of BCCI’s eventual agreement and the subsequent registration of the respondent’s mortgage.
Held: The appeal was dismissed.
1. The real issue between the parties was whether the respondent was entitled to a legal charge over the property, thereby allowing it to obtain possession and to sell the property with good title. Even if the issues raised by the appellants were to be determined in their favour, they could not resist the conclusion that the respondent had a first legal charge over the property and was entitled to possession.
The appellants’ case was based upon the proposition that a claim for subrogation could not be made in circumstances where the person claiming subrogation had actually obtained a valid legal charge over the property, particularly where the valid legal charge was all that it had expected. Accordingly, it was necessary to the appellants’ case on subrogation that the respondent’s mortgage was valid and effective. However, they had maintained throughout the proceedings that the respondent’s mortgage was voidable on the ground that it had been executed under duress. It was not possible for the appellants to rely upon the respondent’s mortgage as being valid for the purpose of defeating the respondent’s case on subrogation, and then, having done so, to contend that that mortgage was invalid: UCB Group Ltd v Hedworth [2003] EWCA Civ 1717; [2003] 3 FCR 739 applied.
2. In the event, as a result of the respondent’s inability to register its mortgage owing to BCCI’s attitude, it was entitled to be subrogated to the building society charge, thereby becoming the legal chargee (albeit only to the extent of the value of the building society mortgage at the time at which it was paid off, together with interest thereafter). A lender that obtained some security, but less than it had expected, was not precluded from claiming further security by subrogation: Banque Financiere de la Cite SA v Parc (Battersea) Ltd [1999] 1 AC 221 applied. The respondent had not obtained the requisite security: Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 and Capital Finance Co Ltd v Stokes [1969] 1 Ch 261 distinguished.
3. The appellants also failed on their second point. The correspondence indicated that the respondent had been seeking BCCI’s acceptance that the respondent was subrogated to the building society mortgage, and not BCCI’s agreement to a rearrangement of the priorities. The subsequent entries in the register were intended to give effect to the order made by the judge.
Adrian Davies (instructed by Fenwick & Co) appeared for the appellants; Andrew Sutcliffe QC and David Gilchrist (instructed by Parker Bullen, of Salisbury) appeared for the respondent.
Sally Dobson, barrister
