Mortgage – Possession proceedings – Costs – Claimant bringing proceedings against defendant for possession of mortgaged properties – Equity in properties insufficient to discharge prior charge held by another lender even before claimant’s second charge taken into account – Proceedings discontinued and defendant becoming entitled to costs – Whether costs to be awarded on standard or indemnity basis – Whether proceedings brought impermissible collateral purpose outside powers conferred by charge – Whether claimant entitled to add any award of costs to sum secured by charge or set it off against sums due – Issues determined accordingly
The claimant held charges over two residential properties owned by the defendant to secure a loan made to a company with which he was connected, and the liabilities of which he had guaranteed. The defendant and his wife lived in one of the properties while the other was occupied by his sister and his daughter. The claimant’s charges were second charges ranking behind earlier charges in favour of another bank.
The company defaulted on its loan and the defendant failed to pay the sum of £840,000 which the claimant demanded from him pursuant to his guarantee. The defendant subsequently entered into an individual voluntary arrangement (IVA) with his creditors. A statement prepared for the purposes of the IVA indicated that there was negative equity in the two properties, the value of which was insufficient to redeem the other bank’s first charge even before the claimant’s charge was taken into account.
The claimant brought proceedings to obtain possession of the two properties pursuant to its rights as mortgagee, but it eventually discontinued both claims and consequently became liable to pay the defendant’s costs of the proceedings pursuant to CPR 38.6, which would ordinarily be assessed on the standard basis.
The defendant contended that costs should be awarded on the indemnity basis, since the claimant had brought the proceedings for a collateral purpose that was beyond its powers as mortgagee or, alternatively, the proceedings had been an abuse of process. He contended that the claimant’s purpose in bringing the proceedings could not have been to sell the properties and recover its money, since he was in negative equity and nothing would be left for the claimant after paying off the other bank’s prior charge, and that its intention had instead been to put pressure on him or his family to pay something off the company’s debt.
The claimant contended that any costs that it was ordered to pay could be added to the sum secured by the charge so that they became a debt owed by the defendant to the claimant, or, alternatively, that it was entitled to set off its liability for the defendant’s costs against the sums otherwise due to it from the defendant.
Held: The issued were determined accordingly.
(1) The powers generally conferred on a mortgagee by a mortgage, such as the right to sell the security, appoint a receiver or take possession of the security, were subject to equitable constraints as to when and how they could be exercised. The right to take possession of the property was a right that the claimant had in its capacity of a mortgagee holding a security for the payment of a debt, and could be exercised only for the purpose of securing repayment of that debt. Where a mortgagee had mixed motives in exercising its powers, it was sufficient that recovering the secured debt formed some part of the purpose: Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295, Quennell v Maltby [1979] 1 WLR 318; [1979] 1 EGLR 106; (1978) 249 EG 1169, Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2 and Meretz Investments NV v ACP Ltd [2007] EWCA Civ 1303;[2007] Ch 197; [2007] PLSCS 259 applied.
A second mortgagee was entitled to sell the mortgaged property, subject to the rights of the prior mortgagee, or it could redeem the prior mortgage and sell the property free from it. However, it was unlikely to do so in practice in a case where the amount due to the prior mortgagee exceeded the unencumbered value of the property. Although a second mortgagee in possession was entitled to grant a tenancy of the mortgaged property, pursuant to section 99 of the law of Property Act 1925, it might be deprived of that right by the terms of a prior mortgage: Julian S Hodge & Co Ltd v St Helens Credit Ltd [1965] EGD 143 applied.
On the evidence, the claimant’s purpose in seeking possession was not to sell the properties, since, in light of the negative equity, it could not have believed that the net proceeds of sale would serve to reduce the sum secured by the charges. Nor was there any evidence that the claimant contemplated letting the properties and deriving an income from them in that way. By virtue of the terms of the other bank’s prior charge, such a tenancy would not be binding on the other bank unless it consented to the grant, which it was unlikely to do unless it was itself to take the income from the tenancy.
The claimant’s purpose in seeking possession had been the more general one of putting pressure on the defendant and his family with a view to obtaining payment from someone in relation to the debts that the charges secured. That was none the less a permissible purpose. Seeking possession in order to place the defendant and his family at a disadvantage, with a view to receiving an offer of payment of the sum secured by the charge, was not a collateral purpose outside the exercise of the claimant’s powers as charge, but amounted to the purpose of obtaining repayment and enforcing a security for such repayment. An order for possession would benefit the claimant. No valid distinction could be made between the case where the charge secured repayment of a debt owed by the chargor and where it secured repayment of a debt owed by a third party such as the company. For similar reasons, the proceedings were not an abuse of the process of the court.
(2) A provision in a charge, to the effect that the costs incurred in enforcing the charge were recoverable as a debt from the chargor and were to be charged on the property, was subject to an implied limit that the mortgagee could not recover any costs that were unreasonable in amount or were unreasonably incurred: Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 applied. Although the claimant had been entitled to bring the possession proceedings, it had obtained absolutely nothing from them and they had been a waste of time and expense from its point of view, which the claimant had itself recognised by discontinuing the proceedings. In those circumstances, the defendant had discharged the burden of showing that the claimant’s own costs of the proceedings were not reasonably incurred, still less so the costs that the claimant had made itself liable to pay to the defendant as a result of starting and then abandoning the proceedings. It followed that those costs were not recoverable under the charge.
(3) The defendant was therefore entitled to be paid the costs that he had incurred in the proceedings, to be assessed on the standard basis. The claimant had no right to a common law or equitable set off. By clause 7 of the standard conditions for IVAs, mutual credit and set-off were permissible only where, before the commencement of the IVA, there had been mutual credits, mutual debts or other mutual dealings. The claimant’s liability to pay the defendant’s costs was not a debt, or the result of a dealing, before the commencement of the IVA.
Karen Troy (instructed by Shoosmiths LLP, of Birmingham) appeared for the claimant; Stephen Davies QC (instructed by Michelmores LLP, of Bristol) appeared for the defendant.
Sally Dobson, barrister
