Leasehold interest taken as security for mortgage–Leasehold interest surrendered with mortgage assignee’s consent but without guarantor’s–Guarantor given leave to defend action for the mortgage debt
By this
procedure summons Mr Alfred Preston Dowling, as sole executor of the assignee
of a mortgage, his deceased wife Ivy Dorothy Dowling, sought judgment in
default of defence for £1,994.75 against the mortgagors, Ditanda Ltd, and
against the sole surviving guarantor of the mortgage, Mr Brian John Cotton. Mr
Cotton sought leave to defend.
Mr D Jackson
(instructed by Doyle, Devonshire, Box & Co) appeared for the plaintiff, and
Mr H Marten (instructed by Sacker & Partners) represented the second
defendant. The first defendants took no part in the proceedings on the summons.
Giving
judgment, OLIVER J said that Mrs Dowling became creditor by assignment of
Ditanda Ltd. She died on December 29 1972, and her will was proved by her
husband. By a writ issued in August 1973 in the Queen’s Bench Division–the
matter was later transferred to the Chancery Division–her husband, as her sole
executor, claimed the outstanding amount of the debt against the company and
against Mr Cotton, the survivor of two guarantors. He now sought leave to sign
judgment.
By a charge
dated June 17 1966 Ditanda borrowed £5,000 and charged as security a lease of
premises in Worthing. The mortgagee was Preston, a company which subsequently
went into liquidation, and by a deed of transfer of mortgage dated December 22
1967 that company by its liquidator transferred the benefit of the mortgage to
Mrs Dowling. By a deed of surrender executed on February 4 1971 and made
between Ditanda, Mrs Dowling and the landlords of the property, a transaction
to which the guarantors were not made parties, the lease was surrendered on
terms therein set out. Ultimately, Ditanda fell down on their obligations. By
clause 8 of the legal charge, the guarantors had agreed severally with the
mortgagee to pay on request any instalment of principal or interest which was
in arrear and unpaid for the space of 21 days after becoming payable. Clause 9
provided:
‘If the
guarantors or either of them shall pay all the moneys outstanding hereunder at
the date of such payment the mortgagee will at the expense in all respects of
the guarantors or guarantor acquiring the same duly transfer the legal charge
to the guarantors or guarantor making such payment.’
Clause 10
read:
‘The giving
of time to the borrower, or the neglect or forbearance of the mortgagee in
requiring or enforcing payment of the . . . principal . . . or interest or any
other variation of the provisions of this legal charge shall not in any way
prejudice or affect the guarantee herein contained and although as between the
borrower and the guarantors the guarantors are only sureties for the borrower
yet as between the mortgagee and the guarantors the guarantors are to be
considered as principal debtors for all the sums hereby guaranteed to be paid.’
Mr Marten, for
the second defendant, had submitted that it was a perfectly well-recognised
principle that a surety was entitled to the transfer of all securities held by
the creditor if he paid off the debt, and that if there was a variation of the
terms of the transaction, the guarantor was discharged. In the light of the
events in the present case, counsel submitted, Mr Cotton ought to be allowed to
defend. Fisher & Lightwood’s Law of Mortgages (8th ed, 1969) at p
523, headed ‘Failure of creditor to preserve securities,’ stated:
‘The surety
being thus interested in the mortgaged estate, the neglect of the creditor to
preserve the securities for his benefit will cause the release of the surety,
either entirely or to the extent of the lost fund. The creditor cannot, as
against the surety, apply the security in payment of any other debt than that
for which the surety was liable. But the creditor is under no obligation not to
assign the securities or the debt. Upon such an assignment the creditor’s
obligation to preserve the securities attaches upon the assignee, who also
acquires the rights of the creditor against the surety; and those rights are
not lost by the neglect of the assignee to give notice of the assignment to the
surety; though by omitting to give notice he will risk the consequences of a
payment by the surety to the assignor. But if, through the neglect of the
creditor or his assignee to enforce or protect the security, the benefit of it
is lost to the surety, he is discharged. It is usual to insert in the guarantee
a provision to prevent the release of securities discharging the surety.’
Mr Jackson,
for the plaintiff, argued that there was such a provision in clause 10, but he
(his Lordship) could not give the clause the construction which counsel sought
to put on it. Clause 9 imposed on the mortgagee a specific obligation to transfer
the legal charge to the guarantor(s) if he/they should pay all the moneys
outstanding under the mortgage. It would be quite fruitless to include clause 9
if the effect of clause 10 were to take away its whole effect. The release of
February 4 1971 was not a question of forbearance, or giving time to the
debtor, but was a clear breach of clause 9. There was thus clearly an arguable
case, and Mr Cotton should have leave to defend.
