Mortgages — Power to grant leases — Consent to lease — Modification of statutory power of leasing — Mortgagor applying for consent to lease — Whether mortgagee owes duty to mortgagor properly to consider application for consent — Whether duty of good faith owed
In October 1980 the claimant and his wife granted the defendant
bank a legal charge of a residential property to secure bank borrowings. By the
express terms of the legal charge, the statutory powers of a mortgagor to lease
the property were excluded and the claimant and his wife were required to
obtain the consent of the bank to any letting. Following his wife’s death in
1991, the claimant first put the property on the market and then sought the
consent of the bank’s manager to letting it so that the claimant could move to
obtain employment. The manager dismissed the request ‘out of hand’. In February
1998 the claimant commenced proceedings against the bank alleging a breach of
certain pleaded duties of the bank in relation to the request to let the
property, including a duty to exercise reasonable skill and care in considering
requests, the only pleaded duty relied on in the Court of Appeal. Rix J allowed
an appeal from the Master, who had struck out the writ and statement of claim
as disclosing no reasonable cause of action, and decided that it was not
unarguable that a bank has a duty to consider requests to let and that the bank
was in breach of that duty. The bank appealed.
duty relied on was one arising out of the duty of good faith owed by a
mortgagee to a mortgagor. It was not open to the mortgagor to advance a duty
based on some positive obligation to be implied into the relevant clause of the
legal charge that the bank must act reasonably in refusing consent (Citibank
International plc v Kessler [1999] Lloyd’s Rep Bank 123), or that
the clause was qualified by an implied limitation that consent should not be
unreasonably withheld; indeed such matters were not so advanced. Although the
duty advanced was based on an alleged breach of good faith, the facts pleaded
did not reveal any dishonesty or improper motive. The pleaded case, based on an
alleged duty properly to consider the claimant’s request, did not disclose a
reasonable cause of action. It was not necessary to consider whether there
could ever be scope for a complaint of bad faith, although there might be
extreme cases.
The following cases are referred to in
this report.
Citibank International
plc v Kessler [1999] Lloyd’s Rep Bank 123
Ideal Film Renting
Co Ltd v Neilson [1921] 1 Ch 575
Imperial Group
Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589; [1991] 2
All ER 597
Medforth v Blake
[1999] 3 All ER 97
Shamji v Johnson
Matthey Bankers [1991] BCLC 36, affirming [1986] BCLC 278
Yorkshire Bank plc
v Hall [1999] 1 All ER 879
This was an appeal by the defendant,
Lloyds TSB Bank plc, from a decision of Rix J allowing an appeal by the
claimant, Kenneth Starling, from a decision of Master Eyre striking out the
claimant’s writ and statement of claim as disclosing no cause of action in
proceedings by the claimant against the defendant for breach of duty and for
damages.
Mark Hapgood QC and Derrick Dale (instructed by CMS Cameron McKenna,
of Bristol) appeared for the appellant; Mark Phillips QC and Jonathan Crystal
(instructed by Charles Russell, of Cheltenham) represented the respondent.
Giving the first judgment, PETER
GIBSON LJ said: This appeal raises a short point which, if the mortgagor
is right in his submissions, will have considerable significance for lenders
and borrowers on the security of real property.
Mortgagors have, under the general law, the power to grant leases
in respect of the mortgaged property. However, any interest taken by the tenant
under such a lease is subject to the prior interest of the mortgagee, and
potential tenants may well be deterred in consequence from agreeing to such a
lease. By the intervention of statute (section 99 of the Law of Property Act
1925), a mortgagor in possession has the power to grant such leases as are
specified in that section. But that power may be excluded or modified (section
99(13)) and in practice institutional lenders almost invariably do modify the
statutory power so as to exclude the exercise of the power save with the prior
consent of the mortgagee.
The point raised in this appeal is whether, in a case where the
statutory power has been so modified, a duty is owed by the mortgagee to the
mortgagor properly to consider any request by the mortgagor to let the
mortgaged property. Master Eyre held that the mortgagee, Lloyds TSB Bank plc
(the bank), owed no such duty and he acceded to the bank’s application to
strike out the writ and statement of claim of the mortgagor, Mr. Starling, as
disclosing no reasonable cause of action. Mr Starling appealed and Rix J
allowed the appeal and refused the bank leave to appeal. Leave was however
given by the single lord justice.
The facts relevant to this appeal, which are largely those alleged
by the statement of claim and must be taken to be true, can be summarised as
follows. Mr
22
residential property, Mole End, West Challow, Wantage, in Oxfordshire, to
secure their borrowings from the bank. Clause 6 of that legal charge was in
this form:
The statutory powers and any other powers of leasing letting
entering into agreements for leases or lettings and accepting or agreeing to
accept surrenders of leases shall not be exercisable by the Mortgagor nor shall
the Mortgagor part with possession of the Mortgaged Property or any part
thereof nor confer upon any person firm or company or body whatsoever any
licence right or interest to occupy the Mortgaged Property or any part thereof
nor grant any licence or permission to assign underlet or part with possession
of the Mortgaged Property or any part thereof without in any such case
obtaining the consent of the Bank signified in writing under the hand of a
Controller or Assistant Regional General Manager of the Bank.
A further legal charge of the property was entered into by Mr and
Mrs Starling on 10 June 1987 in favour of the bank. Clause 6 of that legal
charge was in terms similar to and in effect identical with the clause that I
have cited.
Sadly, Mrs Starling became seriously ill and Mr
give up work to care for her. She died in October 1991. Mr Starling put the
property on the market, but it was a difficult time to be selling residential
property. On 19 February 1992, at a time, we are told, when the value of the
property substantially exceeded the monies owed by Mr
bank, he met the manager of the bank to discuss his financial position. Para 3
of the amended statement of claim continues:
At such meeting, the Plaintiff informed the Defendant’s Manager,
Mr Elger, that the chances of his gaining full-time employment would be greatly
enhanced if he moved from Mole End and he wished to let the property. The
Defendant’s Manager, Mr Elger, failed to give any or any fair reasonable and
proper consideration to the Plaintiff’s request merely informing him that
letting the property was not an option that the Defendant was interested in and
merely dismissing the Plaintiff’s request out of hand.
In saying that Mr Starling’s request was dismissed ‘out of hand’,
the pleader was using the language of the Banking Ombudsman who found
maladministration by the bank in dealing with Mr Starling.
Mr Starling commenced proceedings on 18 February 1998. By his
amended writ he claimed ‘damages for negligence and/or for breach of duty owed
and/or for breach of a partly written and/or partly oral contract in and about
banking services provided by [the bank] to [Mr
statement of claim as amended with the leave of the judge, the following duties
were said to be owed by the bank to Mr
4.1 …
(i) a duty to act fairly and reasonably;
(ii) a duty to consider the Plaintiff’s financial position.
4.2 Further the Defendant by virtue of the terms of the First
Mortgage and Second Mortgage was required to properly consider the Plaintiff’s
request.
4.3 Further, the Defendant was under a duty to exercise reasonable
skill and care in considering requests by the Plaintiff as its customer.
It is then pleaded that in breach of those duties and/or
negligently the bank rejected Mr Starling’s request to let the property, in
circumstances where it knew and would have appreciated that Mr Starling would
not only be deprived of letting income but also his chances of gaining
full-time employment would be seriously diminished. Loss and damage were
alleged and damages were sought by the prayer. Particulars were requested by
the bank of the statement of claim. I need only refer to those supplied in
respect of para 4.2, as it was only the duty alleged in that paragraph on which
Mr Mark Phillips QC, appearing before us for Mr Starling, although he did not
appear before the judge, sought to rely. In the particulars supplied on behalf
of Mr Starling, it was alleged that it was both an express and an implied term
of the legal charge that the bank was required to ‘properly consider’ Mr
Starling’s request to let the property and, in response to a request for the
basis of that implication, it was said that such a term was to be implied as a
matter of law.
The bank applied on 5 August 1998 by summons to strike out the writ
and statement of claim, and I have already stated the outcome of that
application to the Master and of the appeal therefrom to the judge. Rix J, in
an economical judgment on 6 October 1998, said that he assumed what was common
ground, that no implication was to be made that the bank could not unreasonably
withhold its consent. But he continued:
Nevertheless, it seems to me that I cannot say that it is
unarguable that the bank has at least to consider, and possibly fairly and
reasonably consider but, at any rate consider, a mortgagor’s request to let a
mortgaged property. The pleaded circumstances however, (whatever the true facts
may turn out to be) are that in effect no consideration was given to Mr
Starling’s request at all.
The judge referred to the argument of counsel who then appeared for
the bank, and noted a concession by her ‘that a bank must act with bona
fides‘, commenting that she found it difficult to state what came within
that obligation. He concluded by saying that it was ‘not unarguable’ that a
bank has a duty to consider requests to let and that, upon the allegations in
the case, the bank was in breach of that duty. He accordingly allowed the
appeal. The judge did not explain the basis of that duty nor, in his recitation
of the argument of junior counsel then appearing for Mr Starling, did that
explanation appear.
Mr Phillips, in his argument before us, did seek to explain the
basis of that duty. He said that the duty is one arising out of the duty of
good faith that, he submitted, is owed by a mortgagee to a mortgagor when doing
any ‘positive act’, and in particular when exercising the right to withhold
consent to a letting by a mortgagor. I confess that I find it odd to describe
the withholding of consent as a positive act, but I leave that aside. He argued
that the duty of good faith was an equitable duty arising out of the
relationship of mortgagor and mortgagee. He went on to submit that if there was
a duty of good faith, that duty involved an obligation on the mortgagee to
consider any request made to it by the mortgagor to give consent to letting the
mortgaged property, and he relied on Imperial Group Pension Trust Ltd v Imperial
Tobacco Ltd [1991] 1 WLR 589 in support of the proposition that a blanket
refusal to consider giving consent was a breach of that duty. The circumstances
in which the duty of good faith, and hence the duty to consider a request,
arose in the Imperial case were far removed from those of the present
case. The duty found in the Imperial case arose out of an employment
relationship and that case does not assist in establishing the existence of the
duty claimed in the present case.
Mr Phillips did not attempt to justify the suggested duty on any
other basis. He accepted that it was not open to him (at least in this court)
to argue that there was some positive obligation to be implied into clause 6
that the bank in the exercise of its right to refuse consent must act
reasonably. That concession was inevitable in the light of the recent decision
of this court in Citibank International plc v Kessler [1999]
Lloyd’s Rep Bank 123. Nor would it have profited him to argue that the right to
withhold consent was merely qualified by an implied limitation that consent
should not be unreasonably withheld: there is no basis for such an implication
and, in any event, the breach of such a limitation merely leaves the mortgagor
free to let and gives rise to no claim in damages (Ideal Film Renting Co Ltd
v Neilson [1921] 1 Ch 575 at pp581-2). Hence Mr
to equity.
Mr Phillips’ submissions are nothing if not bold and, if correct,
the circumstances in which the court could intervene in relation to decisions
taken by a mortgagee in exercise of contractual rights, but objected to by the
mortgagor, would be considerably widened beyond what has thus far been
established in the authorities. He told us that his submissions were based on
three matters. The first was the concession before the judge by the bank’s
counsel relating to good faith. It is not clear to me precisely what was the
content of that concession, but in any event Mr Hapgood QC for the bank
withdrew the concession. The second was certain remarks by Hoffmann J in Shamji
v Johnson Matthey Bankers [1986] BCLC 278 at pp283-284, approved as they
were by this court on the appeal: [1991] BCLC 36 at p41. There that judge
recognised the possibility that an exercise by a mortgagee of a right to
appoint a receiver might ‘perhaps’ be challenged on the ground of bad faith.
But those dicta, tentatively expressed, related to a right over the
property of the mortgagor with severe consequences for the mortgagor, a right
very different from that merely to withhold consent to a letting by the
mortgagor. Further, Hoffmann J also recognised that where the exercise of a
right involved a conflict of interests between mortgagor and mortgagee, the
mortgagee was entitled to act in protection of his own interests. The third
matter relied on by Mr Phillips was certain remarks made by Sir Richard Scott
V-C (with whom Swinton Thomas and Tuckey LJJ agreed) in Medforth v Blake
[1999] 3 All ER 97 at pp110-111:
The duties imposed on a mortgagee in possession, and on a
mortgagee exercising his powers whether or not in possession, were introduced
in order to ensure that a mortgagee dealt fairly and equitably with the
mortgagor. The duties of a receiver towards the mortgagor have the same origin.
They are duties in equity imposed in order to ensure that a receiver, while
discharging his duties to manage the property with a view to repayment of the
secured debt,
others interested in the mortgaged property. These duties are not inflexible.
What a mortgagee or a receiver must do to discharge them depends upon the
particular facts of the particular case. A want of good faith or the exercise
of powers for an improper motive will always suffice to establish a breach of
duty.
On their face, these remarks relate to duties imposed upon a
mortgagee in possession and a receiver managing property, and have no bearing
on a right to withhold consent to a letting by the mortgagor in possession. I
find it impossible to see how they can assist in establishing the propositions
contended for by Mr
We are concerned with an application to strike out an action on the
ground that the pleadings disclose no reasonable cause of action, and it is
therefore to the pleadings that I turn to see whether they support the case as
now put. It goes without saying that it is only in a plain and obvious case that
the court should exercise the extreme remedy of striking out. It seems clear to
me that the pleader only had common law remedies in mind when drafting the
amended writ and the amended statement of claim. There is no mention of an
equitable duty of good faith and I note that the claim is for damages, not for
equitable compensation. But no doubt that could be cured by amendment. What
cannot, however, be cured by amendment is the absence of any allegation of
dishonesty or improper motive in the alleged failure to consider properly Mr
Starling’s request for consent to let the property. Mr Phillips made clear his
submission that that was a breach of the duty of good faith. But in Medforth
v Blake at p112 the Vice-Chancellor said this:
I do not think that the concept of good faith should be diluted by
treating it as capable of being breached by conduct that is not dishonest or
otherwise tainted by bad faith… In my judgment, the breach of a duty of good
faith should, in this area as in all others, require some dishonesty or
improper motive, some element of bad faith, to be established.
The facts disclosed to us reveal nothing suggestive of dishonesty
or improper motive. Para 3 of the amended statement of claim shows that Mr
Starling presented his request and his reasons therefor to Mr Elger, who
rejected that request. It is impossible to infer any bad faith in that. Mr
Elger could have had any of a variety of honest reasons for that rejection, and
it is not irrelevant to note that the property was on the market at that time,
the debt owed to the bank was substantial and the property, if encumbered by a
tenancy, would almost certainly be worth less than with vacant possession.
There are other difficulties in the way of recognising the duty
pleaded in para 4.2 of the amended statement of claim. One is entitled to ask
what is the content of such duty, given that Mr Starling was not entitled to
complain of an unreasonable decision to withhold consent and that the bank was
entitled, in a case where there was a plain conflict between the bank’s
interest and Mr
Mr
the mortgaged property, had to consider its customer’s interests and to go as
far as it could to further those interests, while reserving the right to
further its own interests. I have to say that that would seem to me to render
the alleged duty unworkable in practice.
For these reasons it is, in my judgment, inescapable that the
pleaded case of Mr Starling, which Mr Phillips has sought to sustain only on
the alleged basis of the alleged duty to consider properly Mr Starling’s
request, does not disclose a reasonable cause of action. It is unnecessary to
decide in what other circumstances, beyond those already recognised by the
courts, a duty of good faith arises in dealings between mortgagors and
mortgagees. It is, in my opinion, clear that in the present case the plea in
para 4.2 is unsustainable, and in acceptance of Mr Hapgood’s lucid arguments I would
allow the appeal and restore Master Eyre’s order.
Agreeing, MANCE LJ
said: I agree with the judgment of Peter Gibson LJ and add only a few
observations of my own. Mr Phillips, appearing for Mr Starling, had to
recognise in the light of Citibank International plc v Kessler
[1999] Lloyd’s Rep Bank 123 that clause 6 in the mortgage could not give rise
to any duty on the bank to exercise reasonable care when considering whether or
not to give its consent to any proposed subletting. He contended, however, that
the bank was under a duty to act bona fide in the same context. He went
on to attempt to recover some of the ground lost in the Citibank case by
contending that this latter duty must at least require the bank to consider any
request; and that there was a sufficiently pleaded case for saying that the
bank had in fact failed or refused to give Mr Starling’s request any
consideration at all.
These submissions blur the concept of good faith, and ignore the
possibility that, if there was a complete failure or refusal to give the
request any consideration at all, this occurred in good faith, whether by
mistake or because the bank’s manager, Mr Elger, thought the request so
evidently unsustainable that it did not merit further consideration. In the
latter situation, I doubt whether it is really appropriate to speak of a
complete refusal to give consideration at all — consideration would have been
given, leading to a clear-cut, immediate decision.
I agree with Peter Gibson LJ that, even assuming that the bank could
be said to owe a duty to act in good faith in deciding whether or not to
consent under clause 6 in the mortgage, nothing is pleaded that could amount to
an assertion of any breach of any such duty. The plea in para 3 of the amended
statement of claim that Mr
failed to give any or any fair reasonable and proper consideration
to the Plaintiff’s request merely informing him that letting the property was
not an option that the Defendant was interested in and merely dismissing the
Plaintiff’s request out of hand
includes, literally, a plea that no consideration at all was given,
although this itself is difficult to reconcile with the information that Mr
Elger is reported as having supplied. But it does not involve any allegation of
bad faith. Nor do any of the specifically pleaded breaches of duty in paras
4.1, 4.2 and 4.3, which Peter Gibson LJ has set out. I agree with him, with
reference to his citation from Sir Richard Scott V-C’s judgment in Medforth
v Blake [1999] 3 All ER 97 at p112, that, if bad faith has any relevance
at all in this context, its ingredients are not to be watered down. If
dishonesty or improper motive is alleged, that requires to be clearly
identified and particularised: see RSC Ord 18 r 12(1)(b), which governed the present
pleading when served and amended, and now also CPR Practice Direction —
Statements of Case, para 10.2, especially (7).
The maladministration that the Banking Ombudsman found — itself not
pleaded — was not that Mr Elger did not consider the matter at all, still less
that he acted in any way in bad faith, but that, in accordance with the bank’s
internal procedures and unknown to Mr
should have been referred by Mr Elger to another department of the bank before
any decision was taken or communicated.
Whether there could ever be any scope for a complaint based on bad
faith in connection with a bank’s refusal of consent to a proposed subletting
under a clause such as clause 6 is not a question that it is, in my view,
either necessary or appropriate to consider in this case. Bearing in mind that
a bank is, as Mr Phillips accepted, entitled to prefer its own interests when
deciding whether or not to give consent under a clause such as clause 6, it is
difficult to think of many or any cases where the question would arise in
practice. It might perhaps arise in an extreme case, eg if a bank official
refused consent for personal reasons in order to injure the mortgagor, but
hypothetical cases of this nature are best left for consideration if they ever
occur. The authorities cited to us suggest the existence of a general equitable
duty of good faith on the part of a mortgagee when exercising a power under the
mortgage or acting in the management of the property the subject of the mortgage:
see Medforth v Blake [1999] 3 All ER 97 and the citation in it
from the judgment of Robert Walker LJ in Yorkshire Bank plc v Hall
[1999] 1 All ER 879. But (as a consequence of the concession made by the bank
below and only withdrawn before us) we heard no full citation of authority or
argument in support of the proposition that the provision regarding consent
could be treated as a form of ‘power’ or that the bank, when deciding whether
or not to give consent to subletting,
as its own best interests under the mortgage.
Also agreeing, MOORE-BICK J said: I agree that
this appeal should be allowed for the reasons set out in the judgment of my
lord Peter Gibson LJ, and I add a few words of my own only because we are
differing from the learned judge.
Mr Starling’s case, in substance, is that the bank owed him a duty
properly to consider his request to consent to the letting of his property, by
which he means that it should have considered how far it could accommodate his
wishes while protecting its own interests. Such a duty, if it exists at all,
must arise out of the contract between the parties or under the general law. An
argument that such an obligation could be implied from the terms of the
contract in the present case was doomed to failure in the light of the decision
of this court in Citibank International plc v Kessler [1999] 1
Lloyd’s Rep Bank 123. As Chadwick LJ pointed out in that case, if it is
necessary to imply any term into a clause such as clause 6 (which in the
present case I think very doubtful), there is no basis for implying anything
beyond a term that the bank’s consent would not be unreasonably withheld. That
would operate as a restriction on the bank’s absolute right to withhold its
consent to a letting of the property and, in accordance with established
principle, a refusal to consent would leave Mr Starling free to let without
obtaining such consent. It would not, however, give him a right of action
against the bank for damages.
Recognising this difficulty, Mr Phillips QC did not seek to uphold
the judge’s decision on the basis of a term to be implied into the contract.
Rather, he submitted that the bank’s duty to consider Mr
request arose out of a duty imposed by equity on all mortgagees to act bona
fide in their dealings with the mortgagor, at any rate when committing any
positive act in relation to the mortgaged property. Before the judge, it was
apparently conceded that the bank did owe Mr Starling an obligation to act bona
fide, although the precise nature and scope of the obligation does not
appear to have been very fully debated. None the less, once the concession had
been made, it naturally coloured the whole argument and led the judge to accept
that it was at least arguable that the bank owed Mr Starling a duty to give
proper consideration to his request. That concession was, however, withdrawn
before us, as a result of which we have had the benefit of argument directed
specifically to the point.
It is apparent that the duty of good faith for which
Mr
the interests of the mortgagor when taking a decision of any kind in relation
to the transaction. The recognition of a general duty of that kind would be a
matter of some significance, not just for mortgagors and mortgagees, but also
for parties to other types of transactions involving security over property.
However, the only authorities on which Mr Phillips could rely in support of his
submission were certain dicta of Hoffmann J in Shamji v Johnson
Matthey Bankers [1991] BCLC 36 and of Sir Richard Scott V-C in Medforth
v Blake [1999] 3 All ER 97 at pp110-111, to which my lord Peter Gibson
LJ has already referred. In neither of those cases, however, was the court
directly concerned with the existence of a general duty of good faith outside
the narrow context of the exercise of a receiver’s or mortgagee’s powers to
manage or otherwise deal with the property in question. The only ‘positive act’
said to have been committed by the bank in this case, however, is the rejection
of a request from the mortgagor to be allowed to take certain steps himself in
relation to the property.
I agree with my lords Peter Gibson and Mance LJJ that it is unnecessary
in this case to decide whether there is a duty on the mortgagee to act bona
fide in a situation of the kind that arose in the present case because the
case as pleaded would in any event be bound to fail. A duty to act bona fide
would not require the bank to give ‘proper consideration’ to Mr Starling’s
request, in the sense of actively considering how far it could accommodate his
wishes consistently with protecting its own interests. That involves much more
than merely acting bona fide, which is essentially a matter of honesty:
see Medforth v Blake. The pleadings contain no allegation of bad
faith in the conventional sense, nor is there any reason to think that such an
allegation could properly be made. Mr Phillips submitted that the bank had
dealt with Mr
arbitrarily ruled out any question of allowing him to let the property and that
that was of itself a breach of the duty of good faith. In support of that
proposition he drew our attention to the case of Imperial Group Pension
Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589. I do not obtain
any assistance from that decision, however, because the duty of good faith that
was there held to exist did not arise out of any general duty in equity but out
of the term that is implied in every contract of employment that the employer
will not, without reasonable and proper cause, undermine the relationship of
trust and confidence between himself and his employee: see per Sir
Nicolas Browne-Wilkinson V-C at p597. The nature of the duty that was held to
exist in that case reflected the nature of the particular relationship between
the parties. I do not think that the bank could be said to have acted in bad
faith, in the sense in which that expression was used by Sir Richard Scott V-C
in Medforth v Blake, simply by refusing to contemplate the
letting of a residential property over which it held a mortgage at a time when
that property was being offered for sale with a view to realising the security.
In my judgment, the statement of claim in its amended form
discloses no cause of action and this appeal should therefore be allowed.
Appeal allowed.
