Mortgage of guest-house–No provision for mortgage money to become due, or power of sale to arise, should mortgagor fail to keep up interest payments–Court orders sale in foreclosure proceedings, on terms as to disposal of moneys raised
This was a
procedure summons by which Twentieth Century Banking Corporation Ltd,
mortgagees of premises known as Park-an-Ithan, Sithney, Helston, Cornwall,
sought an order for sale of the property against the mortgagors, Mr Clive
Philip Wilkinson and Mr Keith Norman Smaldon.
Mr R Scott QC
and Mr R Reid (instructed by Batt, Holden, of Wimbledon) appeared for the
plaintiffs. The defendants did not appear and were not represented.
Giving
judgment, TEMPLEMAN J said that the question was whether, having regard to the
express provisions of a defective legal charge, the plaintiff lenders could
sell or be authorised to sell the mortgaged property. By clause 2 of the charge
in question, dated November 1 1973, the defendant borrowers covenanted to pay
the lenders the principal sum of £19,000 on the expiry date, defined as 15
years less one day from the date of the legal charge. Thus the expiry date was
October 31 1988. By clause 3 the borrowers covenanted to pay 12 per cent
interest per annum, or (if greater) 6 per cent above the lenders’ base rate, on
the seventh of each month, beginning with December 7 1973. By clause 4 the
borrowers charged the property, a residential guest-house at Sithney, by way of
legal mortgage with the payment of all moneys payable to the lenders by the
borrowers. Clause 6 (1) provided that for the purposes of the Law of Property
Act 1925 ‘the mortgage money shall become due on the expiry date.’ Clause 11 (1) provided that subject to
interest having been paid in accordance with the terms of the legal charge the
lenders agreed to accept, and the borrowers covenanted to pay, instalments of
capital beginning in the fifth year from the date of the charge and ending in
the 15th year. The capital and interest instalments amounted to £1,400 each
year, and the payments were to continue beyond the 15th year if an increase in
interest rates made that necessary. The borrowers defaulted in the payment of
interest. Arrears now amounted to £3,400, so that £22,400 was secured on the
property, the current value of which was estimated at £18,750. The difficulty
and the defect was that the legal charge did not expressly provide for the
mortgage money to become due, or for the power of sale to arise, if the
borrowers, in breach of the terms of the legal charge, failed to pay interest.
Even if the borrowers defaulted on a payment of an instalment of principal and
interest in or after the fifth year, there was no express provision for the
mortgage money to become due, or for the power of sale to arise, before 1988.
The practical position was that the lenders and Mr Wilkinson wished the
property to be sold and the proceeds used towards repayment of the legal
charge. Mr Smaldon had emigrated to America and no assistance was afforded by
him to the court to grant any sensible relief or reach any sensible conclusion.
Section 101 of
the Law of Property Act 1925 conferred on a mortgagee power to sell ‘when the
mortgage money has become due.’ The
legal charge in the present case provided that for the purposes of the Act the
mortgage money should become due on October 31 1988. Mr Scott referred to Payne
v Cardiff Rural District Council [1932] 1 KB 241, where the power of
sale conferred by the Act was held to arise when only an instalment of
principal was due. In the present case interest was due, and Mr Scott contended
that the reference in the legal charge to the mortgage money becoming due was
only a reference to one of several possible events, including default in
payment of interest, which caused the statutory power of sale to arise. In his
(Templeman J’s) judgment, however, the charge, by specifically referring to the
Act and expressly providing that the mortgage moneys should become due in 1988,
excluded the statutory power to sell at any prior time. The fact that this was
not appreciated did not, in the absence of any right to rectification, assist
the lenders.
If the lenders
had no existing right to sell of their own volition, they submitted, in the
alternative, that the court had jurisdiction to direct or authorise a sale and
ought to exercise that jurisdiction. Section 91 (2) of the Law of Property Act
1925 provided, inter alia, that ‘in any action . . . for foreclosure . .
. the court on the request of the mortgagee, or of any person interested . . .
in the right of redemption, and notwithstanding that (a) any other person
dissents, or (b) . . . any person so interested does not appear in the action,
and without allowing any time for redemption or for payment of the mortgage
money, may direct a sale of the mortgaged property, on such terms as it thinks
fit. . . .’ On the strict wording of
section 91, it might be that the court had power, in any proceedings in which a
mortgagee sought foreclosure, to order a sale without pausing to consider
whether the mortgagee at that time could establish a right to foreclose. But in
the absence of any argument from the borrowers, he (his Lordship) would assume
in their favour (if, indeed, it was in their favour to avoid a sale) that the
lenders must show that they were now entitled to foreclose before the court
might order a sale under section 91.
The question
was, therefore, whether the lenders had a present right to foreclose now that
the interest was substantially in arrears and the property was an inadequate
security for future payments in full of capital and interest, notwithstanding
that no instalment of capital was due to be paid until 1978, and that the
mortgage money was declared to become due for the purposes of the Law of
Property Act only in 1988. The result of the authorities was that where there
was an express proviso for redemption the legal right to redemption ceased only
when the terms of that proviso had been broken, irrespective of any other
covenant in the mortgage. In the present case there was no express proviso for
redemption, and it was a question of construction whether any breach of
covenant there had been was of a nature which debarred the mortgagor at law
from recovering his property. He (Templeman J) had come to the conclusion that
having regard to the covenant to pay interest, and to the terms of clause 11,
which only bound the lenders to accept instalments of principal if the covenant
to pay interest was punctually observed, the lenders were entitled to foreclose
if the borrowers were in breach of the covenant to pay interest. The borrowers
would in law be entitled to their property back if they complied with all their
covenants to pay principal and interest in the manner indicated in the legal
charge. In default of such compliance, the borrowers had no legal right to the
recovery of their property, but equity accorded them a right, namely an
equitable right to redeem. That equitable right to redeem could, in a proper
case, be terminated by an order for foreclosure. If the lenders were entitled
to foreclose, the court in its discretion could order a sale instead. One of
the borrowers had gone abroad and had showed an intention of evading all his
responsibilities; the interest rate was high; the other borrower wished a sale.
It seemed in these circumstances that the proper order to make was for sale.
The practical
and proper result of ordering a sale seemed to be this: the lenders would of
course be entitled, having paid the expenses of the sale, to discharge all
arrears of interest to date, leaving the principal sum of £19,000 outstanding;
there would remain in the hands of the lenders, after discharging arrears of
interest, and if the sale produced only the £18,000 expected, a sum of, say,
£15,000. To his (his Lordship’s) mind, as the lenders would have that sum in hand
they would be unable to say in future as regards it ‘Payment is not yet due,
therefore we can invest it. Interest at the high rate secured by the mortgage
will continue to accrue and we will give credit for the interest produced by
investing the money at a rate inevitably less than the mortgage rate.’ It seemed that either as a necessary
consequence or as a matter of a condition which could be imposed, the lenders
had to treat any money which was in hand after payment of expenses and interest
down to date as being in satisfaction pro tanto of the principal secured
by the mortgage and of
both parties and to produce an equitable result. Accordingly an order for sale
would be made, but on terms, not opposed by the lenders, that after payment of
costs and interest to date, whatever was left should be treated by the lenders
in satisfaction pro tanto of the principal and future interest.
