Court Procedures

Paul McMahonEnforcement

Cases

Holohan v. Friends Provident and Century Life Office.

Michael & Ors v Miller & Anor 

Meretz Investments NV & Anor v ACP Ltd & Ors

[2006] EWHC 74 (Ch)

MR JUSTICE LEWISON

Mortgagee’s equitable duties

The general principles

It is common ground that a mortgagee, exercising his remedies under the mortgage, owes equitable duties to the mortgagor and to subsequent encumbrancers. In Downsview Nominees Ltd v. First City Corporation Ltd [1993] AC 295 Lord Templeman described them as follows:

“Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower.”

Mr Morgan also referred me to the distillation of principle by Peter Gibson LJ in Raja v. Austin Gray [2003] 1 EGLR 91, 96:

“(1) A mortgagee with the power of sale is not a trustee of that power, the power being given to the mortgagee for his own benefit.

(2) A mortgagee is not under a general duty of care to the mortgagor and can act in his own interests in deciding whether and when he should exercise his power of sale.

(3) A mortgagee, however, is subject to an equitable duty to act in good faith and to obtain the best price reasonably obtainable at the time he decides to sell. That duty is owed to those interested in the equity of redemption. They include the mortgagor, other mortgagees and a guarantor of the mortgage debt, but they do not include a tenant at will of the mortgaged property, nor, where the mortgagor is a trustee, a beneficiary of the trust.”

Mr Morgan also relied on the decision of Stuart V-C in Robertson v. Norris (1857) 4 Jur NS 155, in which the Vice Chancellor described a sale for purposes other than merely to recover payment of the debt as a “fraud on a power”. In so saying, the Vice Chancellor followed what he understood to be the law; namely that the mortgagee was a trustee of his power of sale. However, this view of the law is not correct. Moreover, the decision in Robertson v. Norris was disapproved by Jessel MR, in typically trenchant terms, in Nash v. Eads (1880) 25 Sol J 95 (which I quote below).

To whom are the duties owed?

In Downsview Lord Templeman said that the argument that a mortgagee owed no duty to a subsequent encumbrancer was untenable. He explained:

“The owner of property entering into a mortgage does not by entering into that mortgage cease to be the owner of that property any further than is necessary to give effect to the security he has created. The mortgagor can mortgage the property again and again. A second or subsequent mortgage is a complete security on the mortgagor’s interests subject only to the rights of prior encumbrancers. If a first mortgagee commits a breach of his duties to the mortgagor, the damage inflicted by that breach of duty will be suffered by the second mortgagee, subsequent encumbrancers and the mortgagor, depending on the extent of the damage and the amount of each security.”

Since the damage suffered by a second encumbrancer is measured by the extent of his security, it seems to me to follow that the extent of a mortgagee’s duty to a subsequent encumbrancer must itself be measured by the extent of the subsequent security.

Britel had been paid everything that was due to it as site payments. Its only remaining entitlement was as holder of the equity of redemption in the Lease-Back Option. But the Lease-Back Option was not secured. Consequently, in my judgment FP owed no equitable duty to Britel. Moreover, as Peter Gibson LJ pointed out in Raja, the duty is not owed to a tenant at will of the property. It must follow, therefore, that a mortgagee owes no duty to the holder of an option to take a tenancy of the property. Mr Morgan did not seriously suggest that an equitable duty was owed to Britel.

Meretz had been paid everything that was due to it, so long as the proceeds of sale of completed penthouses did not exceed £7.55 million. It retained its security but the debt thereby secured depended on two contingencies:

i)             Net proceeds of sale exceeding £7.55 million and

ii)            ACP being the grantor of sub-leases of completed penthouses.

The right dependent on the second of these contingencies was not a right capable of being “overreached” in the conventional sense of the word; that is to say a right which is transferred from the property itself to the proceeds of sale. It is this kind of right which gives rise to the equitable duty imposed on a mortgagee to take proper steps to obtain the best price for the mortgaged property. A subsequent mortgagee has an obvious interest in that price being achieved. But Meretz’ right was a contingent right which the exercise of the power of sale would itself destroy, in the sense that the contingency would never be capable of fulfilment. Once the power had been exercised, Meretz would have no interest in the proceeds of sale. If, therefore, the power of sale was exercisable at all, it must have been exercisable in circumstances in which that inevitable result would follow. In those circumstances I conclude that FP owed no equitable duty to Meretz which would require it to refrain from exercising its power of sale even though the result would be to deprive Meretz of its contingent entitlement. In practical terms, this means that FP owed no equitable duty to Meretz, apart from a duty to exercise its powers in good faith.

The content of the duty

Mr Morgan relied on the further statement by Peter Gibson LJ in Raja that:

“Equity intervenes to ensure that proper account is taken of the interests of the mortgagor and others interested in the equity of redemption. The mortgagee is only interested in the discharge of the debt owed to him, but equity makes sure that the mortgagee acts fairly to those interested in the equity of redemption when the mortgagee exercises the power of sale.”

Mr Morgan emphasised the statement that the mortgagee must act fairly to those interested in the equity of redemption. But of equal importance is that this duty arises when the mortgagee exercises his power of sale. Given that Peter Gibson LJ had just said that the mortgagee was entitled to act in his own interest in deciding whether and when to exercise that power, it does not seem to me that he can have intended his reference to the duty to act fairly “when” he exercises that power to cut down the mortgagee’s right to act in his own interests in deciding whether to exercise it.

Mr Morgan also referred to Palk v. Mortgage Services Funding Ltd [1993] Ch 330, 337 in which Nicholls V-C said:

“As Lord Templeman noted in the China and South Sea Bank case, at p. 545, a mortgagee can sit back and do nothing. He is not obliged to take steps to realise his security. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. His interest in the property has priority over the interest of the mortgagor, and he is entitled to proceed on that footing. He can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor.”

This appears to me to emphasise that the mortgagee is entitled to protect his own interests and is entitled to give those interests priority over those of the mortgagor (or, for that matter, over those of a subsequent mortgagee). The question for decision in Palk was not whether the mortgagee was in breach of its duty (the Court of Appeal appeared to think that it was not); but whether the court should exercise a statutory discretion. Palk is not, therefore, of direct help.

The mortgagee’s motives

Mr Morgan submitted that a power of sale would only be properly exercised where the mortgagee had “purity of purpose”; that is to say where the mortgagee’s only motive was to recover, in whole or in part, the debt secured by the mortgage. Even if the mortgagee’s purpose was to protect his security, rather than to recover the secured debt, that was an illegitimate purpose. Moreover, Mr Morgan submitted that if the mortgagee had mixed purposes, the requisite purity of purpose was not achieved, and the exercise was improper. Mr Dutton, on the other hand, supported by Mr Pryor, submitted that as long as one of the mortgagee’s purposes was to recover the debt secured by the mortgage or to protect his security, it did not matter that he had other purposes as well. He referred to Fisher & Lightwood on Mortgages (11th ed para 16.13) in which it is said:

“It seems that a mortgagee who genuinely seeks payment of sums due will not be defeated merely because he has an additional improper motive.”

This is an expression of opinion by a respected work of authority; although in my judgment it is not clear whether the case on which it relies for this proposition (Ashley Guarantee plc v. Zacaria [1993] 1 WLR 62, 69) was a decision of principle or simply a decision on the facts.

In Nash v. Eads (1880) 25 Sol J 95 Jessel MR said:

“The mortgagee was not a trustee of the power of sale for the mortgagor, and if he was entitled to exercise the power, the Court could not look into his motives for so doing. If he had a right to sell on June 1, and he then said, ‘The mortgagor is a member of an old county family, and I don’t wish to turn him out of his property, and will not sell it at present,’ and then on July 1 he said, ‘I have had a quarrel with the mortgagor, and he has insulted me; I will show him no more mercy, but will sell him up at once’ – if all this was proved, the Court could not restrain the mortgagee from exercising his power of sale, except on the terms of payment of the mortgage debt. The Court could not look at the mortgagee’s motives for exercising his power. Lord Eldon had never said anything of the kind which Vice-Chancellor Stuart supposed him to have said. The Vice-Chancellor was entirely mistaken, and must have been citing the judgments to which he referred from his recollection, without looking at the reports. Of course there were some limits to the powers of the mortgagee. He, like a pledgee, must conduct the sale properly, and must sell at a fair value, and he could not sell to himself. But he was not bound to abstain from selling because he was not in urgent want of his money, or because he had a spite against the mortgagor.”

This quotation undoubtedly supports Mr Dutton’s submission. But it also seems to me to run counter to the modern trend of authority which imposes on the mortgagee a duty of some kind to act fairly towards the mortgagor. An exercise of a power of sale out of spite does not, at least at first blush, sit well with such a duty. Nevertheless, it does not appear to have been disapproved in any recent case.

It is in this context that it is appropriate to consider the facts of the Downsview case; and also the decision of the Court of Appeal in Quennell v. Maltby [1979] 1 WLR 318. In Downsview the holder of a second debenture appointed receivers of a company’s assets. Subsequently, a first debenture holder appointed receivers of the same company, not for the purpose of obtaining repayment of its debt; but for the purpose of disrupting a receivership by receivers originally appointed by the second debenture holder, and for reinstating the managing director of the company who had been removed by the second debenture holders’ receivers. The critical finding of fact made by the trial judge was as follows:

“In pursuit of his own objectives [the second defendant] embarked upon a course, having as its first objective disruption of the receivership under the [second] debenture. His intention in urgently acquiring the [first] debenture and accepting appointment as receiver was not for the purpose of enforcing the security under the [first] debenture but for the purpose of preventing the enforcement by the plaintiffs of the [second] debenture.”

The original receivers gave way to the subsequently appointed receivers, since their appointing creditor had priority. In addition the holder of the second debenture offered to buy the first debenture by paying all money secured by it (i.e. offered to redeem) but this offer was wrongly refused by the first debenture holder, even though it would have meant that it recovered its debt in full. The trial judge held that the receivers had been appointed by the first debenture holder for improper purposes. His decision was upheld by the Privy Council and the second receiver was held liable for equitable compensation. The measure of the compensation was the difference between what would have been recovered had the original receivership proceeded undisturbed, and the amount actually recovered under the subsequent receivership.

Mr Dutton submits that this was a case in which no part of the first debenture holder’s purpose was the recovery of the debt secured by the first debenture. This appears to me to be correct, on the facts.

The second case is the decision of the Court of Appeal in Quennell v. Maltby [1979] 1 WLR 318. In that case a house was mortgaged to a bank to secure a debt of £2,500. The house was let to tenants at an annual rate of £1,000. The tenants were protected as against the mortgagor by the Rent Acts. The tenancy was not binding on the bank. The mortgagor’s wife took a transfer of the mortgage and sued for possession. The purpose of obtaining possession was not to enable the wife to sell in her capacity as transferee of the mortgage, but to enable her husband, the mortgagor, to do so. It was held that this was an improper use of the powers conferred on a mortgagee. Lord Denning MR said:

“So the objective is plain. It was not to enforce the security or to obtain repayment or anything of that kind. It was in order to get possession of the house and to overcome the protection of the Rent Acts.”

Bridge LJ said:

“…on the facts of this case it is as plain as a pikestaff that the purpose of the bringing of these proceedings via Mrs. Quennell is not for her own benefit to protect or enforce the security which she holds as the transferee of the legal charge but for the benefit of her husband as mortgagor to enable him to sell the property with the benefit of vacant possession. In substance she is suing as his agent.”

Templeman LJ said:

“In the present case it is clear from the facts and the evidence that the mortgagee, Mrs. Quennell, is not bona fide exercising her rights and powers for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her own husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord. Mrs. Quennell does not even pretend to be acting in her own interests as mortgagee. She brings this action to oblige her husband. In my judgment the court must therefore treat this action, although in form brought by a mortgagee, as an action brought for and on behalf of the landlord mortgagor.”

Mr Dutton submits, and again I agree, that on the facts this was a case where no part of the mortgagee’s purpose in exercising the legal rights conferred on a mortgagee was that of enforcing the security for the mortgagee’s own benefit. I note also that Bridge LJ said that the mortgagee’s purpose was not to “protect or enforce” the security.

The quotation from Jessel MR in Nash v. Eads was applied by Russell J in Belton v Bass [1922] 2 Ch 449. In that case the mortgagees of shares in a brewery wanted to confer an option on one of the directors of the brewery to acquire the shares at a future date. They were advised that they had no power to grant such an option. So they purported to sell the shares to the director, as mortgagees, lending the whole of the purchase price, interest free, for that purpose. They also gave the director the right to require the mortgagees to buy back the shares at the original purchase price. The economic effect of the transaction was, therefore, the same as if they had granted the option that they were advised they could not do. The mortgagor applied to set aside the sale. The argument was that:

“…it is said that the mortgagee exercised his power of sale with an indirect motive, not with the view of realizing his security, but with the object of conferring a benefit upon the defendant Garrard by giving him an option masquerading as a sale.”

Having referred to Nash v. Eads, Russell J concluded:

“I am unable accordingly to inquire into the motives of the defendants Bass, or to hold that the sale is vitiated because they desired to confer a benefit on the purchaser by selling to him upon terms, which included a fair price.”

I should, lastly under this head, refer to the well-known case of Farrar v Farrars Ltd (1888) 40 Ch D 395. Mr JR Farrar was one of three mortgagees of a quarry. He was also a solicitor; and acted in that capacity for himself and his co-mortgagees. The mortgagor (James Farrar) defaulted on the loan. The mortgagees took possession and tried to sell the quarry, but without success. Mr JR Farrar then had the idea of forming a company to buy the quarry; and he and others duly formed the company, which bought the quarry. Mr JR Farrar was the solicitor to the company; and he was also a shareholder in it. The sale was not at an undervalue. The Court of Appeal held that the sale should not be set aside. However, they did say that the mortgagees had the burden of sustaining the transaction. However, they held that Mr JR Farrar had shown that the sale was made in good faith, and at a proper price; with the consequence that the sale stood. This case shows that the fact that the mortgagee will acquire benefits consequent upon the sale does not necessarily involve a breach of the mortgagee’s duty of good faith.

Drawing the threads together, it seems to me that none of the authorities to which I was referred gives unequivocal support to Mr Morgan’s submission that the mortgagee must have “purity of purpose”. On the contrary, Nash v. Eads and Belton v. Bass are inconsistent with it. So, too, is the statement in Fisher & Lightwood. A dissection of a mortgagee’s motives is likely to be difficult in practice. Moreover, unlike statutory powers conferred for the public benefit, or trustees’ powers conferred for the benefit of beneficiaries (which were two analogies on which Mr Morgan relied) a mortgagee’s powers are conferred upon him for his own benefit. In such circumstances “purity of purpose” may be difficult to achieve. The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee’s purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. In addition I consider that it is legitimate for a mortgagee to exercise his powers for the purpose of protecting his security.

Protection of purchasers

The statutory provision

Mr Tamimi relies on section 104 (2) of the Law of Property Act 1925 which provides:

“(2) Where a conveyance is made in exercise of the power of sale conferred by this Act, or any enactment replaced by this Act, the title of the purchaser shall not be impeachable on the ground—

(a) that no case had arisen to authorise the sale; or

(b) that due notice was not given; or

(c) where the mortgage is made after the commencement of this Act, that leave of the court, when so required, was not obtained; or

(d) whether the mortgage was made before or after such commencement, that the power was otherwise improperly or irregularly exercised;

and a purchaser is not, either before or on conveyance, concerned to see or inquire whether a case has arisen to authorise the sale, or due notice has been given, or the power is otherwise properly and regularly exercised; but any person damnified by an unauthorised, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power.”

The expression “purchaser” is defined by section 205 (1) (xxi) of the Act which, so far as relevant, reads:

“”Purchaser” means a purchaser in good faith for valuable consideration and includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property except that in Part I of this Act and elsewhere where so expressly provided “purchaser” only means a person who acquires an interest in or charge on property for money or money’s worth; and in reference to a legal estate includes a chargee by way of legal mortgage; and where the context so requires “purchaser” includes an intending purchaser”

Limits to the protection

Mr Morgan submitted that:

i)             A purchaser cannot rely on section 104 (2) if he has knowledge of or participates in an impropriety in the exercise of a power of sale;

ii)            Knowledge, for this purpose, includes both “shut-eye” knowledge and constructive knowledge;

iii)           Knowledge, for this purpose, also includes knowledge (including “shut-eye” and constructive knowledge) acquired by an agent and imputed to his principal;

iv)           The knowledge need not exist at the date of the contract for sale. Knowledge acquired by the purchaser between contract and completion will equally preclude him from relying on section 104 (2);

v)            A purchaser can only rely on section 104 (2) if he is a purchaser in good faith. That is a concept which goes wider than a mere inquiry into the purchaser’s state of knowledge or notice.

Knowledge of impropriety

Mr Morgan’s first proposition is supported by the decision of the Court of Appeal in Corbett v. Halifax BS [2005] 1 WLR 964, 975 in which Pumfrey J (with whom Schiemann and Scott Baker LJJ agreed) said:

“section 104(2) makes it clear that the purchaser is not protected if he has actual knowledge of the impropriety. But if the purchaser has no notice of the impropriety, then on the face of it he takes free. Thus, the completed sale by a mortgagee pursuant to his statutory power is vulnerable only if the purchaser has knowledge of, or participates in, an impropriety in the exercise of the power.”

I observe in passing that although Pumfrey J speaks of both “knowledge” and “notice” I do not understand him to differentiate between the two. The Court of Appeal was not concerned, in that case, with differing degrees of knowledge or notice.

“Shut eye” or “blind eye” knowledge was described by Lord Scott of Foscote in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 as follows:

“Blind-eye” knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence.”

He concluded:

“In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity.”

I accept Mr Morgan’s submission that “shut eye” or “blind eye” knowledge in this particular sense is the equivalent of actual knowledge.

Constructive knowledge presents more of a problem. The usual concept of constructive knowledge is knowledge that a person would have acquired if he had made all usual and proper enquiries. But section 104 (2) on its face absolves a purchaser from having to inquire whether a case has arisen to authorise the sale, or due notice has been given, or the power of sale is otherwise properly and regularly exercised. To hold that a purchaser cannot rely on section 104 (2) as a result of constructive knowledge appears to me to contradict the express words of the section.

The knowledge of one person may, in certain circumstances, be attributed to another person. This is generally known as imputed knowledge. However, it is not the same as constructive knowledge. The concept of imputed knowledge does not bear on the kind of knowledge possessed by one person that is attributed to another. The general rule of agency is that where in the course of any transaction in which he is employed on his principal’s behalf, an agent receives notice or acquires knowledge of any fact material to that transaction, under circumstances in which it is his duty to communicate it to his principal, the principal will be precluded from relying on his personal ignorance of that fact; and he will be taken to have known of it (or to have had notice of it) as from the time when his agent ought to have communicated it to him if he had performed his duty with due diligence. In Strover v. Harrington [1988] Ch 390, 409 Browne-Wilkinson VC said:

“In this, as in all other normal conveyancing transactions, after there has been a subject to contract agreement the parties hand the matter over to their solicitors who become the normal channel for communication between vendor and purchaser in all matters relating to that transaction. In so doing, in my judgment the parties impliedly give actual authority to those solicitors to receive on their behalf all relevant information from the other party relating to that transaction. The solicitors are under an obligation to communicate that relevant information to their own clients. At the very least, the solicitors are held out as having ostensible authority to receive such information. Whether there be express or ostensible authority, the purchaser is in my judgment estopped from denying that he received the information relating to the transaction which has been communicated to his solicitors acting in the same transaction. In my judgment, such knowledge should be imputed to the principal.”

I accept, therefore, that in a conveyancing transaction a solicitor’s actual or “shut eye” knowledge should be imputed to his client.

Did FP have a power of sale to exercise?

In my judgment it is not open to Meretz or Britel to contend that FP did not have a power of sale to exercise.

Why did FP exercise its power of sale?

The case for Britel and Meretz

Mr Morgan submitted that FP’s purpose in “using the charge” comprised the following strands:

i)             FP wished to “take control” of the development;

ii)            FP wished to put itself into a position in which it could obtain finance and build out the development;

iii)           In order to facilitate (ii) Meretz had to be cut out because its contingent entitlement to commission payments would make the development unprofitable; and Britel had to be cut out because the prospect of having to grant the development sub-lease would prevent FP from building out the development and hamper attempts to raise finance;

iv)           The overriding motive was to avoid a loss for ACP and, if possible, produce a profit for FP.

Conspicuous by its absence in Mr Morgan’s list is any desire on the part of FP to recoup any of its lending.

Financial pressures

It is clear that both ACP and FP were in financial crisis in the summer of 2002. Not only is this clear from the contemporaneous documentation (in particular Mr Bretherton’s e-mail of 3 April 2002, Mr Olsson’s e-mails of 1, 10 and 14 April 2002 and the board minutes), but Mr Olsson also said so many times during the course of his evidence. I quote some examples:

“Q. It did not matter, did it, whether ACP made the profit or FP made the profit, it was one of your companies [that] would make the profit?

A. At the end of the day that is true … but the only way FP could get any of the money it had lent to ACP back was to use the charge. (Day 8 p. 37-8)

Q. The main driving force for you doing this [i.e. entering into the Wrap Around Agreement] was that you were in one of your many financial crises in the run up to the 31st May 2002?

A. Especially it is true .. that there was a cashflow problem. The main problem, though was that the asset, the charge that [FP] had over ACP’s development lease was getting far, far too expensive. It was a great risk, especially after threats from Mr Stern that he would, right or wrong, demand the sub-lease in September. It meant that [FP] had to use the charge before then.” (Day 8 p. 127)

“Q. You had nowhere else to go, had you, except to use the life line that had been pointed out as a possible lifeline?

A. It would not have mattered when we decided to use the charge … we had a charge, we used it and we acted on the advice we had. Had we not then [FP] would have disappeared.” (Day 8 p. 128-9)

The financial crisis was, as Mr Olsson said, partly related to cashflow. But that was not the only problem. Because of cost overruns and delays, completion of the development by ACP was unlikely to prove profitable to ACP if it had to make the contractual commission payments to Meretz. On the contrary, the project was likely to result in a significant loss. ACP was a single purpose vehicle; and had no assets apart from its interest in Albert Court. The debt owed by ACP to FP was mounting; and the only hope of repayment was out of the profits (if any) arising from the development. If ACP made a loss, FP would not be repaid. Accordingly the only prospect for FP to recover any of the money it had lent to ACP was to exercise its power of sale; which would result in the overriding of ACP’s contractual obligation to make commission payments to Meretz. More than that, since the trigger for the making of the commission payments was the grant by ACP of long leases of completed penthouses, the contractual commission payments would not become due at all. Exercise of the power of sale would also defeat the Lease-Back Option which had not been registered against the development lease before FP’s charge had been registered.

FP had been advised, both by counsel and by Mr Hawkins, that the power of sale was only capable of being exercised for the purpose of recovering the debt due or to protect its position as chargee. I do not consider that FP would have disregarded that advice, given that the board of FP were anxious that their use of FP’s powers as mortgagee should be carefully vetted by the lawyers. Nor do I consider that Mr Hawkins would have devised the scheme and carried it into execution if he had thought that the power of sale was being exercised for an improper purpose.

When FP first began to consider “using the charge” one of the options was to sell to QQH. The valuation of the development lease was obtained on the basis that one of the options open to FP was to sell the lease to a developer. The contemporaneous documents show that it was not a condition of any such sale that FP should continue to be associated with the project; although it was willing to continue. This is shown by Mr Olsson’s instructions to the valuer and by Mr Hawkins’ e-mail of 25 March 2002 (among others). They also show that FP was willing to assign the charge to a third party lender (such as NatWest). Part of the problem was that the very success of Mr Stern’s three-fold strategy (and in particular his dogged determination to deter any potential purchaser) had made it impossible for the lease to be sold at anything like its true value in what one might call a clean break. The prospect of becoming embroiled in litigation with Mr Stern and “his companies” would be likely to deter all but the bravest of purchasers. Accordingly in my judgment there was little alternative, if FP was to succeed in recovering any money as a result of a sale, to doing a deal of the kind it did with Mr Tamimi.

Mr Olsson also said, and I accept, that if the lease was to be sold, it would have been “commercial madness” for anyone to attempt to build out the development using traditional as opposed to modular construction techniques; and that there were few builders, apart from FP, who had the necessary know-how.

Mr Morgan criticised FP for buying in the NUBBH charge. But as I see it the real purpose of buying in the NUBBH charge was to secure the release of the Loft, the value of which exceeded the amount secured by the NUBBH charge. I do not regard that as an irrational commercial decision.

Accordingly I conclude that at least one of the purposes (and a significant purpose) of FP’s exercise of its power of sale was to recover what money it could out of the financial wreckage of the project. I do not consider that that was an improper purpose.

Moreover, the appeal of Britel and Meretz is to the protection afforded by equity. But it is an unattractive appeal when they themselves have been responsible for doing their best to disrupt any potential sale; and in addition doing so on the basis of legal arguments which the Court of Appeal subsequently held to be wrong or irrelevant.

Potential loss of security

As Mr Olsson’s evidence indicates, one of the factors motivating FP was the potential loss of its security if Britel successfully exercised the Lease-Back Option. In my judgment another of the factors driving FP’s decision to exercise its power of sale was to avoid that potential loss. I do not regard that as an improper purpose. It would, in my judgment, be a strong thing for equity to impose upon a secured creditor a duty to allow his security to disappear, thus making it impossible for him to recover the debt.

The proof of the pudding

Mr Dutton submitted that one way of testing whether recovery of the whole or part of the secured debt was a purpose of FP was to examine what actually happened. Mr Tamimi paid real cash for the acquisition of the development lease, one of whose effects was to reduce the debt owed by ACP to FP. If that was one of the effects of the transaction, in what sense can it be said that it was not one of its purposes? In my judgment there is no answer to that question.

Conclusion

In my judgment FP exercised its power of sale for a proper purpose; and was not in breach of any equitable duty owed to Meretz.

If FP exercised its power of sale for improper reasons, is Mr Tamimi affected?

This question does not arise. However, I should summarise my conclusions, in case I am wrong on the question whether FP’s exercise of its power of sale is vitiated.

Mr Tamimi had actual or imputed knowledge of the various contractual documents. However, the allegation of improper exercise of the power of sale depends on the allegation that it was no part of FP’s purpose in exercising the power to recover its debt. Mr Tamimi had no knowledge of the internal discussions by the boards of ACP and FP and only limited access to the privileged communications between Mr Olsson and Mr Hawkins. Mr Hawkins had told Mr Ware in terms on 29 April 2002 that FP was taking action “in order to protect its own position as first chargeholder”. I do not consider that Mr Tamimi had knowledge of FP’s motivation, apart from what he was told. Nor did he have any suspicion of impropriety about which he decided not to inquire. If, as I think, the scheme devised by Mr Hawkins was capable of being properly used by a mortgagee, Mr Tamimi was entitled to assume that it would be.

Accordingly, even if FP’s exercise of the power of sale had been improper, Mr Tamimi would not have been affected by the impropriety; and his title is unimpeachable.

Moorview Developments Ltd & Ors -v- First Active PLC & Ors

[2008] IEHC 211 

Judgment by: Clarke J.

3.11           It is clear that the arrangements entered into with Mr. Duffy, both in terms of the original negotiations with Mr. Jackson and subsequently with First Active, contemplated a possible profit share in relation to the ultimate sale proceeds of the property concerned. The property was in the course of being developed by the Cunningham Group when the Cunningham Group went into receivership. What was available for sale was, therefore, a partly-completed development. The arrangement that was sought to be negotiated involved Mr. Duffy taking over and completing the development at an agreed price. However, that agreed price was, at least in significant part, based upon assumptions as to the likely value that would be achieved in the sale-on of the ultimately completed development (which consisted of both residential and commercial elements). There is no doubt (and there is no dispute but that) the negotiations involved the possibility that above certain thresholds, any additional profit secured by Mr. Duffy as a result of completing the development and selling on the units would be shared with either Mr. Jackson or First Active. There is nothing, of course, in itself, wrong with such an arrangement. There are issues in these proceedings in any event concerning the question of whether there was any breach by either Mr. Jackson or First Active of their obligations in relation to the sale of Bailey Point. It would be most inappropriate for me to touch on those questions at this stage when the case has only been opened.

3.12        However, the case now sought to be made by the amendment which is under consideration is to the effect that the benefit of the profit share which was undoubtedly under negotiation with Mr. Duffy, was intended to go directly to Mr. Jackson and/or First Active and not be taken into account for the benefit of the Cunningham Group as part of the proceeds of sale. It is also necessary to note that it was contemplated that First Activewould act as lender to Mr. Duffy in the acquisition of the property concerned. There can be little doubt but that if it were to occur that a bank or receiver were to arrange things so that what ought properly be part of the proceeds of sale of mortgaged property came into their hands in a way that did not allow the proceeds concerned to be credited to the mortgagor, then same would amount to the making of a secret profit. I did not understand counsel for any of the defendants to dispute that if a mortgagee, a receiver, or a purchaser were to enter into arrangements which knowingly involved part of the payment for a property which was being sold on behalf of a mortgagor to fall into the hands of either the mortgagee or a receiver in a way in which the mortgagor was not given credit for that part of the proceeds, then such an arrangement would be unlawful. The issue is, however, as to whether there is any evidence that such an arrangement was, in fact, what was contemplated in this case.

3.13        Against that background it is necessary to consider the principles by reference to which an amendment should be granted which I have already analysed in the earlier judgment in this case as a result of which the Cunningham Group was permitted to plead fraud against First Active. It must be emphasised that this application for an amendment comes very late in the day and against a background of a situation where the parties have already exchanged voluminous discovery, detailed witness statements, and made written submissions. In such circumstances it is manifest that there is likely to be some prejudice of the type which I have described previously as logistical prejudice if the amendment were to be allowed. Against that background and in those circumstances, it is appropriate to have regard to the reason tendered for the amendment being sought at such a late date.

3.14        It is said, and indeed it is obvious from the documentation, that discovered documents made available some considerable time ago to the Cunningham Group would have made it clear that a profit share was contemplated. That much is not in dispute. However, the Cunningham Group places special reliance on a significantly later discovery of a bank memorandum, prepared for the purposes of a consideration of Mr. Duffy’s loan application, in which the profit share is described in one portion of the memorandum as an “arrangement fee”. Strictly speaking there were negotiations as to two separate profit shares in respect of two different aspects of the development. Both profit shares are referred to as “arrangement fee” in at least one portion of the document concerned. That document would appear to be the only document which so characterises the arrangements and on that basis it was said that it was only when that document was fully considered, that the Cunningham Group became aware that there was a credible case to be made to the effect that the profit share was intended to be kept by Mr. Jackson and/or First Active. I am prepared, for the purposes of the argument, to accept that that is so and that there is a legitimate reason for the Cunningham Group seeking to make this application at such a late stage. However, the veryfact that the document concerned is, in reality, the only significant cornerstone of the evidence from which an inference of secret profit is sought to be derived seems to me to cut both ways.

3.15        Firstly, the document concerned is an internal bank memorandum. It is not admissible as to the truth of its contents as against either Mr. Jackson or Mr. Duffy. On that basis alone it is difficult to see what evidence there is as against Mr. Jackson or Mr. Duffy which would connect them to an allegation that there was an intention to make a secret profit. However, the matter goes further. In the course of argument, a document was produced from Mr. Jackson’s discovery which was a Powerpoint presentation made by him to First Active in the course of the receivership in which he set out his then best estimates (on an optimistic and pessimistic basis) for the outcome of the receivership. It is clear beyond doubt that in that presentation Mr. Jackson includes in his calculations the possible benefit that might accrue to the receivership or First Active in its capacity as mortgagee from the profit share. Taking the documents as a whole, therefore, there is, in my view, no basis for the suggestion that a court could draw an inference that either Mr. Jackson or Mr. Duffy was involved in seeking to negotiate an arrangement whereby Mr. Jackson would benefit personally by the contemplated profit share. Rather, it seems to me to be clear on the documentation that both Mr. Duffy and Mr. Jackson at all times regarded any benefit accruing from the profit share as forming part of the proceeds of sale of Bailey Point and accruing for the benefit of the Cunningham Group accordingly.

3.16        There is no other evidence (that is to say no evidence other than the documents to which I have referred) which it is suggested could be relied on by the Cunningham Group for the allegation which they now seek to make. Against that background it seems to me that it would be wholly inappropriate to allow the amendment sought as against either Mr. Jackson or Mr. Duffy. To do so would be to permit a most serious accusation to be made in circumstances where the only consequence could be that the claim would necessarily be dismissed, at the latest, at the close of the plaintiffs case. If there were any realistic basis upon which it might be anticipated that further evidence might emerge in the course of the plaintiffs case which might change that situation, then it is possible that it might have been appropriate to come to a different conclusion. However, there is no such basis. The claim that Mr. Duffy or Mr. Jackson were involved in negotiating arrangements to facilitate Mr. Jackson in obtaining a secret profit is, in my view, unsustainable even given the most favourable view of the evidence proposed to be tendered in support of it. No further evidence is remotely likely to emerge. Counsel for the Cunningham Group spoke of the possibility of cross examining defendants’ witnesses. That is, however, to presuppose that the Cunningham Group could produce evidence which would have the effect of shifting the burden of proof to the defendants. There is no basis put forward which could establish even the possibility of such an eventuality. The claim is, therefore, bound to fail. The assessment of whether a claim is bound to fail is, of course, capable of much greater analysis at a stage such as has been reached in these proceedings where all of the relevant evidence, whether documentary or by witnesses, is now likely to be known. In those circumstances I must refuse the application to amend so far as Mr. Jackson and Mr. Duffy is concerned.

3.17        The issue in relation to First Active is somewhat more complex.  Firstly the internal memorandum to which I have referred is, of course, the banks own document and is admissible as against First Active on the Bula/Fyffes basis. Secondly, the use of the phrase “arrangement fee” in that memorandum in the context in which it is used is, to say the least, unfortunate. There is nothing in itself wrong with a financial institution acting as lender to a purchaser who is in turn buying property from that financial institution in its capacity as a mortgagee. However, care needs to be exercised in such situations to ensure the avoidance of any possible or perceived conflict of interest. In a straightforward situation where there is no either direct or indirect connection between the sale transaction and the lending transaction, then it is difficult to see how any such conflict of interest could arise. The fact that a purchaser may get his funding from one bank or another hardly affects the purchase price which is, after all, the only matter in which the mortgagor has an interest. However, where there may be at least the possibility of an indirect connection between the two transactions and where the terms of both may be complex, care needs to be exercised to ensure that there is not at least an impression that there could be an interaction between the terms of purchase and the terms of the financial facilities being made available. From the purchasers point of view the transaction as a whole is what he is likely to assess. If he were, for example, to obtain less favourable financial terms, then the price or set or arrangements by virtue of which he might be prepared to purchase the property might correspondingly be affected in an adverse way from the mortgagors perspective.

3.18        Against that background it is, it has to be said, unfortunate that a phrase such as “arrangement fee” was used in the memorandum concerned. In its ordinary meaning an arrangement fee is a sum paid to a lending institution for its own benefit rather than a sum treated as part of a purchase price which would accrue to the benefit of the mortgagor. To that extent there is at least some evidence as against First Active from which it might be inferred that there was an intention to treat monies received from Mr. Duffy on foot of the profit share as a benefit accruing to First Active directly rather than for the benefit of the Cunningham Group. In noting that fact I have not ignored the argument put forward that the document as a whole does not bear such inference. Against that it is clear from all of the documentation that the only portion of the profit share that was intended to go to First Active was any additional profit that might be made in relation to what was described as the “back site”. The profit share in respect of the residential element of the development was at all times to go to Mr. Jackson as the receiver and for the reasons which I have already sought to analyse there is no evidence that Mr. Jackson ever regarded that profit share as being destined for anywhere other than for the benefit of the Cunningham Group. It is also true to say that in the PowerPoint presentation to which I have already referred, Mr. Jackson also included a small estimate of a profit share in respect of the back site as part of his overall calculations. The only inference to draw from this is that Mr. Jackson considered any such monies as being due to be paid for the benefit of the Cunningham Group rather than First Active directly.

3.19        At the end of the day I have come to the view that it would not be possible to conclude that the case in respect of First Active in relation to secret profit in respect of the back site alone is bound to fail. There are, undoubtedly, difficulties with the case which the Cunningham Group would wish to make, not least the fact that the documents suggest, as I have pointed out, that Mr. Jackson was at all times of the view that the profit share in respect of the back site was to be included in the funds which would ultimately be placed to the benefit of the Cunningham Group. The documents are, however, open to the possible inference that whatever may have been intended in respect of the profit share for the residential portion of the development, First Active did regard the profit share on the back site as being in the nature of a true arrangement fee. I should also comment at this stage on the allegation made in the course of opening on the part of the Cunningham Group that an appropriate inference to draw from the fact that there does not appear to have been any arrangement fee in the agreements ultimately put in place between First Active and Mr. Duffy is to the effect that there was a secret and undocumented arrangement ultimately put in place for such payment. Such an allegation is wholly without any supporting evidence and should not, therefore, in my view, form any part of the case which can be permitted to go into evidence. However, it would not be appropriate for me to say anything more about the merits of that aspect of the case at this stage. It follows that the case in respect of which I am satisfied that the Cunningham Group has shown that it is not bound to fail is a very limited one. It is a case to the effect that First Active is alleged to have entered into an arrangement whereby First Active was to receive the proceeds of any profit share in respect of the back site for its own benefit, as an arrangement fee in its capacity as lender rather than for the benefit of the Cunningham Group. The amendment is proposed at a time which is, in any event and particularly in the context of this case, very late in the day. However, for the very reasons I have already sought to analyse there is at least a partial explanation for that fact. In those circumstances I propose allowing an amendment limited as set out in this judgment and limited to a claim against First Active. I do not propose allowing any of the amendments which are referable to the allegation of secret profit as against Mr. Jackson or Mr. Duffy.

3.20        The amendment which I propose allowing is, as in respect of the other non controversial amendments, subject to the Cunningham Group producing an amended statement of claim which includes an amendment limited in the way which I have just described. It also seems to me that it is incumbent upon the Cunningham Group, in formulating the amendment which I have permitted as a result of this judgment, to specify precisely what consequences are alleged to flow from the allegation concerned and what relief it is said the court should grant in the event that the allegation is sustained. It also follows from what I have already indicated that, in my view, First Active have had no reasonable opportunity to file witness statements or written submissions concerning this allegation. I will hear counsel for First Active in due course on the proper way in which that situation can be remedied. It is next necessary to turn to the issue which I have identified as arising in relation to the Cunningham Group’s claim in fraud against First Active. As indicated earlier the first question that needs to be addressed is as to whether the case as opened under this heading is consistent with the case as pleaded. I now turn to that question.