Property Mortgages

Cases

Bank of Ireland v. Feeney

---

In re Barrett Apartments Ltd.

[1985]  I.R. 350   Henchy J.           S.C.

 The rationale behind allowing a purchaser a lien on the purchased property in respect of a deposit paid to the vendor is that, by paying the deposit in pursuance of the contract, the purchaser acquires an equitable estate or interest in the property and therefore should be allowed to follow that estate or interest by being accorded a lien on it. See  Rose v. Watson (1864) 10 H.L.C. 672;  Whitbread & Co. Limited v. Watt  [1902] 1 Ch. 835; Tempany v. Hynes  [1976] I.R. 101.

 Where, as is the case here, no contract to purchase was entered into by the depositors, and the only payment made was what was called a booking deposit, which was accepted expressly on the basis that it would be returnable upon notification by either party and that the proposed purchase would be the subject of a written contract, the payment of the booking deposit did not give the payer any estate or interest, legal or equitable, in the property – as would have been the case if a written contract had been entered into and the booking deposit had been converted into a deposit paid on foot of the contract. There is no basis in law or equity, therefore, for treating the depositors as having, on payment of the deposit, acquired a purchaser’s lien on the property.

 We have not been referred to any case in which a purchaser’s lien was allowed to anyone who was not a purchaser, that is to say, anyone who had not entered into a contract to purchase. The suggestion is that the reason for such absence of authority is that a booking deposit is a device of recent origin which has not yet attracted a judicial decision as to its impact on the property being sold. I cannot agree. Payment by prospective purchasers to prospective vendors of money on a provisional, conditional, or otherwise returnable basis, prior to a formal contract, has always been taking place. In my opinion, the fact that such a payment has not been judicially recognised as creating a lien is simply because the payer has not the legal standing necessary to found a purchaser’s lien.

 A lien in its primary sense at common law is a right to retain possession of the property of another until certain demands are met. Such a common law lien arises by implication of law and not by contract. It is plainly not the type of lien that could arise in a case such as this where the creditor does not get possession of the property.

 A lien in its secondary or alternative sense does not depend on possession. It arises either by virtue of a court order binding the property, but giving no right of possession (i.e., a judicial lien), or by virtue of a duty or intention attributed in equity to the owner to make the property available to answer a particular claim (i.e., an equitable lien). It is only the latter type of lien that could be put forward as applying in this case. Such a lien is usually referred to as a purchaser’s lien. The basis for it is given in the following passage from the judgment of Lord Cranworth in  Rose v. Watson  (1864) 10 H.L.C. 672 which was cited with approval by Kenny J. when giving the  majority judgment of this Court in  Tempany v. Hynes  [1976] I.R. 101 at p. 104:

 “There can be no doubt, I apprehend, that when a purchaser has paid his purchase-money, though he has got no conveyance, the vendor becomes a trustee for him of the legal estate, and he is, in equity, considered as the owner of the estate. When, instead of paying the whole of his purchase-money, he pays a part of it, it would seem to follow, as a necessary corollary, that, to the extent to which he has paid his purchase-money, to that extent the vendor is a trustee for him; in other words, that he acquires a lien, exactly in the same way as if upon the payment of part of the purchase-money the vendor had executed a mortgage to him of the estate to that extent.”

 The persons who paid booking deposits in this case clearly did not get a purchaser’s lien, for they acquired no beneficial estate or interest in the property. But ought they to be deemed to have acquired some other kind of equitable lien for the amount of the deposit, on the basis that it would be inequitable to deny them the standing of a secured creditor?

 I fear I am unable to accept that submission, which has been supported by the proposition that it would be unjust to allow the building company to retain the booking deposits. I agree that if it were a question of the building company retaining the deposits, it would be unjust to allow that to happen. But where, as is the case here, the building company is insolvent and is being wound up, the booking deposits will not be retained by the building company. They will be applied in the winding up, as will the rest of the assets, towards the payment of the company’s debts, according to a fixed order of priority amongst the creditors. Therefore, the point at issue is not to be decided by assessing the comparative merits of the depositors and of the company. It is the claims of the creditors inter se that have to be looked at.

 Assuming that it would be within the legitimate range of judicial creativity to bring into being a new type of equitable lien in respect of booking deposits, I fear there would be no basis in equity for such an innovation in the circumstances of a case such as this. It has to be remembered that when, as happened here, a building company falls into insolvency, many creditors, particularly those who have supplied goods or services, may find that as unsecured creditors their debts are irrecoverable in the winding up of the company and that as a result they may be financially ruined. If a prospective purchaser who paid a booking deposit (which is a fixed sum, usually of a comparatively small amount) were to be accorded the status of a secured creditor by the recognition of the deposit as a lien, and thereby be advanced towards the head of the queue of creditors, such preferential treatment would be unfairly and unjustifiably discriminatory vis-a-vis other creditors. Whatever may be the position of individual depositors, I do not consider that, as a class, depositors have an equity to be treated as secured creditors when other creditors, whose debts may be more deserving of payment and no less closely connected with the property, are left to languish as unsecured creditors without hope of payment at the tail-end of the queue of creditors.

 I would allow this appeal by holding that the persons who paid booking deposits are not entitled to rank in the winding up as secured creditors.

Hederman J.

 I agree.

McCarthy J.

 The learned trial judge dealt with the motion on behalf of the official liquidator in two stages. Michael Cummins and Michael Farrell had each entered into a building agreement with the company and Keane J. concluded that “where there is a contract in existence, the payment by the purchaser of part of the purchase price entitles him to a lien on the property in respect of the money so paid. There may be many reasons why a purchaser who has paid part of the purchase price may be precluded from specifically enforcing the contract in circumstances which are no fault of his; and his right to recover the purchase money actually paid by him, and the existence of an equitable lien to secure the payment, cannot depend on the availability to him of such a remedy.” This was the view of the House of Lords in  Rose v. Watson  (1864) 10 H.L.C. 672, the principles laid down in which were adopted by the majority of the Supreme Court in  Tempany v. Hynes  [1976] I.R. 101. At the commencement of the hearing of this appeal, the Court was informed that the receiver has settled with Messrs. Cummins and Farrell. In the circumstances it is unnecessary to express any view on that part of the judgment of Keane J.

 The receiver has been appointed pursuant to the bank’s debenture; the assets (in effect, the site of the intended apartment block) when sold will be insufficient to pay off the debenture holder and/or other secured creditors, so that there will be nothing left for the unsecured creditors which include those claiming debts, professional fees, inter company accounts as well as deposits ranging from £1,000 upwards and described as “booking deposits”. It is common case that there was no binding contract- either for sale or to build – between each such depositor and the company in liquidation. Accordingly, none could have acquired what is commonly called a purchaser’s lien. After the words cited by Kenny J. in  Tempany v. Hynes  [1976] I.R. 101, Lord Cranworth in  Rose v. Watson  (1864) 10 H.L.C. 672 continued:

 “It seems to me that that is founded upon such solid and substantial justice, that if it is true that there is no decision affirming that principle, I rejoice that now, in your Lordships’ House, we are able to lay down a rule that may conclusively guide such questions for the future. I think, however, that there are some authorities which have been pointed out which have established that rule, in principle, if not in terms. But I think it is unimportant to go into that, because it is now established, and will from henceforth be established as a very sound principle, founded on solid justice.”

 In my view, part of the rationale underlying this purchaser’s lien is the reciprocity attaching to the contract. The purchaser obtains a lien in that”every portion of the purchase money paid in pursuance of that contract is a part performance and execution of the contract, and, to the extent of the purchase money so paid, does, in equity, finally transfer to the purchaser the ownership of a corresponding portion of the estate.” (Lord Westbury L.C. at p. 678 in  Rose v. Watson  (1864) 10 H.L.C. 672.) Keane J. qualified this view when he said: (at p. 355)

 “It (the bank’s submission) proceeds on the assumption that, for such a lien to exist, the money must have been paid on foot of a contract; and that, where there is no such contract or, at all events, no contract capable of being enforced, no lien can arise. I think it is clear that the lien which is claimed by the depositors in the present case arises not from the existence of any contract but from the right of the prospective purchaser to recover his deposit in circumstances where it would be unjust for the prospective vendor to retain it.”

 He then cited from the judgment of Vaughan Williams L.J. in  Whitbread and Co. Limited v. Watt  [1902] 1 Ch. 835 at p. 838. I do not share the view of the learned trial judge that the right to the lien claimed is to be determined irrespective of there being a contract. It may be, as Vaughan Williams L.J. said, that the lien is not the result of any expressed contract, if that means that it does not have to be expressed in the contract; in my view, it does depend upon there being a contract, meaning what had originally been a legally enforceable contract as was the case in  Whitbread and Co. Limited v. Watt  [1902] 1 Ch. 835;  Rose v. Watson  (1864) 10 H.L.C. 672; Wythes v. Lee  (1855) 3 Drew 396; and  Combe v. Swaythling (Lord)  [1947] 1 Ch. 625 (infra). To take the analogy used by Vaughan Williams L.J., it is true that, generally speaking, in an action brought for money had and received to the use of the plaintiff, the money has not been so received – that is, expressly to the use of the plaintiff, but, undoubtedly, the money has been received – otherwise the action could not lie. In the course of argument, reference was made to  Combe v. Swaythling (Lord)  [1947] 1 Ch. 625, in which Wynn-Parry J. said at p. 628:

 “The basis of the undoubted right of a purchaser, who has paid a deposit to a vendor, to a lien for his deposit if the contract goes off otherwise than through the purchaser’s default is, in my judgment, that the purchaser is to be regarded, in respect of that deposit, as a secured creditor. That, in my view, emerges clearly from the speeches of Lord Westbury L.C. and Lord Cranworth in  Rose v.Watson  in which case, be it observed, it was not claimed that the lien  ought to extend to the costs of the suit. In the later authorities to which I have been referred, however-namely,  Middleton v. Magnay 2 H & M 233,  Whitbread & Co. Limited v. Watt  [1901] 1 Ch. 911; [1902] 1 Ch. 835 and  Kitton v. Hewitt  [1904] W.N. 21 – it does appear that the purchaser’s right, where the sale goes off otherwise than through his default, has being extended to cover, in such cases, his costs of suit and the costs of investigating title.

 In my judgment all those cases are to be explained by reference to the underlying principle that the right of a purchaser to a lien in such circumstances is tested on the basis that he is to be regarded as a secured creditor. I cannot see how a purchaser has any right to a lien until it can be postulated of him that he is a secured creditor.”

 This latter reference indeed, seems to beg the very question raised in this appeal. Mr. Landy has laid great stress upon the words of Vaughan Williams L.J. where he says:”. . . it is a right which may be said to have been invented for the purpose of doing justice.” Be it so – how does the doing of justice demand that those who pay advances in respect of an anticipated contract should be put in a position better than that of trading creditors or professional creditors who have put their goods or their services at the disposal of the self same debtor without payment and whose claims can only rank as those of unsecured creditors? I cannot see that any principle of justice requires any different treatment for the former as compared with the latter. In Irish Conveyancing Law (J.C.W. Wylie 1978 Ed.) the learned author said at para. 10.134:

 “It is not uncommon for builders to demand money from prospective purchasers at a very early stage in the development of a site; indeed, often before any building has commenced at all. Sometimes this takes the form of what is called a “booking deposit” and may be paid before any contract is entered into. The dangers of paying such a pre-contract deposit or any other money before a contract is signed cannot be emphasised too much. If, as is often the case, the money is paid to a builder which is a limited liability company, the prospective purchaser runs the risk that, in the event of the company becoming insolvent or going into liquidation, he will be treated as an unsecured creditor with little hope of recovery of his money.”

 The learned author was right. I would allow the appeal accordingly.

---

Byrne v. Allied Irish Banks

 [The purchase money had been placed on deposit account with a merchant bank pursuant to the order of 24th June, 1974. The order made pursuant to the judgment,supra, declared that the sum of £3353-62 secured by the equitable charge was well charged on the purchase money, and ordered that sum to be withdrawn and paid to the respondent bank and the balance to be withdrawn and paid to the applicant as official liquidator of the company.

---

Duff v Devlin

[1924] IR 56

---

United Bank of Kuwait Plc v Sahib & Ors

Order:Appeal dismissed with costs; leave to appeal to the House of Lords refused.

---

Abbey National Building Society v Cann

[1990] UKHL 3 [1991] AC 56, [1991] 1 AC 56 189, [1990] UKHL 3, [1991] 1 AC 56

Lord Jauncey

As a result of the various transactions to which my noble

and learned friend has already referred Mrs. Cann had, prior to its

sale in August 1984, an equitable interest in 30, Island Road. On

its sale she ceased to have any further interest in that house but

acquired rights against her son George Cann in relation to the

proceeds of sale. On completion of the purchase of 7, Hillview

she once again acquired an equitable interest in that house. Since

that interest derived from George Cann it followed that she could

acquire no equitable interest in the house prior to his acquisition

of an equitable interest therein on completion, nor could she

acquire an interest greater than he acquired. Mr. Aylen argued

that the equitable interest which Mrs. Cann took on completion

had priority over the equitable interest which the society took at

that time. This argument necessarily presupposed that there was a

moment of time when George Cann had a right to the

unincumbered leasehold estate whereby he could grant to Mrs.

Cann an interest which took priority over that of the society as

mortgagees. Mr. Munby countered that argument by submitting

that the two transactions of purchasing 7, Hillview and borrowing

money from the society must be looked at as one and that in

reality George Cann never acquired more than the equity of

redemption in 7, Hillview from which it followed that any

equitable interest acquired by Mrs. Cann could only be carved out

of this limited interest.

– 22 –

In order to consider these arguments it is necessary to look

at a number of authorities. In re Connolly Brothers Ltd. (No. 2)

[1912] 2 Ch. 25. a company issued debentures creating a floating

charge over all their property present and future and subject to a

condition that it should not be in a position to create any other

mortgage or charge in priority to the debenture. Thereafter the

company bought a property after borrowing a sum of £1,000 for

that purpose from a Mrs. O’Reilly. It was a condition of that

loan that Mrs. O’Reilly should have a charge upon the property

purchased. It was held that the company only acquired the equity

of redemption in the property with the result that Mrs. O’Reilly

was entitled to priority over the debenture holders. Warrington J.

said, at pp. 28-29:

‘It must be borne in mind that these debentures and the

trust deed, so far as this after-acquired property is

concerned, amount to nothing more than a contract by the

company to give to the debenture holders a security upon

this particular item of property by its description as

appearing in the conveyance, but only on such interest as

the company may in fact acquire in that and their other

after-acquired property. Now, in my judgment, the company

on the facts of this case never acquired as against Mrs

O’Reilly any interest in this property at all, except subject

to the obligation of giving to her a charge for the amount

of the purchase-money which she so advanced.”

In dismissing the appeal Sir Herbert Cozens-Hardy M.R. said, at p.

31:

“Did the company as between themselves and Mrs. O’Reilly

ever become the absolute owners of the property? Or was

not the bargain that Mrs. O’Reilly was to have a first

charge, and the company was only to get the property

subject thereto? In my opinion we should be shutting our

eyes to the real transaction if we were to hold that the

unencumbered fee simple in the property was ever in the

company so that it became subject to the charge of the

debenture holders.”

In Coventry Permanent Economic Building Society v. Jones

[1951] 1 All E.R. 901 the first defendant successfully bid for a

house at auction. On the following day she agreed to let the

ground floor to two tenants. Thereafter she borrowed a sum of

money from the plaintiffs to enable her to complete the purchase.

On the date of completion she granted a mortgage to the

plaintiffs which excluded her right to grant leases. It was argued

for the tenants that a tenancy by estoppel had been created

before the completion of the conveyance to the first defendant

and that there must be predicated a scintilla temporis between the

conveyance to her and the mortgage by her into which the tenancy

by estoppel could be inserted so as to precede the mortgage. In

dismissing this argument Barman J. said, at p 903:

“The question is whether I must assume the scintilla

temporis and assume that because of the obligations of the

landlord she must be held to have defrauded her mortgagee

by creating a tenancy which is good against the society

– 23 –

although it was not willing to lend the money except on the

footing that she had no such right. I do not see why I need

postulate this. The whole transaction was one transaction.

The vendor would not sell without without receiving his

purchase money, and the mortgagee would not provide the

purchase money without receiving the term of years. The

money, in fact, went straight – as is the universal practice

– from the mortgagee to the vendor, and not until it was in

the vendor’s hands would a legal state be created either in

favour of the landlord or of the mortgagee. It seems to me

that the whole thing is one transaction in substance, and I

am not constrained to introduce an artificiality so as to

affect the rights of the building society. Consequently, I

reject the argument that the doctrine of estoppel must have

created in the tenants an estate in priority to that of the

building society. The grantor of the so-called tenancy would

never have acquired the estate which she did acquire but

for that mortgage money, and it would not be right,

therefore, to introduce a fiction in the manner suggested.”

In re Connolly was followed by the Privy Council in Security

Trust Co. v. Royal Bank of Canada [1976] AC 503. In that case

the contract of sale provided for payment of part of the price in

cash and the balance by a mortgage granted in favour of the

vendor. After the contract but before completion the purchaser

granted a debenture charging all his property present and future

and providing for a fixed first charge on all his present freehold

property. In a competition between the mortgagee and the

debenture holder it was held that the mortgagee had priority.

Delivering the advice of the Board Lord Cross of Chelsea said, at

p. 518:

Their Lordships turn now to consider what were the

relative priorities of this charge and the appellant’s

mortgage apart from any question of registration under the

Registration of Records Act. As they see it the mortgage

was entitled to priority. The respondent’s charge was a

charge on Fisher’s interest under the contract and could

give the respondent no greater interest than Fisher had.

Fisher could not obtain a conveyance of the lands free from

the obligation to grant back the mortgage to the appellant.

He had no right to obtain an unencumbered fee simple and

the charge on his interest which he created in favour of the

respondent only gave the respondent rights which were

subject to the prior rights of the appellant. The case is

exactly parallel to In re Connolly Brothers Ltd. (No. 2)

[1912] 2 Ch. 25.”

Although in that case the contract of sale required that a

mortgage be granted in favour of the vendor Lord Cross obviously

considered that this in no way distinguished it from In re Connolly

where the obligation to grant the mortgage was not a term of the

contract of sale. These three cases ail support the contentions of

the society.

Mr. Aylen however relied strongly on Church of England

Building Society v. Piskor [1954] Ch. 553 where the Court of

Appeal declined to treat as one individual transaction the purchase

– 24 –

of leasehold premises and the granting of a mortgage to a lender

who had provided a substantial part of the purchase price. The

relevant facts may be summarised as follows:

In September 1946 the defendants agreed to purchase

leasehold premises having in August 1946 made application for an

advance on mortgage. Having paid part of the purchase price the

purchasers were allowed by the vendors to take possession. In

early November they granted weekly tenancies of part of the

premises. At the end of November the purchase was completed by

an assignment of the lease to the purchasers and at the same time

they granted a mortgage to secure the sum which had been paid

by the plaintiffs direct to the vendor. The mortgage contained a

recital that the borrower was the estate owner. There was

evidence that if the money had not been advanced for the

plaintiffs the vendors would not have delivered the assignment.

Sir Raymond Evershed M.R. said, at p. 558:

“From what I have said, it is clear that as between the

mortgagors and Captain Hamilton (and I will henceforth

speak of Captain Hamilton, treating him and Miss Hunnex as

equivalent) there was created a tenancy by estoppel. So

much is not contested, although the facts about the creation

of that tenancy are somewhat vague. If, then, the

mortgagors acquired a legal estate before the legal charge

took effect, for however short a time, then the estoppel

would, as it is said, be fed and the plaintiffs’ claim must

necessarily be defeated.”

After commenting that the conclusion of Harman J. in

Coventry Permanent Economic Building Society v. Jones “that the

whole thing LwasJ one transaction in substance” might be justified

on its facts he stated, at p. 561:

“at any rate in a case such as the present, the transaction,

although it may fairly be said to be one in substance, still

cannot be said in the eyes of the law to be one and

indivisible. The claim of the plaintiffs to a title paramount

rests essentially upon their having obtained a legal estate,

and this they can only have done by virtue of the legal

charge on which they sue; and if for some moment of time

the legal estate was vested in the mortgagors and was

therefore capable of being subjected by them to the charge

upon which the mortgagees rely – if that is right, then it

seems inevitable that the estoppel, which was involved in

the tenancy created in favour of Captain Hamilton,

necessarily is fed by the legal estate in the hands of the

mortgagors; in other words, I am not satisfied, with all

respect to Harman J., that if the language which I have

read was meant to lay down a general proposition covering

all cases of this kind, it was correct. It is no doubt true

to say that in one sense the transaction was one

transaction; but it is equally true to say that it consists

necessarily of certain defined steps which must take place

in a certain defined order, if the result intended is

eventually to be achieved. That seems to me not an

artificiality, but a necessary result of the law and of the

conveyancing practice which was involved.”

– 25 –

Later the Master of the Rolls referred to the facts of In re

Connolly and after opining that the question between Mrs. O’Reilly

and the debenture holders was a question of equitable priorities

said, at p. 563:

“It is true that Sir H. Cozens-Hardy M.R. in his judgment

said: ‘In my opinion we should be shutting our eyes to the

real transaction if we were to hold that the unencumbered

fee simple in the property was ever in the company so that

it became subject to the charge of the debenture holders.’

But I do not think that that language, appropriate to a case

of competing equities, can be used to justify the view that

there is one transaction – one, that is, not only in substance

but in law one and indivisible – in a case such as the

present.”

Romer L.J. said, at pp. 564-565:

“The mortgage of the purchased property cannot have any

operation in law (whatever rights it may give rise to in

equity or by estoppel) unless and until the purchaser is in a

position to vest a legal term in the property, as security, in

the mortgagee, and he is not and cannot be in a position to

do this until he himself has acquired from the vendor the

legal estate out of which the mortgage term is capable of

being created. From this it follows that the execution and

delivery of the conveyance (if the property is freehold) or

of the assignment (in the case of a leasehold) by the vendor

to the purchaser must of necessity constitute an essential

preliminary to the vesting in the mortgagee of a subsidiary

interest in the property. . . the fact remains that the

purchasers could not have given the society the legal charge

which the society required unless, at the time when the

charge was executed, the purchasers were the owners of the

legal interest in the property charged. That this was

recognised by the society itself is sufficiently shown by the

fact that there appears in the schedule to the charge the

statement that the premises were then (that is to say, at

the moment of the delivery of the charge) vested in the

mortgagors – a circumstance of evidence upon which

Danckwerts J. relied in Woolwich Equitable Building Society

v. Marshall [1952] Ch. 1. I agree with Danckwerts J. that

the plaintiffs, having inserted that statement in the charge,

cannot very well complain if the statement is regarded as

true. Even without this element, however, I should still

regard the legal interest in the purchased premises as having

become vested in the purchasers prior to the execution of

the charge for, as I say, unless this sequence of interests is

observed, the charge would have been wholly ineffective in

law to achieve its immediate purpose. I agree with Mr.

Alcock’s submission that a composite transaction cannot be

regarded as being one transaction, unless it is not only one

but one and indivisible; and that two transactions, each

possessing a legal individuality of its own, do not coalesce

into one merely because they are dependent on each other.”

Romer L.J. concluded his judgment, at p. 566, by hypothesising

that after the creation of the tenancies but prior to completion of

the sale the purchasers had bound themselves to give to the

– 26 –

plaintiffs a charge upon the property when assigned to secure the

advance in which event he considered that:

“the legal estate which passed to the purchasers, subject to

the equity in favour of the plaintiffs arising from the

agreement, would have sufficed to feed the estoppel in

favour of the tenants. As, however, there is no evidence of

such an agreement having been entered into, whether before

or after the tenancies were granted, the point does not

arise, and I express no concluded opinion upon it.”

It must be noted that Romer L.J. expressed no views as to what

would have been the position if the undertaking to the plaintiffs

had preceded the grant of the tenancies. In any event feeding the

estoppel in favour of the tenants would merely confer on them as

against the purchasers such rights as they, the purchasers, were in

a position to confer.

In Security Trust Company v. Royal Bank of Canada [1976]

A.C. 503 Lord Cross sought to reconcile the decisions in In re

Connolly Brothers Ltd. (No. 2) [1912] 2 Ch. 25 and Church of

England Building Society v. Piskor [1954] Ch. 553 in the following

passage, at pp. 519-520:

“But Romer L.J. in distinguishing In re Connolly Brothers

Ltd. (No. 2) was careful to point out (see [1954] Ch. 553,

566) that there was no evidence to show that the purchasers

had prior to granting the tenancy entered into any binding

contract with the plaintiff building society to grant it a

morgage on completion in consideration of its advancing

some of the purchase price. If there had been such an

agreement then the rights of the parties might well have

been different, although as the tenancy was undoubtedly

subsequently clothed with the legal estate an agreement to

grant a mortgage, even though made before the grant of the

equitable tenancy to him, would presumably not have bound

the tenant unless he had notice of it. Furthermore, the

fact that the plaintiff building society had not inspected the

property or inquired as to the rights of any person in

occupation might also have been relevant. But the basic

difference between the two lines of cases is that in cases

such as In re Connolly Brothers Ltd. (No. 2) and this case

the charge under the debenture only bites on property which

is already fettered by the agreement to give the other

charge, whereas on the facts of Church of England Building

Society v. Piskor the tenancy was created out of an interest

which was then unfettered by any such agreement.”

I have difficulty in understanding the second sentence in the

foregoing passage because just as the tenancy was subsequently

clothed with the legal estate or, as Romer L.J. put it, the legal

estate passing to the purchaser would have fed the estoppel in

favour of the tenants, so would the mortgage in favour of the

plaintiffs have been clothed with the legal estate. If the

agreement to grant the mortgage preceded the granting of the

tenancy then I should have thought that when both equitable

interests were clothed with the legal estate the prior equitable

interest would prevail.

– 27 –

Both Sir Raymond Evershed M.R. and Romer L.J. treated

Piskor as a case involving legal interests alone and on this basis

the Master of the Rolls was able to distinguish In re Connolly.

Furthermore the court appeared to proceed upon the basis that the

only interest of the mortgagees which required to be considered

was that which they acquired by virtue of the execution of the

charge in their favour after the legal estate had vested in the

purchaser. This, in my view was to ignore the interest which they

must have acquired when they handed over the purchase price to

enable completion to take place. It would be quite unrealistic to

assume that the money was made available unconditionally and

that only at or immediately after the moment of completion did

the question of the execution of a charge in their favour arise.

In Lloyds Bank Plc v. Rosset [1989] Ch 350, 389 Mustill

L.J. carefully analysed the three decisions in In re Connolly,

Piskor and the Security Trust Co. case and confessed to finding it

hard to see how they could stand together. I share his difficulty.

It would have been possible for the Privy Council in the Security

Trust Co. case to have distinguished that case from In re Connolly

on the basis that in terms of the contract of sale the purchaser

could never acquire from the vendor more than the equity of

redemption. In the event Lord Cross drew no distinction between

the two case and sought instead to distinguish Piskor. In each of

the three cases the purchaser was dependent upon the loan.

It is of course correct as a matter of strict legal analysis

that a purchaser of property cannot grant a mortgage over it until

the legal estate has vested in him. The question however is

whether having borrowed money in order to complete the purchase

against an undertaking to grant security for the loan over the

property the purchaser is, for a moment of time, in a position to

deal with the legal estate as though the mortgagee had no interest

therein. In re Connolly, Coventry Permanent Economic Building

Society v. Jones [19195] 1 All E.R. 901 and the Security Trust

Co. case say that he is not in such a position recognising, in my

view, the realities of the situation. Piskor say that he is, thereby

ignoring any interest which the mortgagee may have prior to

completion of the purchase. Nevertheless in each of the four

cases the purchase was dependent upon the loan and I find it

impossible to see any material distinction between the

circumstances obtaining in the three former cases and those

obtaining in Piskor. In my view a purchaser who can only

complete the transaction by borrowing money for the security of

which he is contractually bound to grant a mortgage to the lender

eo instante with the execution of the conveyance in his favour

cannot in reality ever be said to have acquired even for a scintilla

temporis the unencumbered fee simple or leasehold interest in land

whereby he could grant interests having priority over the mortgage

or the estoppel in favour of prior grantees could be fed with

similar results. Since no one can grant what he does not have it

follows that such a purchaser could never grant an interest which

was not subject to the limitations on his own interest. In so far

as Piskor decided that such a purchaser could be vested for a

moment of time in the unencumbered freehold or leasehold estate

with the consequences to which I have just referred, I consider

that it was wrongly decided. Conversely I consider that the

decision of Harman J. in the Coventry Permanent Economic

Building Society case was correct.

– 28 –

I would only add a further word about Piskor in relation to

the recital in the mortgage that the property “is now vested in

the mortgagors free from incumbrances for the unexpired residue

of the term”. Romer L.J., at p. 565, considered this to be a

matter of some importance and referred to a dictum of

Danckwerts J. in Woolwich Equitable Building Society v. Marshall

[1952] Ch. 1 where the judge said, at p. 9:

“It seems to me that a mortgagee, who has inserted in the

deed under which he acquires title a statement that the

mortgagor is ‘the estate owner in respect of the property’

which is being mortgaged or charged to the morgagee,

cannot object if that statement is taken to be true.

Therefore, it seems to me that the irresistible inference is

that I must assume that to be the position, even if the

transfer by the vendors to the purchaser bore the same date

as the charge. In fact, the trasfer must have been

executed at a time earlier than that at which the charge to

the society was executed; so that there was a time in which

it would be correct to say that the mortgagor had become

the estate owner, i.e., the legal owner of the fee simple of

the property subsequently charged by him to the society to

secure the amount of his loan.”

My Lords I think that Romer L.J. and Danckwerts J. read too

much into these recitals. In my view they amount to no more

than an acknowledgment by the mortgagor that he is the person

who is able to grant a valid legal charge over the property in

question.

In the present case George Cann borrowed money from

society in order to complete the purchase of 7, Hillview and in

return granted to them a mortgage. The mortgage was executed

by George Cann prior to 13 August 1984 when the purchase was

completed. It follows that as a matter of reality George Cann

was never vested in the unencumbered leasehold and was therefore

never in a position to grant to Mrs. Cann an interest in 7,

Hillview which prevailed over that of the society. The interests

that Mrs. Cann took in 7, Hillview could only be carved out of

George Cann’s equity of redemption. In reaching this conclusion it

is unnecessary to consider whether or not Mrs. Cann was aware

that George Cann would require to borrow money in order to

finance the purchase of 7, Hillview.

That is sufficient for the disposal of this appeal but in

deference to the able arguments addressed to your Lordships on

the relevant date for the determination of the subsistence of an

overriding interest for the purposes of section 23(1)(b) and section

70(1)(g) of the Act of 1925, and in view of the general importance

of this question I propose to say a few words thereanent. I should

at the outset explain that I am in entire agreement with the

analysis and reasoning of my noble and learned friend Lord Oliver

of Aylmerton on this matter and that anything that I may say

must be treated as merely supplementary thereto.

Mrs. Cann claimed to have an overriding interest in 7,

Hillview by virtue of (1) her notional contribution to the purchase

of 48, Warren Road, (2) George Cann’s undertaking that she would

always have a roof over her head and (3) her occupation of the

– 29 –

premises on the date of the conveyance to George or in any event

on the date of registration of George Cann’s title to the premises.

Mrs. Cann’s primary submission was that the tempus inspiciendum

for the ascertainment of her overriding interest was the date of

registration whereas the society submitted that it was the date of

completion of the relevant transaction. The point is almost devoid

of authority and until the recent case of Lloyds Bank Plc v.

Rosset [1989] Ch 350 had been considered only once in the county

court case of Paddington Building Society v. Mendelsohn, 50 P &

C.R. 244 in which Judge McCarraher in the Bristol county court

held that actual occupation at the date of the mortgage was

necessary to found an overriding interest. On appeal to a court of

two judges the decision of the trial judge was upheld on another

ground, Browne-Wilkinson L.J. observing that it was undesirable for

a two-judge court to adjudicate upon so important a point if the

appeal could be otherwise disposed of. It is true that in In re

Boyle’s Claim [1961] 1 W.L.R. 339 Wilberforce J. expressed the

view that the relevant date was that of registration. However the

issue in that case was whether a claimant was entitled to

compensation for rectification of the register by the removal from

his title of land belonging to a neighbour, the land being subject

to overriding interests. The issue was thus far removed from that

which is raised in this appeal and the present point does not

appear to have been argued.

In Rosset the trial judge faced with the obvious

conveyancing absurdity of construing section 70(1)(g) in a way

which could give to someone moving into occupation after

completion of a transfer or mortgage an interest taking effect in

priority to the completed transaction essayed a construction of

section 20(l)(b) which avoided this. He concluded (see [1989] Ch.

350, 371) that section 20(1)(b) fell to be construed as though it

read “subject . . . (b) . . .” to the overriding interests, if any,

affecting the estate transferred or created at the time it is

transferred or created.” Thus only those overriding interests which

subsisted at the date of completion would be effective against the

transferee or mortgagee, any interests coming into existence

between completion and registration being ineffective. The Court

of Appeal saw difficulties in the judge’s construction of section

20(l)(b) and approached the problem in a rather different way.

Nicholls L.J., considered at p. 372, that the natural construction of

section 20(1) was that both paragraphs (a) and (b) focused on the

position at the time of registration, although He recognised the

conveyancing absurdity to which I have already referred. However

he felt unable to accept the conclusion of the trial judge because

that would result in the transferee or mortgagee taking “free from

all overriding interests, whatever their nature, which came into

being after the execution of the transfer or mortgage …” (p.

373). He went on to say

“I am not persuaded that section 20(1)(b) was intended to

have the effect that a purchaser or a mortgagee should take

free from local land charges coming into being after

execution of the transfer or mortgage.”

He said, at p. 374:

“Consistently with conveyancing sense and the underlying

conveyancing principle which is being carried forward into

– 30 –

paragraph (g), it seems to me that paragraph (g) is

concerned with persons who are in actual occupation of the

land at the time when the estate or interest which is said

to be subject to the rights of the occupant was created.

For example, on completion of a purchase or a mortgage in

the usual way. This is so despite the need for a further

step to be taken (registration) before the legal estate will

be acquired by the purchaser or mortgagee. In line with

this is the exception provided for in paragraph (g).

Explicitly, the rights of an occupant are not protected if

enquiry is made of him and the rights are not disclosed.

That exception, implicitly, contemplates an inquiry by or on

behalf of the person whose estate or interest is said to be

subject to the rights of the occupant and, again implicitly,

an inquiry made before he acquired his estate or interest.

Otherwise the provision makes no sort of sense. If this is

right, the pieces of the jigsaw fit together reasonably well.

A purchaser or mortgagee inspects and inquires before

completion, in the established fashion. Or he fails to do so,

at his own risk. He then completes the transaction, taking

an executed transfer or mortgage. Whether or not an

overriding interest under paragraph (g) subsists so far as his

freehold or mortgage is concerned falls to be determined at

that moment. If an overriding interest does subsist, then

his estate when registered takes subject to that interest. If

it does not, then subsequent entry of a person into

occupation before the transfer or mortgage has been

registered, and “completed” for the purposes of section 19,

does not have the consequence of creating an overriding

interest under paragraph (g) in relation to that freehold or

mortgage.”

If I understand Nicholls L.J. correctly he is there saying

that one must look at the date of execution of the mortgage to

see whether an overriding interest of the type described in section

70(1)(g) subsists and is protected by occupation and that if such

interest still subsists at the date of registration it will fall within

the ambit of section 20(l)(b). By this line of reasoning he was

able to avoid the conveyancing absurdity to which he earlier

referred and also the problem of post-completion land charges.

My Lords I have sympathy with the courts below in their

quest for the true meaning of section 20(1)(b). I agree with

Nicholls L.J. that it is implicit in section 70(l)(g) that the inquiry

as to actual occupation is one which is capable of being made

before completion of the mortgage or other transfer. Inquiry

about occupation which commenced after completion would be

futile because by then the transferee or mortgagee would be

committed and the die cast. However whichever of the two

constructions of section 20(1)(b) referred to in Rosset is correct

there will be anomalies. Nicholls L.J.’s approach to section

70(1)(g) does not avoid the problem of the transferor of land

creating overriding interests under section 70(1)(j) and (k) between

the date of completion of a mortgage and the registration thereof

by granting sporting rights or leases for less than 21 years.

Conversely it would be an odd result if a land charge resulting

from the listing of a building of special architectural interest or

from the incurring of expense of a highway authority should not

bind the transferee or mortgagee.

– 31 –

During the course of argument I was attracted by Mr.

Munby’s submissions that section 15(1) of the Land Charges Act

1925 provided an answer to Nicholls L.J’s difficulty. The whole of

that Act was repealed by the Local Land Charges Act 1975 but

that does not affect the matter as Nicholls L.J. was considering

the position as at the time when the Land Registration Act 1925

was enacted. In terms of that subsection a local land charge is

“void as against a purchaser for money or money’s worth of

a legal estate in the land affected thereby, unless registered

in a appropriate register before the completion of the

purchase.”

“Purchaser” is defined to include a mortgagee or lessee. Thus, it

was argued, a local land charge created prior to the execution of

a mortgage but not registered in the appropriate register until a

later date would have been void as against a mortgagee. That

being the position it might be thought to follow that a local land

charge arising between the creation and registration of a mortgage

would also have been void under section 15(1) against the

mortgagee and could not therefore be an overriding interest within

the meaning of section 70(1)(i). Thus the problem which concerned

Nicholls L.5. could never arise. However on further consideration

I have come to the conclusion that the submission is unsound.

Under the 1925 legislation a local land charge was capable

of registration in two different registers, namely, the appropriate

local register under the Land Charges Act 1925 and the Land

Registry under the Land Registration Act 1925. Registration in

the local register was required for the purposes of section 15 and

such registration by virtue of section 198 of the Law of Property

Act 1925 constituted actual notice of the charge to all persons for

all relevant purposes. Registration in the Land Registry was

required before a local land charge affecting registered land could

be realised. Subject to the foregoing provisions a local land

charge was good against the owner of land for the time being.

Section 15 was dealing with a situation where the local land

charge had been created prior to the completion of sale or

mortgage. In the case of registered land completion of the

purchase or mortgage of the legal estate could only take place on

registration of the relevant disposition (section 20(1) of the Land

Registration Act 1925). Accordingly a local land charge created

before or after execution of a disposition of registered land but

registered in the local register before registration of the

disposition in the Land Registry would not have been void under

section 15 and could thus constitute an overriding interest under

section 70(1)(i) of the Land Registration Act 1925 if registration

under that act were the relevant date.

It therefore follows that section 15(1) of the Land Charges

Act 1925 does not resolve the problems which concerned Nicholls

L.J. and I am satisfied that it cannot have been the intention of

the legislature that local land charges imposed on registered land

between the execution and registration of a disposition should be

ineffective against the disponee. It may well be that charges of a

non-financial nature such as listing of a building could be

reimposed on the land after registration of the disposition but this

could not happen in the case of a financial charge which had once

arisen. I therefore conclude that Nicholls L.J. was correct (1) in

– 32 –

taking the date of registration as the relevant date for

determining the existence of overriding interests which will effect

the estate transferred or created for the purposes of sections

20(1)(b) and 23(1)(c) and (2) in his approach to the construction of

section 70(1)(g). “I do not feel that I can usefully add anything

further to what has already been said on this matter by my noble

and learned friend Lord Oliver of Aylmerton.

For the foregoing reasons I would dismiss the appeal.

– 33 –

---

Brighton & Hove City Council v Audus

 [2009] EWHC 340 (Ch)  [2009] NPC 31, [2010] 1 All ER (Comm) 343, [2009] EWHC 340 (Ch), [2009] 9 EG 192

MR JUSTICE MORGAN

The legal principles

Before addressing the matters which fall to be decided in this case, it is necessary to set out the legal principles which are relevant.

It is first necessary to understand the concept of a mortgage or charge. A classic definition of a mortgage (albeit based on the conventional form of a mortgage of land before 1926) was given by Lindley MR in Santley v Wilde [1899] 2 Ch 474 where he said:

“…a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given. This is the idea of a mortgage: and the security is redeemable on the payment or discharge of such debt or obligation, any provision to the contrary notwithstanding”.

Most mortgages or charges involve a loan where the relevant obligation on the mortgagor is to repay the loan, rather than perform some other obligation. The function of the mortgage is to give the lender security for the repayment of the loan.

It is inherent in the concept of a mortgage or security interest that the borrower of money should be able to discharge the security interest, that is, to redeem the mortgage by paying the money and in that way performing the obligation performance of which is secured. At common law it was possible to include in a mortgage a contractual term which had the effect that the mortgagor would lose the right to redeem if he failed to repay the monies due by a specified date. Equity regarded such a term as liable to work injustice and hardship and equity granted relief against the operation of such a contractual term by recognising an equitable right to redeem, notwithstanding non-compliance with the contractual term. It is not necessary for present purposes to describe in detail the difference between a right to redeem at law, the right to redeem in equity and the “equity of redemption”. It is sufficient to turn to the rules of equity which came into existence to protect the equitable right to redeem. These rules have a long history and they operated in one way before the repeal of the usury laws in 1854 and in a different way after that date. For present purposes, the modern law is stated in the speeches in the House of Lords in Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914] AC 25. That decision restated some of the equitable rules and clarified the law in relation to suggested collateral advantages taken by the mortgagee from the mortgagor and relating to the circumstances in which the mortgagor could redeem the mortgage. This area of the law is often described by using the phrase “clogs on the equity of redemption” but that phrase is not particularly helpful in identifying the detail of the relevant rules.

The relevant rules are threefold. The first is that a condition which is repugnant to the contractual right to redeem and the equitable right to redeem is void. The second rule is that a condition which imposes a penalty in respect of the exercise of the equitable right to redeem, following a failure to exercise a contractual right to redeem, is void in equity. The third rule is that a provision which regulates or controls the right to redeem is invalid, if it is unconscionable.

The question of when a provision regulating the right to redeem is unconscionable was considered in Cityland and Property (Holdings) Limited v Dabrah [1968] Ch 166. That decision was analysed in Multiservice Bookbinding Limited v Marden [1979] Ch 84, where the decision of the Court of Appeal in Knightsbridge Estates Trust Limited v Byrne [1939] Ch 441 (which had not been cited in the Cityland case) was also considered. In Marden, it was held (at page 110) that a bargain could not be unfair and unconscionable unless one of the parties to it had imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience. It was not enough to show that the term was “unreasonable”.

In relation to the rule, identified in Kreglinger, that a term relating to the right to redeem which was unconscionable was “invalid”, there was considerable debate at the hearing before me as to whether such a term was void and of no effect, or whether such a term was voidable, so that an application to avoid the term had to be made by the mortgagor and so that such a claim would be subject to any equitable defences available where there is a claim to set aside a transaction in equity. In my judgment, having regard to the history of the equitable rules and the way in which the matter is described in Kreglinger itself, an unconscionable term of this kind will be void. It is thus open to a subsequent encumbrancer such as the Council in this case, who has a right to redeem a prior charge, to come to court and establish that a term in that prior charge relating to the right to redeem is an unconscionable term and if that is established the term will be of no effect for all purposes. Indeed, that is the way in which the matter is described by Lord Tomlin in Mehrban Khan v Makhna (1930) 57 Ind. App. 168 at 172.

The equitable rules described above apply to mortgages or security interests. Over the centuries, disputes have arisen as to whether a transaction involved a mortgage or security interest, or had some other character. This type of dispute was prevalent before 1926 when the conventional land mortgage consisted of a conveyance to the mortgagee with a right for the mortgagor to a reconveyance. The courts frequently had to rule whether the transaction involved an absolute conveyance in the first place or a conveyance by way of security. Consistently with equity’s concern to protect the right to redeem a security interest, equity looked to the substance and not the form of such transactions in order to detect whether the underlying transaction was in truth a security transaction. Since 1925, questions of this kind continue to arise but less often in relation to land transactions.

The modern approach to an issue as to whether a transaction is in substance a security transaction or has some other character is stated by the Court of Appeal in Welsh Development Agency vExport Finance Co Limited [1992] BCC 270. One of the issues in that case was whether the transactions were by way of absolute sale or by way of secured loan. The court (Dillon, Ralph Gibson and Staughton LJJ) held that the transaction was by way of sale. The documents in that case took the form of a sale transaction. It was not suggested that the documents were a sham or a pretence. The court examined the detailed terms of the documents and identified the legal substance of the matter, as set out in those terms, as being in accordance with the form, that is as a sale and not a secured loan. Staughton LJ pointed out at page 300A that one was seeking to ascertain the legal nature of a transaction and not its economic effect. There were many ways of raising money besides borrowing. If the transaction is not in the form of a loan it is not to the point to say that its object was to raise money or that the parties could have produced the same result more conveniently by borrowing and lending money. He identified two ways of examining the question. The first was the external route and the second was the internal route. The external route involved an allegation that the written document did not truly represent the agreement of the parties in that it was a sham or a pretence. The internal route involved an examination of the written agreement in order to ascertain its legal nature from the terms contained in the document.

The analysis of Staughton LJ in the Welsh Development Agency case has been influential. It was applied by the Court of Appeal in Lavin v Johnson [2002] EWCA Civ 1138. That case is interesting in that when the court applied this analysis to the facts before it, it held that the legal nature of one part of the transaction was in accordance with the form of the documents where the form was not that of a security transaction, whereas the legal nature of a second part of the transaction was not in accordance with its form and in substance represented a security transaction.

Staughton LJ’s analysis was again applied by the Court of Appeal in Dutton v Davis [2006] EWCA Civ 694 where it was again held that the legal nature of the transaction was in accordance with the form of the transaction and did not involve the grant of a security interest which could be redeemed.

The overwhelming majority of the cases where the courts have examined the substance of the transaction, to see whether it created a security interest, have been cases where the documents did not take the form of a security interest and the allegation was that the substance of the matter did involve a security interest. However, the principle relating to the search for the substance of the transaction seems to apply in reverse also, at any rate, in relation to the equitable rules which I have described above, which control certain terms relating to redemption of a security interest. A modern example of a case of this kind is Warnborough Limited v Garmite Limited [2003] EWCA Civ 1544. The facts can be simplified for present purposes. Warnborough sold real property to Garmite. The purchase price was left outstanding as payable to Warnborough and Garmite’s obligation to pay the purchase price was secured by a mortgage in favour of Warnborough. Garmite also granted Warnborough an option to repurchase the property. The issue was whether the option to repurchase was “a clog on the equity of redemption”. The only judgment given in the Court of Appeal was that of Jonathan Parker LJ. He referred to the Kreglinger case and the passages in the speeches of Viscount Haldane LC and Lord Parker which referred to the need to assess the real nature and substance of the transaction. Jonathan Parker LJ said at [73] that the Court had to look at the “substance” of the transaction and to enquire as to the true nature of the bargain which the parties had made. To do that, the Court examined all the circumstances, with the assistance of oral evidence if necessary. At [76], he said that where the alleged “clog” was entered into against the background of a sale of the property, by the grantee of the option as owner of the property to the grantor, for a price left outstanding on mortgage there must be “a very strong likelihood” that on an examination of all the circumstances the court would conclude that the substance of the transaction was one of sale and of purchase and not one of mortgage. It will be noted in that case that the transaction undoubtedly involved a genuine and enforceable mortgage. The approach of the Court of Appeal did not involve a finding that the mortgage was ineffective or had some other character but rather that the part of the transaction which involved a mortgage was not to be regarded as the dominant part of the transaction, which identified the character of the transaction. The transaction was a composite of its parts and although one part of the transaction involved a mortgage, the legal character of the composite transaction was a transaction of sale and purchase. Jonathan Parker LJ at [76] rejected the argument that the sale was “incidental to the loan” as turning the transaction “on its head”. The appeal in the Warnborough case to the Court of Appeal was against a decision of a Deputy High Court Judge who had given summary judgment in favour of the mortgagee. The Court of Appeal allowed the appeal with the result that the issue as to the character of the transaction had to be determined at a subsequent trial. That issue, together with many other issues, was tried by Mr Sheldon QC sitting as a Deputy High Court Judge: [2006] EWHC 10 (Ch). He held, in particular at [34], that the substance of the transaction was a sale and purchase. Warnborough’s position as seller was crucial. The case was not a case of a third party lender obtaining a mortgage and an option to purchase.

In my judgment, Warnborough Limited v Garmite Limited is authority for the proposition that where there is a composite transaction, which includes as one of its elements a genuine mortgage, it is open to the court to assess the overall character of the composite transaction and identify that character as being other than that of mortgage. The court can, and indeed should, proceed in that way even where it is an admitted fact that one element in the transaction is a genuine mortgage.

The Council came close to submitting to me that Warnborough Limited v Garmite Limited was wrongly decided. I am quite clear that the principle established in that case is one which I ought to apply in the present case. The decision is a binding authority of the Court of Appeal and is itself based on the decision of the House of Lords in Kreglinger. Further, although Warnborough is a relatively rare example in more recent times of a court holding that the substance of a composite transaction (which includes a mortgage) is otherwise than a mortgage or security transaction, the decision is in line with much more ancient authority, to which I later refer.

The Council also submitted that when one applied the principle in Warnborough Limited v Garmite Limited in a case where a provision was being attacked as repugnant to the right to redeem the mortgage, one should assess the character of the composite transaction without taking into account the allegedly repugnant provision. I do not think that can be right. Before one knows whether the composite character of the transaction is a mortgage or security transaction, one must assess the character of the transaction taken as a whole and that must include the provision in dispute. Indeed the very provision which is said to be “repugnant” to a security transaction may be such an important or dominant provision that it demonstrates that the substance of the transaction is not that of a security transaction. It is only in a case where one holds that the composite character is that of mortgage that one then goes on to consider whether the provision under attack is in truth repugnant to the mortgage transaction.

As I have indicated, the decision in Warnborough Limited v Garmite Limited does not stand alone. There is ancient authority which adopts a somewhat similar approach where the transaction is a composite one and, although one element is a mortgage, the character of the composite transaction differs from a mortgage or security transaction. The earlier cases have previously been analysed under the heading of “family arrangement”. The principal examples in this line of cases are Howard v Harris (1681) 1 Vern 33 and Newcomb v Bonham (1681-1683) 1 Vern 7, 214, 232 and 233n. The decision in the latter case is also described in the argument of counsel in Salt v The Marquess of Northampton [1892] AC 1 at pages 11-12. This special treatment of cases of family arrangements is also singled out for mention in Coote on the Law on Mortgages, 9th Edition (1927), at page 26. Coote also cites the decision in Gossip v Wright 32 LJ Ch 648, see at page 653.

The family arrangement cases were discussed and approved by the House of Lords in Kreglinger. At page 36, Viscount Haldane said:

“But whatever else may have been the intention of those judges who laid the foundations of the modern doctrines with which we are concerned in this appeal, they certainly do not appear to have contemplated that their principles should develop consequences which would go far beyond the necessities of the case with which they were dealing and interfere with transactions which were not really of the nature of a mortgage, and which were free from objection on moral grounds. Moreover, the principle on which the Court of Chancery interfered with contracts of the class under consideration was not a rigid one. The equity judges looked, not at what was technically the form, but at what was really the substance of transactions, and confined the application of their rules to cases in which they thought that in its substance the transaction was oppressive. Thus in Howard v Harris Lord Keeper North in 1683 set aside an agreement that a mortgage should be irredeemable after the death of the mortgagor and failure of the heirs of his body, on the ground that such a restriction on the right to redeem was void in equity. But he went on to intimate that if the money had been borrowed by the mortgagor from his brother, and the former had agreed that if he had no issue the land should become irredeemable, equity would not have interfered with what would really have been a family arrangement. The exception thus made to the rule, in cases where the transaction includes a family arrangement as well as a mortgage has been recognised in later authorities.” (Emphasis added).

At page 37, Viscount Haldane referred again to Howard v Harris, stating that the substance of the transaction must be looked at to see whether the cases in question “were in reality something more than cases of mortgage…”

In Kreglinger, Lord Parker of Waddington, at page 51, referred to Newcomb v Bonham. He described a case where the real intention of the parties was that the property should be held as security for the monies charged thereon and restored intact to the mortgagor as soon as these monies were paid. He then gave Newcomb v Bonham as an example of a case where that was not the true intention of the parties and in such a case the transaction was not really a mortgage under the rule “but something more complex”.

Analysis and conclusions

Having directed myself as to the legal principles which fall to be applied, I will now attempt to deal with the matters arising.

The first question is as to the arrangement made between Mr and Mrs Bull on the one hand and Mr Audus on the other in 1988. I have made my findings of fact on that question earlier in this judgment. I now need to consider the nature of that arrangement. Neither party to this action contends that the deeds entered into on the 19th December 1988 were a sham or a pretence. I have pointed out that the two documents do not set out all of the terms agreed between the parties. I have also attempted to describe the various important respects in which the documents are at variancewith the terms agreed. Although there was scope for argument as to whether the written terms should prevail over the oral terms, the Council appeared to me to accept that Mr Audus’ promise to allow Mr and Mrs Bull to remain in the flat for the remainder of their lives and his further promise to pay rent and service charge and outgoings were contractually binding on him. Similarly, the Council accepted that Mr and Mrs Bull were not obliged to repay the sum of £12,375 during their lifetime. Nonetheless, both parties proceeded on the basis that if I had to assess the legal character of the interests created by the two deeds of 19th December 1988 I should hold the nature of those interests to be interests by way of legal charge. I suspect that Mr Audus contended for this result due to a concern that if his rights were not as chargee but took effect in equity only, they might possibly be overridden by the Council’s statutory charge. Conversely, the Council was concerned to persuade me that Mr Audus was a chargee under the first deed of 19th December 1988 so as to enable the Council to invoke the equitable rules to which I have referred above. It follows from this that neither party asks me to follow the external route identified by Staughton LJ in the Welsh Development Agency case, when determining the substance of the transaction. However, this question as to the legal character of the interests created by the two relevant deeds is not necessarily the same question as to the nature of the transaction which is represented by the two relevant deeds together with the surrounding oral agreement made in 1988.

It follows that I should next consider what Staughton LJ described as the internal route. On the facts of this case, the internal route does not restrict the court to examining the express terms of the two written documents. Mr Audus and the Council agree that the arrangement between the parties in 1988 was not contained exclusively in those written documents but extended to terms agreed orally. Accordingly, to assess by the internal route the character of the arrangement, I must have regard to the written terms and also to the terms agreed orally. There was some debate as to how far one could go to admit oral evidence of the background circumstances but, in my judgment, it is not necessary to resolve any such question as the answer in the present case clearly emerges from considering the terms which are binding on the parties, whether expressed in writing or orally. I should add, for the avoidance of doubt, that no point was taken on the validity of the oral terms as a result of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.

Approaching the matter in accordance with the principle identified in Warnborough Limited v Garmite Limited, my assessment of the substance of the composite transaction in this case is that it went beyond a security transaction. I have already discussed the question of whether Mr and Mrs Bull were obliged to repay the sum of £12,375 and whether Mr Audus was entitled to pursue that sum. I have also discussed whether it was ever envisaged that Mr and Mrs Bull would redeem the two charges during their lifetime. In my judgment, the transaction in the present case was not in substance a loan nor a security for a loan. It was in substance a transaction whereby Mr Audus would buy the flat and have ownership of the flat but his rights were to be postponed to the rights of Mr and Mrs Bull to live in the flat for their lives.

Similarly, if I approach the question in accordance with the family arrangement cases as analysed in Kreglinger, I hold that although the transaction included the grant of a charge or charges the substance of the transaction was wider than that and that substance differed from a security transaction. This transaction was “something more complex” than a mortgage, to use the words of Lord Parker in Kreglinger.

Having assessed the substance of the transaction entered into in 1988, it follows that the equitable rules relied upon by the Council in this case do not apply.

If the equitable rules relied upon by the Council in this case do not apply then there is no basis on which I am asked to hold that the Council can disregard Mr Audus’ rights under the Supplemental Deed.

Mr Audus’ rights under the Supplemental Deed have priority to the Council’s rights under its statutory charge. Under Section 22 of the Health and Social Services and Social Security Adjudications Act 1983, the Council’s charge is on Mrs Bull’s interest in the land. At the relevant time Mrs Bull’s interest in the land was subject to the two charges in favour of Mr Audus. This is not a case where the statute gives the Council a right to charge “the land” or “the property” so that the charge is an effective charge on all interests in the land and has priority to other pre-existing charges, as was the case in Westminster City Council v Haymarket Publishing Limited [1981] 1 WLR677 (and the cases cited therein).

Furthermore, even if Mrs Bull had some claim in equity to set aside one or both of the charges of 19th December 1988, the Council accepts that such a claim is vested in Mrs Bull alone and the statutory charge does not entitle the Council to bring its own claim of that kind. In addition, the Council does not put forward any contention in reliance on consumer credit legislation.

---

Allied Irish Banks PLC -v- Heagney

 [2012] IEHC 138

Kearns P,

DECISION

I may state at the outset that I accept the defendant’s proposition that the bank became mortgagees in possession following the liquidation of Balmain Ltd and that from that time onwards Mr Luby became an agent of the bank. The evidence of his continued management of the asset is open to no other interpretation.

The duties of a mortgagee m possession are set out in Fisher Lightwood’s Law of Mortgage (Butterworths, 11th ed., 2002) at p 737:­

“A mortgagee in possession is not liable for waste as such. He is, however, under an equitable duty to give back the property uninjured on redemption. Thus the mortgagee must take reasonable care of the property: he will be liable to the mortgagor for negligence resulting in damage to the mortgaged property arising out of his possession of it. For example, he will be liable if mortgaged mines are flooded by improper working; if water pipes are negligently allowed to freeze; if mortgaged chattels are injured by negligent removal; or if loss is caused due to alterations injurious to the value of the property, such as the pulling down of cottages on an estate. As regards agricultural land under cultivation, a mortgagee is liable for damage caused by his own gross negligence. He will be liable if, after an order for possession has been made in his favour, he fails to take reasonable steps to protect the premises (for example, against vandals pending sale) and damage to the premises ensues…Any loss caused by deliberate injury to the property, or by the negligence of the mortgagee, will be charged on the accounts with interest, either as a capital loss or the lost rents or profits.”

In Holohan v Friends Provident and Century Life [1966] I.R. 1 O’Dalaigh C.J. at p. 18 cited with approval the passage from the judgment of Sir John Stuart in Robertson v. Norris [1 Giff. 421] where he outlined the duties as follows:-

“…this Court requires that he will exercise the power of sale in a provident way, with a due regard to the rights and interests of the mortgagor.”

O’Dalaigh C.J. also cited with approval the statement of Sir Stewart in Jenkin v. Jones [2 Giff. 99) that “the mortgagee must take all reasonable means to prevent any sacrifice of the property”

Continuing at p. 19 the Chief Justice, quoting and adopting the law as stated by Lindley L.J. in Kennedy v. De Trafford [1896] 1 Ch. 762, stated:-

“A mortgagee is not a trustee of a power of sale of the mortgagor at all; his right is to look after himself first. But he is not at liberty to look after his own interests alone, and it is not right, or proper, or legal, for him, either fraudulently, or wilfully, or recklessly, to sacrifice the property of the mortgagor: that is all.”

The relevant test was then outlined as follows by O’Dalaigh CJ at p. 21:-

“The trial judge, I am satisfied, applied too lenient a test in judging the conduct of the defendants. The question he should have asked was: Did the defendants act as a reasonable man would in selling the plaintiffs property?”

I have dwelt at considerable length on the evidence given that my findings on factual issues will determine whether or not there was any breach of the duty of care owed by either the plaintiff bank or its agent to the defendant in this case. Given that at different times Mr. Luby was both a receiver and an agent of the bank, I am treating the relevant duty as being the higher of the two insofar as they may differ. While I have not been referred to any statutory duty so stating, I am also taking it that Mr. Luby’s duty was to obtain the best price he could in the context of any sale, be it as receiver or agent of the bank.

I have come to the conclusion that there was no breach of duty by the plaintiff bank or Mr. Luby, either in his capacity as receiver or as agent of the bank. I do not accept Mr. Heagney’s contention that this hotel was in “perfect” condition in June 2009. I accept Mr. Luby’s evidence that he found evidence of damp on his walk- through of the premises the day after his appointment as receiver. Similar findings were reported from the would be purchasers who decided not to proceed further in negotiations with Mr Morrissey in late 2009. I find as a fact that these premises were in a less than good condition at the time of the commencement of Mr. Luby’s stewardship. This is hardly surprising, given that for some considerable time the premises had ceased to operate as a hotel and functioned on some sort of ad hoc basis at weekends only.

I am satisfied that following his appointment as receiver Mr. Luby carried out his duties in a responsible fashion. He secured the premises. He arranged for an inventory of contents to be prepared. He retained the services of Mr. Tony Morrissey to report on the possibility of a sale of the premises as a going concern. He explored and made preparations for rectifying the multiple problems associated with the licences in the hotel. Later, in his capacity as agent of the bank, he responded swiftly when notified of a number of trespass incidents in late 2009 and reacted similarly following the major trespass incident in December of that year with increased security measures in early 2010. Through the agency of Messrs. Morrisseys, he engaged with potential purchasers in 2009. He is not to be faulted because the state of the market combined with the reported condition of the hotel made a sale virtually impossible.

I am not satisfied that the bank failed to fund Mr. Luby adequately as has been contended by Mr. Heagney. He was provided with sufficient funds to carry out his work and has not complained that he was left short. By the time the hotel was bricked up and put “into mothballs” in 2010 a sum of €175,000 had been expended on receivership fees, security fees and repairs to the roof of the hotel. Against a backdrop where the bank were already out of pocket to the tune of €7 million, I do not believe it can seriously be suggested that they had an obligation to continue clocking up expenses under these various headings in the clear knowledge that they would never recover them, either from the defendant or in the context of any sale of the hotel premises.

Insofar as the breaking of the glass panels outside the hotel is concerned, I do feel that Mr. Heagney has a valid ground of complaint, because there was evidence to suggest that these panels could have been removed without being broken up. This was an act of waste perpetrated by the security company, but in the overall context it cannot avail Mr. Heagney in any meaningful way.

Nor can I hold that Mr. Luby was obliged to expend the sum of €125,000 in order to renew and reconfigure the licences attaching to the premises. It is clear from the evidence that a very considerable expenditure of this nature would have been necessary for the purpose of obtaining a certificate of compliance with fire regulations.

Equally I am satisfied that neither Mr. Luby or the bank were negligent in refusing to accept the offer of €1.4 million offered for the premises in May 2010. This offer was conditional on compliance with a number of conditions, including the resolution of the difficulties surrounding the alcohol licences. Having regard to the valuations so recently obtained by the plaintiff bank through the receiver, it might have been wiser to have accepted the offer given that the advice to this effect was given by both Mr. Morrissey and indeed with the view of Mr. Luby himself. However, I cannot possibly hold that the failure to sell for that figure was negligent or in breach of any duty of care in all the circumstances.

Accordingly, I am satisfied in an overall way that both the bank and the receiver did take reasonable care as regards the interests of Mr. Heagney in this case.

Quite apart from that conclusion, I also accept the submissions made by the bank to the effect that no allowance would exonerate the defendant from liability for the amount of his guarantee having regard to the amount of debt due by Balmain Ltd to Allied Irish Banks. Even were I to have held that the bank should have accepted the offer of €1.4 million for the premises made in May 2010, the debt would have remained close to €6 million after the costs associated with the receivership had been deducted.

Finally, I must also take into account that the terms of the guarantee specifically preclude any set off howsoever arising and I am compelled to accept as correct the plaintiff’s submissions to this effect.

In all the circumstances, the defendant has failed to make out the case elaborated in his defence and in circumstances where the amount covered by the guarantee is agreed, it seems to me I have no alternative but to give judgment for the plaintiff in the sum of €2.4 million.

 Silven Properties Ltd. & Anor v Royal Bank of Scotland Plc & Ors [2003] EWCA Civ 1409 (21 October 2003)

URL: http://www.bailii.org/ew/cases/EWCA/Civ/2003/1409.html

Cite as: [2004] 4 All ER 484, [2004] WLR 997, [2003] EWCA Civ 1409, [2004] 1 WLR 997 Lightman J

THE LAW

The Claimants’ submissions require an examination and comparison of the duties of mortgagees and receivers. We shall therefore first consider the relevant duties of mortgagees and then turn to the duties of receivers.

MORTGAGEES

A mortgagee has no duty at any time to exercise his powers as mortgagee to sell, to take possession or to appoint a receiver and preserve the security or its value or to realise his security. He is entitled to remain totally passive. If the mortgagee takes possession, he becomes the manager of the charged property: see Kendle v. Melsom [1998] 139 CLR 46 at 64 (High Court of Australia). He thereby assumes a duty to take reasonable care of the property secured: see Downsview Nominees Ltd v. First City Corp [1993] AC 295 (“Downsview”) at 315A per Lord Templeman; and this requires him to be active in protecting and exploiting the security, maximising the return, but without taking undue risks: see Palk v. Mortgage Services Funding Plc [1993] Ch 330 at 338A per Nicholls V-C (“Palk”).

A mortgagee “is not a trustee of the power of sale for the mortgagor”. This time-honoured expression can be traced back at least as far as Sir George Jessel MR in Nash v. Eads (1880) 25 Sol. J. 95. In default of provision to the contrary in the mortgage, the power is conferred upon the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed: see Cuckmere Brick Co v. Mutual Finance Limited [1971] Ch 949 (“Cuckmere”) at 969G. A mortgagee is at all times free to consult his own interests alone whether and when to exercise his power of sale. The most recent authoritative restatement of this principle is to be found in Raja v. Austin Gray [2002] EWCA Civ 1965 paragraph 95 per Peter Gibson LJ (“Raja”). The mortgagee’s decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagor: see China and South Sea Bank Limited v. Tan Soon Gin [1990] 1 AC 536. It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price: see Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 at 1355B.

The Claimants contend that a mortgagee is not entitled to ignore the fact that a short delay might result in a higher price. For this purpose they rely on certain obiter dicta of Lord Denning MR in Standard Chartered Bank v. Walker [1982] 1 WLR 1410 (“Standard Chartered”) at 1415G-H and 1416A. The mortgagee in that case, having obtained insufficient on the sale at auction of the property charged to recover the sum secured, applied for summary judgment against the mortgagor for that sum. The mortgagor resisted the application alleging that the mortgagee had sold at an undervalue on a variety of grounds one of which was that the sale took place at the wrong time of year. The Court of Appeal gave the mortgagor leave to defend on the ground that there was an arguable case that the sale had been negligently handled. It was common ground in that case that a mortgagee can choose his own time for sale: see Fox LJ at p.1418 F-G. Lord Denning accepted that there were dicta to this effect, but added that he did not think that this meant that the mortgagee could sell at the worst possible moment and that it was at least arguable that in choosing the time he must exercise a reasonable degree of care. The view expressed by Lord Denning cannot stand with the later authorities to which we have referred and which state quite categorically that the mortgagee is under no such duty of care to the mortgagor in respect of the timing of a sale and can act in his own interests in deciding whether and when he should exercise his power of sale.

The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value. There is no obligation to take any such pre-marketing steps to increase the value of the property as is suggested by the Claimants. The Claimants submitted that this principle could not stand with the decision of the Privy Council in McHugh v. Union Bank of Canada [1913] AC 299. Lord Moulton in that case (at p.312) held that, if a mortgagee does proceed with a sale of property which is unsaleable as it stands, a duty of care may be imposed on him when taking the necessary steps to render the mortgaged property saleable. The mortgage in that case was of horses, which the mortgagee needed to drive to market if he was to sell them. The mortgagee was held to owe to the mortgagor a duty to take proper care of them whilst driving them to market. The duty imposed on the mortgagee was to take care to preserve, not increase, the value of the security. The decision accordingly affords no support for the Claimants’ case

The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can “unlock” the potential for an increase in value of the property mortgaged (e.g. by an application for planning permission or the grant of a lease) and indeed (going further) he can proceed with such an application or grant. But he is likewise free at any time to halt his efforts and proceed instead immediately with a sale. By commencing on this path the mortgagee does not in any way preclude himself from calling a halt at will: he does not assume any such obligation of care to the mortgagor in respect of its continuance as the Claimants contend. If however the mortgagee is to seek to charge to the mortgagor the costs of the exercise which he has undertaken of obtaining planning permission or a lessee, subject to any applicable terms of the mortgage, the mortgagee may only be entitled to do so if he acted reasonably in incurring those costs and fairly balanced the costs of the exercise against the potential benefits taking fully into account the possibility that he might at any moment “pull the plug” on these efforts and the consequences for the mortgagor if he did so.

If the mortgagor requires protection in any of these respects, whether by imposing further duties on the mortgagee or limitations on his rights and powers, he must insist upon them when the bargain is made and upon the inclusion of protective provisions in the mortgage. In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and (save where statute otherwise requires) the court must give effect to them. The one method available to the mortgagor to prevent the mortgagee exercising the rights conferred upon him by the mortgagee is to redeem the mortgage. If he redeems, there can be no need or justification for recourse by the mortgagee to the power of sale to achieve repayment of the debt due to him secured by the mortgage.

When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain “the fair” or “the true market” value of or the ” proper price” for the mortgaged property at the date of the sale, and not (as the Claimants submitted) the date of the decision to sell. If the period of time between the dates of the decision to sell and of the sale is short, there may be no difference in value between the two dates and indeed in many (if not most cases) this may be readily assumed. But where there is a period of delay, the difference in date could prove significant. The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off his debt: Palk at 337-8 per Nicholls V-C. He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale. The remedy for breach of this equitable duty is not common law damages, but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption, not just for what he actually received, but for what he should have received: see Standard Chartered at 1416B.

In our judgment there can accordingly be no duty on the part of a mortgagee, as suggested by the Claimants, to postpone exercising the power of sale until after the further pursuit (let alone the outcome) of an application for planning permission or the grant of a lease of the mortgaged property, though the outcome of the application and the effect of the grant of the lease may be to increase the market value of the mortgaged property and price obtained on sale. A mortgagee is entitled to sell the property in the condition in which it stands without investing money or time in increasing its likely sale value. He is entitled to discontinue efforts already undertaken to increase their likely sale value in favour of such a sale. A mortgagee is under a duty to take reasonable care to obtain a sale price which reflects the added value available on the grant of planning permission and the grant of a lease of a vacant property and (as a means of achieving this end) to ensure that the potential is brought to the notice of prospective purchasers and accordingly taken into account in their offers: see Cuckmere. But that is the limit of his duty.

RECEIVERS

We turn to the question of the duties regarding mortgaged properties of receivers and in particular of receivers who under the term of the mortgage under which they are appointed are designated as agents of the mortgagor.

There is binding authority for the proposition that (again in default of agreement to the contrary) in the exercise of the power of sale receivers owe the same equitable duty to the mortgagor and others interested in the equity of redemption as is owed by the mortgagee: they are both obliged to take care to obtain the best price reasonably obtainable: see e.g. Cuckmere; Downsview; Yorkshire Bank plc v. Hall [1999] 1 WLR 1713 at 1728E-F; Medforth v. Blake [2000] Ch 86 at 98H-99A (“Medforth”); and Raja at paragraph 55. The critical issue however is whether the receiver (unlike the mortgagee) is under a duty of care in regard to the date of sale and to ensure that steps are taken (in particular in respect of planning and the grant of leases) to realise the full potential of the secured property before sale by obtaining permission or granting the leases.

In a number of respects it is clear that a receiver is in a very different position from a mortgagee. Whilst a mortgagee has no duty at any time to exercise his powers to enforce his security, a receiver has no right to remain passive if that course would be damaging to the interests of the mortgagor or mortgagee. In the absence of a provision to the contrary in the mortgage or his appointment, the receiver must be active in the protection and preservation of the charged property over which he is appointed: see Lightman & Moss, Law of Receivers and Administrators 3rd ed para 7.030. Thus if the mortgaged property is let, the receiver is duty bound to inspect the lease and, if the lease contains an upwards only rent review, to trigger that rent review in due time: see Knight v. Lawrence [1991] BCC 411. His management duties will ordinarily impose on him no general duty to exercise the power of sale: see Routestone Ltd v. Minories Finance Ltd [1997] BCC 180 at 187G. But a duty may arise if e.g. the goods are perishable and a failure to do so would cause loss to the mortgagee and mortgagor.

The critical issue raised is whether (as contended by the Claimants) the wider management duties imposed on a receiver (but not on a mortgagee) may require a receiver (and in particular a receiver appointed the agent of the mortgagor) to postpone a sale until after steps have been taken (in this case proceeding with an application for planning permission and with the grant of a lease) calculated to increase the price obtainable in a sum greater than the cost of taking those steps plus the sum representing accrued interest over the period whilst those steps are being taken.

The existence and scope of the duties of an agent, fiduciary and otherwise, depend on the terms on which they are acting: see Kelly v. Cooper [1993] AC 205 at 214. In the case of an agent appointed to manage his principal’s property on his behalf alone, general agency principles will apply. The agent will be obliged to pursue single-mindedly the interests of his principal and he will owe the duties to his principal for which the Claimants contend. This is reflected in the passage in the judgment of Millett J in the case of Re Charnley v. Davies Ltd (No 2) [1990] BCLC 760 cited by Patten J. The administrator as agent for the company owes a duty of care to the company in the choice of the time to sell and (by parity of reasoning) in the decision whether to take the appropriate available advantageous pre-marketing steps which are calculated to achieve the best price. The issue raised is whether receivers who are appointed by a mortgagee to act as agents of the mortgagor are in a like legal position and owe a like duty to the mortgagor.

The character and incidents of such receivers’ agency has been the subject of judicial and extra-judicial consideration. Mr Peter Millett QC (as he then was) in “The Conveyancing Powers of Receivers After Liquidation” (1977) 41 Conv. (NS) 83 at 88 wrote: “The so called ‘agency of the [receivers]’ is not a true agency, but merely a formula for making the company rather than the [mortgagee] liable for his acts”. But this agency of the receivers is a real one, even though it has some peculiar incidents: see Re Offshore Ventilation (1989) 5 BCC 160 at 166A-B. Its reality is reflected in the continuity after the appointment of receivers of the rateable occupation of the mortgagor through the agency of the receivers (see Ratford v. Northavon RDC [1987] QB 357) and in the absence of personal liability of the receivers for tax in respect of receipts which come to the hands of the receivers as agents: see In re Piacentini [2003] 3 WLR 354.

The peculiar incidents of the agency are significant. In particular: (1) the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver. In the words of Rigby LJ in Gaskell v. Gosling [1896] 1 QB 669 at 692: “For valuable consideration he has committed the management of his property to an attorney whose appointment he cannot interfere with”; (2) there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only: see Medforth and Raja; (3) the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver; (4) the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption. The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty. That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default; (5) not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid: see Medforth at p86; and (6) the receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee: see Re B Johnson & Co (Builders) Ltd [1953] Ch 634 per Jenkins LJ at 661 cited with approval by Lord Templeman in Downsview at 331B and at p646 per Evershed MR cited with approval by Scott V-C in Medforth at p95H to 96A. His powers of management are really ancillary to that duty: Gomba Holdings v. Homan [1986] 1 WLR 1301 at 1305 per Hoffmann J.

In the context of a relationship such at the present, which is no ordinary agency and is primarily a device to protect the mortgagee, general agency principles are of limited assistance in identifying the duties owed by the receiver to the mortgagor: see Gomba Holdings v. Homan [1986] 1 WLR 1301 at 1305 B-D (Hoffmann J); [1988] 1 WLR 1231 at 1233 D-H (Fox LJ). The core duty of the receiver to account to the mortgagor subsists, but (for example) the mortgagor has no unrestricted right of access to receivership documents. The mortgage confers upon the mortgagee a direct and indirect means of securing a sale in order to achieve repayment of his secured debt. The mortgagee can sell as mortgagee and the mortgagee can appoint a receiver who likewise can sell in the name of the mortgagor. Having regard to the fact that the receiver’s primary duty is to bring about a situation where the secured debt is repaid, as a matter of principle the receiver must be entitled (like the mortgagee) to sell the property in the condition in which it is in the same way as the mortgagee can and in particular without awaiting or effecting any increase in value or improvement in the property. This accords with the repeated statements in the authorities that the duties in respect of the exercise of the power of sale by mortgagees and receivers are the same and with the holding in a series of decisions at first instance that receivers are not obliged before sale to spend money on repairs (see Meftah v. Lloyds TSB Bank [2001] 2 All ER (Comm) 741 at 744 and 766 per Lawrence Collins J), to make the property more attractive before marketing it (Garland v. Ralph Pay & Ransom [1984] 2 EGLR 147 at 151 per Nicholls J) or to “work” an estate by refurbishing it (Routestone Ltd v. Minories Finance Ltd [1997] 1 EGLR 123 at 130D per Jacob J).

In summary, by accepting office as receivers of the Claimants’ properties the Receivers assumed a fiduciary duty of care to the Bank, the Claimants and all (if any) others interested in the equity of redemption. This accords with the statement of principle to this effect of Lord Browne-Wilkinson in Henderson v. Merrett Syndicates Limited [1995] 2 AC 145 at 205 E-H relied on by the Claimants. The appointment of the Receivers as agents of the Claimants having regard to the special character of the agency does not affect the scope or the content of the fiduciary duty. The scope or content of the duty must depend on and reflect the special nature of the relationship between the Bank, the Claimants and the Receivers arising under the terms of the mortgages and the appointments of the Receivers, and in particular the role of the Receivers in securing repayment of the secured debt and the primacy of their obligations in this regard to the Bank. These circumstances preclude the assumption by, or imposition on, the Receivers of the obligation to take the pre-marketing steps for which the Claimants contend in this action. Further no such obligation could arise in their case (any more than in the case of the Bank) from the steps which they took to investigate and (for a period) to proceed with applications for planning permission. The Receivers were at all times free (as was the Bank) to halt those steps and exercise their right to proceed with an immediate sale of the mortgaged properties as they were.

CONCLUSION

For these reasons this appeal should be dismissed.