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Wednesday 15th August 2012
Beverley Vara writes about a recent case, in which the Court of Appeal considered the implications of a failure to include a variation to the statutory power of sale.
16 August 2012
The issue
Under Section 101 of the Law of Property Act 1925, a lender protecting mortgage monies by way of charge by legal mortgage enjoys a statutory power of sale over the property securing the debt in order to recover the monies.
Such power arises automatically and can be varied, extended or excluded by express wording in the mortgage deed. In the absence of any such exclusion, modification or extension, the power of sale will arise when the mortgage monies fall due in accordance with agreed repayment terms.
The purchaser of a charged property from a chargee pursuant to the statutory power of sale is not obliged to enquire whether the power of sale was properly exercised.
In a recent case, the Court of Appeal considered the implications of a failure to include a variation to the statutory power of sale within the mortgage deed.
Background
Landmain Ltd (Landmain) is the registered proprietor of premises in London (the premises). Dancastle Associates Ltd (the mortgagee) provided a six-month bridging facility of £635,000 to Landmain pursuant to a facility agreement dated 30 July 2010. On the same date it executed a standard form charge over the premises.
The facility agreement purported to extend the statutory power of sale such that it was exercisable immediately upon execution of the charge. The charge did not contain this wording but was still registered at HM Land Registry. The facility agreement was not registered.
In December 2010, the mortgagee notified Landmain of its intention to exercise its power of sale over the Premises. Despite Landmain disputing this on the grounds of no default, the mortgagee sold the property to Cherry Tree Investments Ltd (the purchaser) in 2011.
The purchaser was subsequently unable to register its transfer at HM Land Registry and issued proceedings.
Appeal
At first instance, the judge found for the purchaser. Landmain appealed, arguing that the first instance judge was mistaken and that it should remain the registered proprietor.
Where, as here, the document under scrutiny was registered on a public register open to inspection by third parties, extrinsic evidence such as the facility agreement should be inadmissible.
The judge was therefore not entitled to have interpreted the charge as incorporating the terms of the facility agreement. According to the charge alone, the statutory power of sale existed unmodified such that an event of default on Landmain's part would be required before the mortgagee could exercise the power of sale.
Landmain also argued that the court was not entitled to correct the parties' mistake by contractual construction. The error related not to the language used in the charge, a necessary condition for construction, but instead the legal requirements of a charge.
Response
The purchaser responded, arguing that the first instance judgment was correct.
The facility agreement and the charge had been executed as part of a single transaction and the first instance judge was right to have read them together so as to incorporate the modified power of sale wording.
The fact that HM Land Registry was open to members of the public was irrelevant as the charge was only enforceable as between the two parties to it, who each knew both of the existence of the facility agreement and of its terms and intention.
With regards to the court's powers of interpretation, the purchaser argued that the parties had mistakenly failed to include the variation of the statutory power of sale into the charge, and that the court was permitted to correct this. In the alternative, the purchaser argued that the facility agreement and the charge should be viewed as a single document.
Decision
By a majority decision, the Court of Appeal upheld Landmain's appeal ruling that the statutory power of sale applied unamended and that Landmain remained the registered proprietor.
The public nature of the charge meant that extrinsic background evidence had a limited part to play. While the facility agreement was admissible as evidence, it would not affect the interpretation of the charge, which was a public document registered on a public register.
Third parties inspecting the charge were entitled to rely on it as drafted without any need to refer to any collateral document. Contractual construction was therefore inappropriate for mistakes in such documents.
The court did acknowledge that the purchaser could plead a claim for rectification (which it had not done in these proceedings).
Conclusion
Beverley Vara is a partner and head of real estate litigation at solicitors Allen & Overy LLP
The issue
Under Section 101 of the Law of Property Act 1925, a lender protecting mortgage monies by way of charge by legal mortgage enjoys a statutory power of sale over the property securing the debt in order to recover the monies.
Such power arises automatically and can be varied, extended or excluded by express wording in the mortgage deed. In the absence of any such exclusion, modification or extension, the power of sale will arise when the mortgage monies fall due in accordance with agreed repayment terms.
The purchaser of a charged property from a chargee pursuant to the statutory power of sale is not obliged to enquire whether the power of sale was properly exercised.
In a recent case, the Court of Appeal considered the implications of a failure to include a variation to the statutory power of sale within the mortgage deed.
Background
Landmain Ltd (Landmain) is the registered proprietor of premises in London (the premises). Dancastle Associates Ltd (the mortgagee) provided a six-month bridging facility of £635,000 to Landmain pursuant to a facility agreement dated 30 July 2010. On the same date it executed a standard form charge over the premises.
The facility agreement purported to extend the statutory power of sale such that it was exercisable immediately upon execution of the charge. The charge did not contain this wording but was still registered at HM Land Registry. The facility agreement was not registered.
In December 2010, the mortgagee notified Landmain of its intention to exercise its power of sale over the Premises. Despite Landmain disputing this on the grounds of no default, the mortgagee sold the property to Cherry Tree Investments Ltd (the purchaser) in 2011.
The purchaser was subsequently unable to register its transfer at HM Land Registry and issued proceedings.
Appeal
At first instance, the judge found for the purchaser. Landmain appealed, arguing that the first instance judge was mistaken and that it should remain the registered proprietor.
Where, as here, the document under scrutiny was registered on a public register open to inspection by third parties, extrinsic evidence such as the facility agreement should be inadmissible.
The judge was therefore not entitled to have interpreted the charge as incorporating the terms of the facility agreement. According to the charge alone, the statutory power of sale existed unmodified such that an event of default on Landmain's part would be required before the mortgagee could exercise the power of sale.
Landmain also argued that the court was not entitled to correct the parties' mistake by contractual construction. The error related not to the language used in the charge, a necessary condition for construction, but instead the legal requirements of a charge.
Response
The purchaser responded, arguing that the first instance judgment was correct.
The facility agreement and the charge had been executed as part of a single transaction and the first instance judge was right to have read them together so as to incorporate the modified power of sale wording.
The fact that HM Land Registry was open to members of the public was irrelevant as the charge was only enforceable as between the two parties to it, who each knew both of the existence of the facility agreement and of its terms and intention.
With regards to the court's powers of interpretation, the purchaser argued that the parties had mistakenly failed to include the variation of the statutory power of sale into the charge, and that the court was permitted to correct this. In the alternative, the purchaser argued that the facility agreement and the charge should be viewed as a single document.
Decision
By a majority decision, the Court of Appeal upheld Landmain's appeal ruling that the statutory power of sale applied unamended and that Landmain remained the registered proprietor.
The public nature of the charge meant that extrinsic background evidence had a limited part to play. While the facility agreement was admissible as evidence, it would not affect the interpretation of the charge, which was a public document registered on a public register.
Third parties inspecting the charge were entitled to rely on it as drafted without any need to refer to any collateral document. Contractual construction was therefore inappropriate for mistakes in such documents.
The court did acknowledge that the purchaser could plead a claim for rectification (which it had not done in these proceedings).
Conclusion
- This case is the first in which the courts have been asked to decide upon the admissibility of background evidence to help interpret a public document where a collateral document has not been made public
- The question has generated discussion at high levels, the Court of Appeal having overturned a first instance High Court judgment with a majority, not unanimous, decision
- Lenders should ensure the terms of a mortgage deed, and standard form charges, accurately reflect their agreement so as to protect their interests.
Beverley Vara is a partner and head of real estate litigation at solicitors Allen & Overy LLP