Monthly Update
October 2010
Case ReportAnfield (UK) Ltd v Bank of Scotland Plc [2010] EWHC 2374 (Ch)
Legal points
Mortgages - subrogation – lender’s negligence in failing to register mortgage - Appleyard
Facts
2000: Hx mortgage to S. Registered at HMLR.
2006: BoS mortgage to S which redeems Hx mortgage. BoS fail to register at HMLR.
2007: A obtains charging order against S. Protected by unilateral notice on register.
BoS claimed to be subrogated to Hx and rank in priority to A. The trial judge found that BoS was entitled to be subrogated to Hx and to be registered as proprietor of Hx charge to the extent of the monies advanced to redeem it.
A appealed, relying on dicta of Walton J in Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 to the effect that a lender who fails to obtain his desired security by reason of non-registration under the Land Registration Acts is not entitled to subrogation because he has obtained everything he bargained for, namely a charge in registrable form.
Held
In Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291 the Court of Appeal held that a lender does not obtain all that he bargained for if he bargained for a legal charge but by reason of non-registration only obtained an equitable charge. While Burston Finance may have been correctly decided on its facts, the Court of Appeal expressed severe doubts about the correctness of Walton J’s comments on the effect of non-registration under the Land Registration Acts.
Although strictly the court was not bound by the decision in Appleyard since Neuberger LJ expressly left open the question whether a lender’s negligent failure to protect or perfect its security should be treated differently, the Court of Appeal’s criticism nonetheless carried the strongest possible persuasive effect.
In addition, the Court of Appeal’s view was that the effect of Lord Hoffmann’s observation in Banque Financiere de la Cite SA v Parc (Battersea) Ltd [1999] 1 AC 221 at 235E-G as to the irrelevance of the lender’s negligence “was probably to impliedly disapprove the observations of Walton J in Burston Finance”. The lender’s carelessness in obtaining the desired security does not, by itself, defeat a claim for subrogation. The court is required to look at the question of the justice of the enrichment of the defendant. The enrichment is unjust because BoS funded the repayment of the Hx charge on the basis that it would obtain a legal charge. The fact that the borrower has performed the terms of the bargain between the lender and borrower does not matter.
Finally, to allow subrogation in these circumstances does not subvert the policy of the Land Registration Act 2002. The policy of the Act does not encroach on the principle of unjust enrichment. Although there may be potential harm to third party lenders who can demonstrate reliance on the register, the law is flexible enough to recognise that detriment might form the basis for withholding the remedy of subrogation for eg. by way change of position defence.
Appeal dismissed.
Comment
This case is undoubtedly correct in law although the judge’s reasoning is fairly circuitous. Negligence in taking or perfecting security is almost invariably the reason why lenders resort to subrogation. Subrogation is an equitable restitutionary remedy which turns on unjust enrichment:
(1) Was D enriched at C’s expense?
(2) Was the enrichment unjust?
(3) Are there any policy reasons to deny C a remedy?
BanqueFinanciere de la Cite v Parc (Battersea) Ltd[1999] 1 AC 221 per Lord Hoffmann at p 234D
The unjust enrichment in this case (although it is not particularly clear from the judgment) is the prospect of A’s charging order gaining priority as a result of BoS discharging the Hx charge.
It remains to be seen whether there is any mileage in the judge’s comment that third party lenders who have suffered detriment by relying on the conclusive nature of the register might be able to raise a change of position defence. While this may figure in the court’s overall assessment of whether the enrichment is unjust, it doesn’t get round the fact that someone will have been enriched at the later lender’s expense, thereby putting the later lender in the driving seat.
Practitioners are reminded of the significance and flexibility of subrogation in the context of re-mortgages.
Case ReportChelsea Building Society v Nash
(unrep) Court of Appeal 19/10/2010
Legal points
Mortgage - shortfall debt - joint debtors - accord and satisfaction – preservation of rights against co-debtor
Facts
H and W purchased a property with a joint mortgage from CBS. H and W separated. Arrears accrued and after obtaining an order for possession, CBS sold the property leaving a shortfall debt of £54,040.
CBS’s practice was to divide the debt equally between joint debtors. They negotiated with H alone and accepted £5,000 in full and final settlement. They then pursued W on the basis that she remained liable for the other half of the debt.
W argued that they had accepted £5,000 in full and final settlement of the entire debt and that she was therefore discharged from further liability.
The judge held that there had been no agreement to accept £5,000 in full and final settlement of the whole debt and gave judgment to CBS in the sum of £27,020.
W appealed.
Held
The appeal would be allowed.
Where one co-debtor was released by accord and satisfaction, all co-debtors would be released unless the creditor expressly (or impliedly) reserved its rights against the co-debtors.
The judge should have determined two questions of fact:
(1) Whether an express reservation had been made; if not
(2) Whether it was necessary by virtue of the surrounding circumstances to imply such a reservation.
On the facts, there was no such reservation.
In determining whether there had been a positive agreement between H and CBS that W's liability was to be discharged, the judge had reversed the burden of proof from CBS to W.
Comment
This is an important decision for lenders pursuing joint shortfall debts.
In simple terms, ‘accord and satisfaction’ involves the purchase of a release from an obligation – the accord is the agreement by which the obligation is discharged; the satisfaction is the consideration which makes the agreement operative (Halsbury’s Laws, Vol 9(1), para 1043). Whether there has been an accord in any particular case is a question of fact. There may be a valid oral accord or an accord in writing, of a contract made by deed.
The practice of ‘splitting’ joint shortfall debts, while convenient, may lead to complications. A lender who wishes to settle with one co-debtor should expressly reserve his right to pursue the other co-debtor for the balance.