Paragon Finance Plc v Pender & Anor

This is an appeal by Mr and Mrs Pender, the defendants in a possession action brought against them by Paragon Finance plc (“Paragon”) as chargee under a Legal Charge (“the Legal Charge”) dated 1 August 1989 of a freehold property at 29 Knightswood Close, Broadfields Estate, Edgeware, Middlesex HA9 8FR (“the Property”).

Mr and Mrs Pender have been the registered proprietors of the Property since 1985; Paragon has been the registered proprietor of the Legal Charge since its registration 16 August 1989.

On 5 January 1995 Paragon obtained a possession order in respect of the Property. For reasons which are not material to the present appeal the possession order was not enforced, and on 21 January 2002 (some seven years later) Mr and Mrs Pender applied to set it aside. They also sought permission to appeal against the possession order out of time. On 25 November 2003 HHJ Mayer, in the Barnet County Court, dismissed both applications. Mr and Mrs Pender applied to the High Court for permission to appeal against Judge Mayer’s dismissal of the application to set aside the possession order (no appeal lay from the judge’s dismissal of the application for permission to appeal against the possession order).

The application for permission to appeal against Judge Mayer’s dismissal of the application to set aside the possession order was listed before Peter Smith J, with the substantive appeal to follow were permission to be granted. Peter Smith J accordingly heard full argument. In the event, by his order dated 25 November 2003 he granted limited permission to appeal but went on to dismiss the substantive appeal.

Mr and Mrs Pender sought permission to appeal to this court against Peter Smith J’s order. Permission for a second appeal was refused on paper by Arden LJ but limited permission was granted by Jacob LJ at an oral hearing on 29 July 2004.

The Property was formerly a Council house, of which Mr and Mrs Pender were tenants. They bought the Property in 1985 for £29,000 under the ‘right to buy’ scheme. The purchase was financed by a loan of £17,500 from the Halifax Building Society (“the Halifax”) secured by a first charge on the Property (“the Halifax Charge”). In May 1989 they applied to Paragon (under its then name The National Home Loans Corporation plc) for a loan of £75,000 to enable them to carry out works of repair and renovation to the Property.

Paragon offered Mr and Mrs Pender a loan of £75,000 repayable over 25 years on an interest only basis, to be secured by a legal charge (the Legal Charge). The offer was based on a valuation of the Property at £100,000, and was expressed to be subject to the special conditions set out in the offer and to Paragon’s standard general conditions. The standard general conditions then current were Paragon’s Mortgage Conditions 1988 (“the 1998 Conditions”).

The offer stated that the rate of interest was variable, and that the current rate was 12.99 per cent. Special condition 7 provided that the rate of interest would be fixed for the first three years, and provision was also made for a three-year deferral of part of the monthly interest payments. Condition 8.1 of the 1988 Conditions provided that the interest rate was variable from time to time in accordance with the relevant conditions.

The loan transaction was completed (subject to registration of the Legal Charge) on 1 August 1989. Part of the loan was applied in redeeming the Halifax charge; the balance was paid directly to Mr and Mrs Pender. The Legal Charge was registered on 16 August 1989, with Paragon as its proprietor.

The Legal Charge incorporated the 1998 Conditions, but by a Deed of Variation dated 11 July 1990 it was varied by substituting Paragon’s 1990 Mortgage Conditions (“the 1990 Conditions”) for the 1988 Conditions.

Condition 3.3 of the 1990 Conditions is in the following terms (so far as material):

“Interest on any Loan shall be charged at such rate as the Company shall from time to time determine …. and may accordingly be increased or decreased by the Company at any time and with effect from such date or dates as the Company shall determine ….”

Condition 7 of the 1990 Conditions provides that the secured debt is to become due, and that the power of sale is to arise, 28 days after the date of the Legal Charge. Condition 7.3 of the 1990 Conditions provides that the whole of the secured debt shall become due and payable if (among other things) the borrower fails to make two monthly payments in whole or in part. Condition 9.6 of the 1990 Conditions contains a power for Paragon, at its absolute discretion and without the consent of or notice to Mr and Mrs Pender, to transfer the Legal Charge to any third party: it is in the following terms (so far as material):

“Without prejudice to any rights of the Company whether at common law by statute or otherwise the Company may at its absolute discretion without the consent of or notice to the Borrower… assign or transfer all or any of its rights and benefits and/or transfer all or any of its obligations embodied in the Mortgage together with any securities of other property of the Borrower charged to or held by the Company in support thereof to any person or persons whatsoever. The Borrower… agree[s] that to the extent that the Company agrees to assign or transfer (whether at common law or in equity) its rights and benefits to any person they shall be bound to any such assignee in like manner and to like extent as they are bound to the Company under the mortgage and to the extent that the Company shall be released from further obligations towards them which differ from such released obligations only so far as such assumed obligations are owed by and constituted by claims against such transferee assignee and not the Company. The Borrower… hereby irrevocably consents to any such assignment or transfer.”

Since early 1987 Paragon has been party to what are known as ‘securitisation’ arrangements. Such arrangements typically involve (and the instant case is a typical case) the transfer by way of sale of a portfolio of mortgages (I use the word mortgages to include charges) to a ‘special purpose vehicle’ (SPV) in consideration of a sum which is funded by the issue by the SPV of listed bonds carrying an entitlement to interest at a floating rate. In order to attract investors the bonds must carry a credit-rating which is acceptable to the market, for example a rating from a well-known credit agency such as Standard & Poor’s. Interest payable on the bonds is in turn funded from the income generated by the mortgages transferred. The sale is non-recourse, in that the transferor is not liable for losses incurred by holders of the bonds. The transfer of the mortgages may or may not be completed by the vesting of the legal title in the SPV. In the case of a mortgage of registered land, vesting of the legal title will occur on the registration of the SPV as proprietor of the mortgage; in the case of a mortgage of unregistered land, vesting of the legal title will occur on the execution of an appropriate deed of transfer.

As Dr Eilis Ferran MA (presently Reader in Corporate Law and Financial Regulation at Cambridge University) points out in a book entitled ‘Mortgage Securitisation – Legal Aspects’ (Butterworths, 1992) to which we were helpfully referred by Mr Ali Malek QC (for Paragon) in the course of argument, if the transfer of the mortgages is not completed by registration, the SPV acquires an equitable title to the mortgage but the transferor retains the legal title, albeit as trustee for the SPV (assuming, as will usually be the case, that the full consideration has been paid). Dr Ferran goes on to point out that, for reasons essentially of administrative convenience and cost, transfers by way of securitisation are usually left uncompleted, but with provision being made for completion in certain specified circumstances, e.g. if the transferor persistently defaults on its obligations under the securitisation arrangements. Typically, such obligations will be contained in an ‘administration agreement’ between the transferor and the SPV. These general observations about securitisation (for which I am indebted principally to Dr Ferran’s book) are not the subject of dispute in the instant case.

I return, then, to the instant case. Three administration agreements have been disclosed by Paragon, as being the administration agreements which relate to the Legal Charge. The first such agreement is dated 9 March 1990. This was the agreement which was in force at the date of the possession order. The later administration agreements are dated 30 June 1997 and 29 May 2002 respectively; thus they post-date the possession order. It has not been suggested that, for the purposes of the present appeal, there is any difference of substance between the three agreements. For reasons which will appear, I shall have to revert to these agreements later in this judgment.

By 1994, Mr and Mrs Pender had fallen into arrears with monthly payments under the Legal Charge. Included in the evidence before the court are letters from Paragon to Mr and Mrs Pender about the arrears which are signed on behalf of Paragon “As administrator for and on behalf of CMS No 3 plc” (i.e. for and on behalf of the SPV). At the time, no query was raised about this by or on behalf of Mr and Mrs Pender.

On 10 February 1994 Paragon made formal demand for payment of all sums due. The demand was not met. On 22 April 1994 Paragon commenced the present action, claiming possession of the Property and payment of the sums due. Following a number of interlocutory hearings and adjournments, a possession order was eventually made on 5 January 1995, subject to the proviso that it was not to be enforced without the leave of the court.

Following the making of the possession order, Mr and Mrs Pender made regular monthly payments under the Legal Charge, but in consistently lesser sums than the amounts due, with the result that the arrears continued to rise. Since May 2000, however, no further payments have been made. As at October 2004 the arrears amounted to some £130,000; as of today they exceed £280,000, including costs.

On 22 July 2000 Paragon issued a warrant for possession. This prompted Mr and Mrs Pender to apply for a stay of the possession order, pending the provision by Paragon of full details of the transactions on the mortgage account. A stay was granted, and subsequently extended.

Mr and Mrs Pender’s application to set aside the possession order was not made until 21 January 2002. The grounds for the application (at that stage) were: (a) misrepresentation (Mr and Mrs Pender’s allegation being that they were misled about interest rates by the mortgage broker, a Mr McPherson), (b) breach of an implied term of the Legal Charge; (c) an alleged failure by Paragon to provide a mortgage protection policy; and (d) a challenge to the calculation of the arrears.

After a number of directions hearings and adjournments, the application came before Judge Mayer in the Barnet County Court on 30 January 2003.

In paragraph 36 of his judgment, Peter Smith J records that as at 31 December 2002 (in effect, as at the date of the hearing before Judge Mayer) the total amount outstanding under the Legal Charge was in excess of £148,000, making no allowance for unbilled litigation costs of some £78,000.

Before Judge Mayer, Mr and Mrs Pender (who were represented by Mr Sheridan of counsel) relied on a witness statement made by themselves jointly and a witness statement made by Mr McPherson. Exhibited to their joint witness statement was a report dated 6 November 2000 by a Mr Graham Bolderson, the Technical Director of an organisation called MortgagecheK. Appended to that report was a schedule of setting out, for the purposes of comparison, the interest rates charged by Paragon during the currency of the loan and interest rates charged by the Halifax over the same period. In the body of the report, Mr Bolderson expressed the view that, whilst the initial rate of interest charged by Paragon was “very competitive”, there was strong evidence that Paragon had abused its power to vary the rate of interest, to the detriment of Mr and Mrs Pender.

In a careful and detailed judgment, Judge Mayer concluded that the court had no power to set aside the possession order, and that the right procedural course for Mr and Mrs Pender to have taken would have been to appeal it. However, for the sake of completeness and lest that conclusion be wrong, she went on to address the various grounds on which Mr and Mrs Pender sought to set aside the possession order. In the result, she rejected each of them. Mr and Mrs Pender duly applied for permission to appeal to the High Court.

At that point, Mr and Mrs Pender retained new solicitors: Messrs Joseph Aaron & Co. Shortly thereafter, the solicitors served a witness statement by Mr Joseph Aaron in which he sought to raise three further issues.

In the first place, he contended that as at 5 January 1995 (the date of the possession order) Paragon had no title to sue for possession of the Property since by virtue of the administration agreements the right to take such proceedings was, as at that date, vested not in Paragon but in the SPV. I will refer to this issue as “the title to sue issue”.

Secondly, Mr Aaron contended that in any event as at 5 January 1995 Mr and Pender were not in default under the Legal Charge in that in exercising its power under condition 3.3 of the 1990 Conditions to vary the rates of interest charged from time to time Paragon breached its implied obligation under the Legal Charge not to exercise such power improperly or capriciously; and that if interest charged in breach of that implied obligation is left out of account no event of default had occurred prior to 5 January 1995. In support of the existence of such an implied obligation, reliance was placed on the decision of this court in Paragon Finance v. Nash and Staunton [2002] 1 WLR 685 (“Nash and Staunton”). I will refer to this issue as “the implied obligation issue”.

Thirdly, Mr Aaron contended that the Legal Charge represents an “extortionate credit bargain” for the purposes of the Consumer Credit Act 1974 (“the 1974 Act”) in that at the date when the Legal Charge was granted Paragon’s power to vary the rate of interest was fettered by the terms of the securitisation (i.e. by the terms of successive administration agreements to which Paragon was a party and which related to the Legal Charge); and that Paragon failed to disclose the existence of that fetter to Mr and Mrs Pender. I will refer to this issue as “the extortionate credit bargain issue”.

In his witness statement, Mr Aaron stated that these issues had been raised in a number of other pending actions between Paragon and borrowers for whom his firm acted, and he exhibited to his witness statement an expert report by Mr Francis Higgins, whose experience lies in building society management. Mr Higgins’ report had been provided for the borrower in one of the other actions, namely a Mr Adrian Bradshaw. (I should note at this stage that it has not been suggested by Paragon that, for the purposes of the issues raised on this appeal, there is any material difference between the position of Mr Bradshaw under his mortgage and that of Mr and Mrs Pender under the Legal Charge; nor has it been suggested that the terms of the administration agreement relating to Mr Bradshaw’s mortgage is in any material respect different from the terms of the 1990 Agreement.)

Before turning to Mr Higgins’ report, it is convenient to refer at this point to the relevant administration agreements.

Since, as noted earlier, no reliance has been placed by either side on this appeal on any suggested difference of substance between the three administration agreements which are before the court, I shall for convenience refer only to the 2002 Agreement.

The parties to the 2002 Agreement include Paragon (defined as “PFPLC”), the SPV (defined as “the Issuer”), a Jersey company associated with Paragon called Homeloans (Jersey) Ltd (defined as “HLJ”) and Citicorp Trustee Company Ltd (defined as “the Trustee”). The 2002 Agreement recites that Paragon carries on the business of managing and administering (among other things) mortgage portfolios; that HLJ has agreed to sell certain mortgages granted by individual borrowers; and that “PFPLC is willing to provide administration and management services to the Issuer and the Trustee”.

In clause 1 of the 2002 Agreement ‘Administrator’ is defined as meaning Paragon in its capacity as the provider of the services set out in Schedule 1 (which lists a large number of services of an administrative or clerical nature relating to the securitisation). The expression ‘Minimum Mortgage Rate’ is defined as the rate determined in accordance with clause 12.5 and Schedule 3. Clause 12.5 provides merely that the rate is to be calculated in accordance with Schedule 3. Schedule 3 contains a complicated mathematical formula which I shall not attempt to explain. ‘Mortgages’ is defined as, in effect, the mortgages the subject of the securitisation. ‘Notes’ means the bonds issued by the Issuer. Clause 2 contains the appointment of Paragon as administrator (as defined). Clause 2.1 provides (so far as material) as follows:

“2.1

… the Issuer, HLJ, PFPLC and the Trustee … each hereby appoints the Administrator as its lawful agent in its name and on its behalf to exercise their respective rights, powers and discretions, and to perform their respective duties under the Mortgages.”

Clause 4 of the 2002 Agreement concerns the services to be provided by Paragon as administrator. Clause 4.4.2 provides (so far as material) that prior to the occurrence of any of seven events there specified:

“… the Administrator shall not be obliged to and shall not, but thereafter shall forthwith upon demand by the Issuer … (i) … execute and deliver Transfers of the Mortgages to the Issuer, (ii) submit for registration at HM Land Registry … the relevant Transfers … and (iv) give notice to each relevant Borrower .. of (1) the transfer of his or her Mortgage … to the Issuer …”

The seven specified events include (at (a)) the service by the Trustee on the Issuer of a notice enforcing the Issuer’s obligations under the Notes; and (at (e)) the subcharge to be taken by the Trustee as security for such obligations “being in jeopardy in the reasonable opinion of the Trustee and the Trustee deciding to take such action to reduce materially such jeopardy”. In essence, therefore, the obligation of the Administrator (Paragon) to execute formal Transfers of the mortgages to the Issuer (the SPV) – thereby enabling the Issuer to be registered as proprietor, and hence the legal owner, of the mortgages – arises in the event of actual or threatened default by the Issuer on its obligations to the Trustee, with the consequent prospect of the Trustee enforcing its subcharge against the Issuer.

Clause 5 of the 2002 Agreement is headed “Mortgage Rate”. Clause 5.1 is in the following terms (so far as material):

“5.1

… HLJ, the Issuer and the Trustee grant the Administrator full right, liberty and authority from time to time, in accordance with the relevant Mortgage Conditions, to determine and set the rate or rates of interest chargeable to Borrowers … HLJ, the Issuer and the Trustee shall be bound by any rate or rates of interest set in accordance with this Agreement.”

Clause 5.3.1 provides as follows (so far as material):

“The Administrator covenants with and undertakes to the Issuer and the Trustee that until all the Notes have been redeemed in full and all interest thereon has been paid, it will not set such rate or rates of interest chargeable to Borrowers in respect of the Mortgages or permit them to remain in effect at any time at such a level as would result in the weighted average yield on the Mortgages … being less than the then current Minimum Mortgage Rate …”

Clause 6.4 is headed “Enforcement of Mortgages”. Subclause 6.4.1(b) provides as follows (so far as material):

“(b)

it is acknowledged by the Issuer and the Trustee that mortgage lenders generally exercise discretion in pursuing their respective enforcement procedures and that [in relation to the enforcement of the mortgages] the Administrator may exercise such discretion as would be exercised by a reasonably prudent lender …”

There is an issue between the parties on this appeal as to whether clause 5.3.1 was ever engaged in the instant case. Mr Hugo Page QC (for Mr and Mrs Pender) asserts that it was; Mr Malek asserts that it was not. Since there is no evidence either way, this is an issue which must remain unresolved.

I can now turn to Mr Higgins’ report.

In paragraph 11 of his report, Mr Higgins asserts that the administration agreement relating to Mr Bradshaw’s mortgage gives Paragon only “nominal authority to set interest rates for borrowers”, and that “in reality” such interest rates reflect the credit rating on the bonds set by Standard and Poor’s.

Mr Higgins goes on to make a number of serious criticisms of Paragon, directed principally at its strategy and motives in setting interest rates.

Thus, in paragraph 13.1 of his report he asserts that from about 1990 Paragon’s primary purpose in setting interest rates was to avoid insolvency by accelerating the level of redemptions, and in the process “to drive away as many as possible of its borrowers” (an assertion which he repeats in paragraph 19.1 of his report).

In paragraph 15 and 15.1 of his report, Mr Higgins says this:

“15.

In the annual review by the Chief Executive dated 12^th December 1995, [Paragon] admits to charging pre-1991 borrowers in ‘the old book’ higher rates, claiming reasons of arrears, negative equity, cost of administration and ‘the risk of the portfolio’. I cannot think of any other home loans lender attempting to operate such unreasonable, non-contractual and retrospective conditions. [Paragon’s] charging policy vis-à-vis these existing borrowers is neither fair, nor honest nor in good faith. Indeed it is arbitrary and unreasonable – unless it had express powers in its deed and mortgage conditions – which is extremely doubtful.

15.1

[Paragon] borrowers between 1985 and 1991 became an underclass in 1994/5 when ‘Homeloans Direct’ (HLD) became [Paragon’s] new mortgage lending arm and were discriminated against with higher interest rates on similar loans in ‘the residential first mortgage market’, made by HLD.”

In paragraph 15.15 of his report, Mr Higgins says this:

“I believe that my evidence supports, that in certain of the [administration agreements] … [Paragon] voluntarily, knowingly and recklessly entered into contractual obligations with its investors, disregarding vital terms of its originating contract with all the [Paragon] borrowers affected. No other [member of the Council of Mortgage Lenders], so far as I can tell, so deliberately destroyed the credit worthiness of its own borrowers.”

In paragraph 16.8(b) of his report, Mr Higgins asserts that in setting Mr Bradshaw’s interest rates Paragon abused its discretionary power by exercising it for a “collateral” and “improper” purpose, viz:

“… to drastically foreshorten the agreed contractual 30 year term of his mortgage, in order that [Paragon] could repay its creditors/funders in accordance with the much shorter contractual terms set out in a succession of [securitisation agreements]”.

Finally, for present purposes, in paragraph 19.5(d)(i) of his report Mr Higgins accuses Paragon of having thrust unfair burdens on the backs of borrowers in the ‘old book’ (i.e. existing borrowers) in order to cross-subsidise the more reasonable rates of interest offered to new borrowers.

In response to Mr Higgins’ report, Paragon served a copy of the report of its own expert in Mr Bradshaw’s case, namely Mr Adrian Bloomfield. Mr Bloomfield’s experience lies in the banking and mortgage industry. In his report, he rejects Mr Bolderson’s conclusions based on a comparison of Paragon’s rates of interest with those of the Halifax, and he rejects all Mr Higgins’ criticisms of Paragon.

Turning first to the general background to Mr Bradshaw’s case, in paragraph 5.2.22 of his report Mr Bloomfield describes Mr Bradshaw’s application for a loan as:

“…. one that a centralised lender, such as [Paragon], would be more prepared to consider bearing in mind the streamlined level of checking and investigation they undertook, and the higher risk profile they were prepared to accept.”

He goes on to assert (in paragraph 5.2.23) that a “traditional” lender would not have considered lending on the basis of self-certification (i.e. where the offer of a loan is based upon an unverified assertion of the applicant’s income) and of deferred interest (causing an inevitable increase in the amount of the loan over the period of deferment), both of which elements are present in Mr Bradshaw’s case as they are in the instant case. He accordingly concludes that, even at the outset, Mr Bradshaw’s mortgage would have been considered “a higher than ‘standard’ risk”.

As to the factual history in Mr Bradshaw’s case, Mr Bloomfield concludes that Paragon was “quite patient” with Mr Bradshaw (and the same can undoubtedly be said in the instant case, as the background history which I have already summarised demonstrates).

Turning next to Mr Bolderson’s report, and to the question of interest rates, Mr Bloomfield asserts (in paragraph 6 of his report) that a comparison between the rates set by Paragon and those set by the Halifax is not a proper or appropriate comparison, given the risk profile of Paragon’s mortgage portfolio.

As to securitisation generally, Mr Bloomfield says this (in paragraph 7.4 of his report):

“In my view and experience this attractive, relatively inexpensive and sound method of funding was part of the fabric of [Paragon] and a basic operational procedure and opportunity for a modern lending institution such as [Paragon].”

Turning to the criticisms of Paragon’s interest rates made by Mr Higgins in his report, Mr Bloomfield concludes (in paragraph 7.15) that Paragon’s interest rates were not the consequence of any unusually high cost of funds or of the securitisation of its assets. He continues:

“… [Paragon] accepts that it set interest rates with regard to its own financial situation and its own commercial interests and having regard to the performance of its loans and the cost of managing them and the underlying risk of loss arising from shortfalls on them.”

Reverting to the ‘old book’ borrowers, Mr Bloomfield says this (in paragraph 7.26 of his report):

“[Paragon] was affected more than most others by the recession of the early 1990s because all their loans were vulnerable as they were written in the 1980s. It was inevitable [that] their arrears and repossessions would be a higher proportion of their book than others who also had older and safer loans.”

Turning to Mr Higgins’ criticisms based on Paragon’s securitisation arrangements, Mr Bloomfield, echoing paragraph 7.4 of his report, describes securitisation (in paragraph 7.45) as “a sensible and relatively inexpensive method of fund raising” which has been adopted and used by all major lenders, including banks. As to the specific securitisation arrangements into which Paragon entered, Mr Bloomfield says this (in paragraphs 8.6 and 8.7):

“8.6

[Paragon] entered into securitisation arrangements. In my view this was a sensible course of action and resulted in [Paragon] obtaining lower matched funding with acceptable covenants. The terms and conditions of the mortgage they had granted to Mr Bradshaw remained totally unaffected. [Paragon] maintained the right (and indeed the obligation) to set interest rates as they wished and saw fit, apart from one requirement which was to set rates to cover a minimum ‘threshold rate’ to be paid to investors of [sic] the loan notes. The ‘threshold rate’ was never triggered and to in the context of the dispute between [Paragon] and Mr Bradshaw it is irrelevant.

8.7

In my opinion the claim is simply incorrect that [Paragon] transferred to others the right to set or materially influence their interest rate setting decisions.”

By their amended grounds of appeal from Judge Mayer’s order, Mr and Mrs Pender sought permission from Peter Smith J to raise the following issues:

At the hearing before Peter Smith J issue (5) (the human rights issue) was not pursued.

The judge concluded that the issues as to misrepresentation and breach of contract which had been argued before Judge Mayer had no real prospect of success, and he accordingly refused permission to appeal on those issues.

He further concluded that although Judge Mayer had erred in holding that she had no jurisdiction to set aside the possession order, she had nevertheless reached the right conclusion.

However, as noted earlier, after hearing full argument on the new issues raised in Mr Aaron’s witness statement (issues (1), (2) and (3) above) he granted permission to appeal on those issues.

The judge addressed the title to sue issue (issue (1)) in paragraphs 100 to 147 of his judgment. In paragraph 100 he described Mr and Mrs Pender’s stance on this issue as “both technical and unmeritorious”. In paragraph 101 he said that he could not see why the proceedings could not, if necessary, be amended pursuant to CPR 19.2(2)(a) to substitute the correct claimant. In paragraph 102 he said this:

“If the party’s need to be joined is purely technical i.e. the arrangements mean that the Claimants are not the correct parties to sue for the debt, it is proper that the correctly constituted party is joined to ensure that there is debt recovery provided the Defendants suffer no disadvantage by that. No actual disadvantage so far as I can see has been suffered, even if the Defendants’ case on Title to Sue is correct.”

The judge nevertheless went on to address the arguments advanced by Mr Page on the title to sue issue. He turned first to Mr Page’s argument based on section 114(1) of the Law of Property Act 1925. Section 114(1) provides as follows:

“114 Transfers of mortgages

(1). A deed executed by a mortgagee purporting to transfer his mortgage or the benefit thereof shall, unless a contrary intention is therein expressed, and subject to any provisions therein contained, operate to transfer to the transferee-

(a)

the right to demand, sue for, recover, and give receipts for, the mortgage money or the unpaid part thereof, and the interest then due, if any, and thenceforth to become due thereon; and

(b)

the benefit of all securities for the same, and the benefit of and the right to sue on all covenants with the mortgagee, and the right to exercise all powers of the mortgagee; and

(c)

all the estate and interest in the mortgaged property then vested in the mortgagee subject to redemption or cesser, but as to such estate and interest subject to the right of redemption then subsisting.”

Mr Page had submitted (as he has submitted to us) that the effect of section 114(1) in the instant case is that, by virtue of the administration agreements, the SPV became an equitable mortgagee with all the powers and rights exercisable by the chargee under the Legal Charge, including the right to take proceedings to recover possession of the Property; and hence that the SPV, and not Paragon, was the proper claimant in the action. However, in paragraph 121 of his judgment the judge pointed out that, in contrast to the position in relation to unregistered land, by virtue of section 33 of the Land Registration Act 1925 an executed transfer of registered land operates only in equity until it is registered. He accordingly concluded that in order for section 114 to be fully operative in the instant case, the SPV needed to be registered as proprietor of the Legal Charge.

The judge then referred to sections 33 and 34 of the Land Registration Act 1925, which provide as follows (so far as material):

“33 Transfer of charges

(1)

The proprietor of any registered charge may, in the prescribed manner, transfer the charge to another person as proprietor

(2)

The transfer shall be completed by the registrar entering on the register the transferee as proprietor of the charge transferred, but the transferor shall be deemed to remain proprietor of the charge until the name of the transferee is entered on the register in respect thereof.

(3)

A registered transferee for valuable consideration of a charge and his successors in title shall not be affected by any irregularity or invalidity in the original charge itself of which the transferee did not have notice when it was transferred to him.

(4)

On registration of any transfer of a charge, the term or subterm (if any) granted expressly or by implication by the charge or any deed of alteration shall, without any conveyance or assignment and notwithstanding anything to the contrary in the transfer or any other instrument, vest in the proprietor for the time being of the charge.

(5)

Subject to any entry to the contrary on the register, the vesting of any term or subterm in accordance with this section in the proprietor of a charge shall, subject to the right of redemption, have the same effect as if such proprietor had been registered as the transferee for valuable consideration of the term or subterm.

34

Powers of proprietor of charge

(1)

Subject to any entry on the register to the contrary, the proprietor of a charge shall have and may exercise all the powers conferred by law on the owner of a legal mortgage.

…”

The judge went on to conclude (in paragraph 130 of his judgment) that in the context of registered land section 114 of the Law of Property Act 1925 does not have the immediate effect which it would have in the case of unregistered land; and (in paragraph 133 of his judgment) that section 114 takes effect in the case of registered land subject to the statutory regime contained in the Land Registration Act 1925. In any event, in paragraphs 144 and 146 he concluded that under the terms of the administration Paragon was clearly intended to retain the power to enforce the charges and to control them, and that there was in any event a contrary intention sufficient to disapply section 114.

He accordingly rejected Mr Page’s submissions on the title to sue issue.

The judge addressed the implied obligation issue in paragraphs 156 to 171 of his judgment. In paragraph 157 of his judgment he set out the implied term for which Mr Page contended (as he contends in this court) as follows:

“that the power to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily, or in a way in which no reasonable mortgagee acting reasonably would do”.

The above formulation of the implied term is taken from the headnote of the report of Nash and Staunton, and it is convenient at this point to refer to that authority. In Nash and Staunton the claimant mortgagee made loans to each of the defendants. The loan agreements contained variable interest clauses. By their Defence the defendants pleaded that the loan agreements were ‘extortionate credit bargains’ within the meaning of the 1974 Act. The issue before the Court of Appeal was whether the judge at first instance had been right to strike out the Defence on the ground that it had no real prospect of succeeding at trial. Although the case is of direct relevance to the extortionate credit bargain issue, it is also relevant to the implied obligation issue in that the Court of Appeal held that the power of a mortgagee to set interest rates from time to time was not completely unfettered, and that there was an implied term in each mortgage to the effect set out above.

The leading judgment was given by Dyson LJ, with whom Astill J and Thorpe LJ agreed. In paragraphs 30 to 32 of his judgment, Dyson LJ said this:

“30.

I cannot accept the submission of Mr Malek that the power given to the Claimant by these loan agreements to set the interest rates from time to time is completely unfettered. If that were so, it would mean that the Claimant would be completely free, in theory at least, to specify interest rates at the most exorbitant level. It is true that in the case of the Nash agreement, clause 3.3 provides that the rate charged is that which applies to the category of business to which the Claimant considers the mortgage belongs. That prevents the Claimant from treating the Nashes differently from other borrowers in the same category. But it does not protect borrowers in that category from being treated in a capricious manner, or, for example, being subjected to very high rates of interest in order to force them into arrears with a view to obtaining possession of their properties.

31.

The Stauntons do not even have the limited protection that is afforded by clause 3.3 of the Nash agreement. In the absence of an implied term, there would be nothing to prevent the Claimant from raising the rate demanded of the Stauntons to exorbitant levels, or raising the rate to a level higher than that required of other similar borrowers for some improper purpose or capricious reason. An example of an improper purpose would be where the lender decided that the borrower was a nuisance (but had not been in breach of the terms of the agreement) and, wishing to get rid of him, raised the rate of interest to a level that it knew he could not afford to pay. An example of a capricious reason would be where the lender decided to raise the rate of interest because its manager did not like the colour of the borrower’s hair.

32.

It seems to me that the commercial considerations relied on by Mr Malek are not sufficient to exclude an implied term that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily. I shall come shortly to the question whether the discretion should also not be exercised unreasonably. But before doing so, I should explain in a little more detail why I would reject Mr Malek’s submission that there is no need for an implied term at all.”

In paragraph 35 of his judgment, Dyson LJ gave an example of capricious conduct by a mortgagee, as follows:

“But it seems to me to be obvious that there may be circumstances in which the lender will act capriciously towards an individual borrower knowing that it might compel the borrower to redeem the mortgage and go elsewhere. Indeed, the lender may have decided to increase the rate of interest for that very reason. But why should the lender be able capriciously to compel the borrower to find another lender with impunity?”

In paragraphs 37 to 42 of his judgment, Dyson LJ addressed the question whether the implied term should also extend to “unreasonably”, as follows:

“37.

I come, therefore, to the question whether the implied term should also extend to “unreasonably”. The first difficulty is to define what one means by “unreasonably”. Mr Bannister was at pains to emphasise that he was not saying that the rates of interest had to be reasonable rates in the sense of closely and consistently tracking LIBOR or the rates charged by the Halifax Building Society. He said that what he meant by the unreasonable exercise of the discretionary power to set the rate of interest was something very close to the capricious or arbitrary exercise of that power.

38.

As we have seen, in Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397 Leggatt LJ said that where A and B contract with each other to confer a discretion on A, the discretion must be exercised honestly and in good faith, and not “arbitrarily, capriciously or unreasonably”. In that case, the judge held the owner acted unreasonably in the sense that there was no material on which a reasonable owner could reasonably have exercised the discretion in the way that he did. Leggatt LJ (with whom the other two members of the court agreed) found that various factors called into question the owners’ good faith and strongly suggested that their decision was arbitrary. He also upheld the judge’s approach to the question of reasonableness. Thus the word “unreasonably” in the passage at page 404 must be understood in a sense analogous to unreasonably in the Wednesbury sense: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.

39.

This question whether an apparently unfettered discretion is subject to an implied limitation that it must be exercised reasonably has been considered in other contexts. They were helpfully reviewed by Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] All ER (D) 33. That case concerned a reinsurance contract which contained a clause which provided that no settlement or compromise of a claim could be made or liability admitted by the insured without the prior approval of the reinsurers. One of the questions that arose was whether the right to withhold approval was subject to any (and if so what) restriction. The judge held that the reinsurers could not withhold approval unless there were reasonable grounds for doing so. Mance LJ (with whom Latham LJ agreed) decided that the right to withold consent was less restricted. Having reviewed a number of previous authorities, Mance LJ said (paragraph 64) that what was proscribed in all of them was “unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed”. He said, at p 324, para 67:

“I would therefore accept as a general qualification that any withholding of approval by reinsurers should take place in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance.”

40.

After a detailed consideration of what considerations could properly be take into account, he said, at p 326, para 73:

“If there is any further implication, it is along the lines that the reinsurer will not withhold approval arbitrarily, or (to use what I see as no more than an expanded expression of the same concept) will not do so in circumstances so extreme that no reasonable company in its position could possibly withhold approval. This will not ordinarily add materially to the requirement that the reinsurer should form a genuine view as to the appropriateness of settlement or compromise without taking into account considerations extraneous to the subject-matter of the reinsurance.”

41.

So here too, we find a somewhat reluctant extension of the implied term to include unreasonableness that is analogous to Wednesbury unreasonableness. I entirely accept that the scope of an implied term will depend on the circumstances of the particular contract. But I find the analogy of Gan Insurance and the cases considered in the judgment of Mance LJ helpful. It is one thing to imply a term that a lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. It is unlikely that a lender who was acting in that way would not also be acting either dishonestly, for an improper purpose, capriciously or arbitrarily. It is quite another matter to imply a term that the lender would not impose unreasonable rates. It could be said that as soon as the difference between the Claimant’s standard rates and the Halifax rates started to exceed about two percentage points, the Claimant was charging unreasonable rates. From the appellants’ point of view, that was undoubtedly true. But from the Claimant’s point of view, it charged these rates because it was commercially necessary, and therefore reasonable, for it to do so.

42.

I conclude therefore that there was an implied term of both agreements that the Claimant would not set rates of interest unreasonably in the limited sense that I have described. Such an implied term is necessary in order to give effect to the reasonable expectations of the parties.”

On the facts of the cases before him, however, Dyson LJ agreed with the judge at first instance that there was no real prospect of the defendants establishing a breach of the implied term at trial. In paragraphs 46 and 47 of his judgment Dyson LJ said this:

“46.

In my judgment, the mere fact that the rates charged were made “without reference to the prevailing rates” is not evidence from which it can be inferred that, in fixing them, the Claimant acted in breach of the implied term. It is not said by Mr Bannister that the rates set by the Claimant had to match those of the Halifax. As Mr Rosenberg points out in his report (paragraph 4.3.7), the Claimant was not regarded as a sub-prime lender; it was a centralised lender with no branch network; and relied on self-certification by borrowers. It was not in the same category of lenders as the Halifax. The real complaint is that the gap between the Claimant’s rates and those charged by the Halifax widened from 1995 onwards. It widened from about 2 percentage points to 4-5 points. One of the reasons for this according to counsel for the Claimant (if not the only reason) was that the Claimant was in serious financial difficulties because many of its borrowers had defaulted, the money markets charged higher rates for lending to the Claimant because it was perceived to be a greater risk than other mortgage lenders, and these higher costs had been passed on to borrowers. It is the fact that the Claimant took this into account in deciding at what level to fix its rates that forms the basis of the second way in which the case of breach of the implied term is put. In my view, if it was the case that the rates were increased because the Claimant was in financial difficulties for reasons of that kind, that would not be a breach of the implied term. If a lender is in financial difficulty, for example, because it is obliged to pay higher rates on interest to the money market, then it is likely to have to pass those increased costs on to its borrowers. If in such circumstances the rate of interest charged to a borrower is increased, it is impossible to say that the discretion to set the rate of interest is being exercised for an improper purpose, capriciously, arbitrarily or in a way in which no reasonable lender would reasonably do.

47.

On the material placed before this court, there is no evidence to suggest that the decision to widen the gap between the rates of interest charged by the Claimant to the appellants and the standard rates charged by the Halifax Building Society to its borrowers was motivated by other than purely commercial considerations. The Claimant is not a charitable institution. Its aim is to make a profit by lending money. It follows that if it encounters financial difficulties, it may feel obliged to raise the interest rates paid by its borrowers. In deciding whether to raise interest rates, it will have to make fine commercial judgments. But if it decides to take that course in order to overcome financial difficulties, it is not acting dishonestly, capriciously or in an arbitrary manner. It is not taking into account an irrelevant consideration. Nor is it acting in a way which is so unreasonable that it can be said of it that no reasonable lender would take that course if placed in that situation.”

In paragraphs 49 onwards in his judgment, Dyson LJ addressed the issue whether the defendants had a real prospect of establishing at trial that the loan agreements were extortionate credit bargains. In paragraphs 67 and 68 he said this:

“67.

It might be said that, if variations in rates of interest are not to be taken into account in deciding whether a credit bargain is extortionate, then there is a glaring lacuna in the protection provided by the 1974 Act. Mr Malek was unable to suggest any policy reason why the protection should be limited in this way. But if I am right in holding that the discretion to set variable interest rates is subject to an implied restriction that it will be exercised in the way that I have described, then the lacuna is less considerable than it might appear. Moreover, the measure of the protection that is undoubtedly afforded by the 1974 Act should not be overstated. At paragraph 47.26 of Consumer Credit Law and Practice, Professor Goode says:

“Nevertheless, it seems clear that the concepts of extortion and unconscionability are very similar. ‘Extortionate’, like ‘harsh and unconscionable’, signifies not merely that the terms of the bargain are stiff, or even unreasonable, but that they are so unfair as to be oppressive. This carries with it the notion of morally reprehensible conduct on the part of the creditor in taking grossly unfair advantage of the debtor’s circumstances. This element of moral culpability, in the form of abuse of power or bargaining position, is well brought out in the judgment of Sir John Donaldson MR in Wills v Wood [1984] CCLR 7: ‘It is, of course, clear that the Consumer credit Act 1974 gives and is intended to give the widest possible control over credit bargains which, for a variety of reasons, might be considered “extortionate”. But the word is “extortionate”, not “unwise”. The jurisdiction seems to me to contemplate at least a substantial imbalance in bargaining power of which one party has taken advantage’.”

68.

In practice, there are unlikely to be many situations in which an allegation of breach of the term that I have held should be implied would fail where the same allegation, expressed as a complaint that the rate of interest is “grossly exorbitant” so as to render the transaction “extortionate”, would succeed. ”

I can now return to the judge’s judgment in the instant case. Addressing the implied obligation issue, the judge said this (in paragraphs 162 to 171 of his judgment):

“162.

Mr Page QC submits that there are four indications of improper purposes:-

(a)

To satisfy the financial needs of the Claimant, which is not the mortgagee.

(b)

To encourage borrowers to redeem their mortgages, thus releasing capital (such a purpose being recognised in the Paragon case as being an improper purpose (paragraph 35)).

(c)

To force old book borrowers to finance the new.

(d)

Increase of interest rate because of default.

163.

There is no evidence to show that (d) has ever been applied.

164.

I see nothing in item (a) I have already analysed the interrelation between the Claimants and the SPV and the mere fact that it is a bare trustee is irrelevant. Under the terms of the AA it is given the power to vary the interest rates and I do not accept that there is any evidence, which shows that the Claimant has no interest in the recovery of monies under the mortgage for reasons, which I have already set out in this judgment.

165.

There is no evidence to show that the Claimants have embarked on a policy of forcing people to redeem their mortgages (item (b)). Further it appears from paragraph 35 of the Nash judgment that what the court of appeal is contemplating is a particular policy addressed to a particularborrower. There is nowhere any suggestion in Mr Higgins’s report (for self evident reasons) to suggest that the Defendants have been singled out. His report was not prepared for their case. Even if the judgment is interpreted, as on the basis of being a general policy, there is no evidence provided by Higgins’s report that that was the Claimant’s policy. Indeed, as I have already observed, if that was their policy they would not have been so tolerant of the Defendants’ failure to pay the mortgage arrears over many years. It does not make sense for them to allow the arrears to accumulate if they were motivated by a desire to raise interest rates to force the Defendants to redeem (or sell the property over their head because of default).

166.

If I accept that the old borrowers have financed the new borrowers that seems to me a perfectly legitimate commercial reason, which the Claimants could enter into to help recover itself from the losses that it has sustained over a period of time.

167.

Raising the interest rates may well be necessary for its financial survival. That might have the consequential result that the borrowers move elsewhere because they can obtain lower rates of interest elsewhere. It does not follow that the Claimants’ policy is motivated by a desire to force them to remortgage, it is a consequence of their raising higher rates, because of the financial circumstances in which they find themselves. Mr Higgins in paragraph 13.1 of his report makes assumptions , which to my mind are completely unreal and not sustainable by any evidence. I have no evidence to show, for example, there has been an aggressive possessions policy in this case (quite the opposite). I have no evidence to show that in this case they were attempting to drive the Defendants away and force them to remortgage.

168.

Mr Higgins’ report and summary in paragraph 15 is strong on assertion and totally lacking in evidence.

169.

It is to be contrasted with Mr Bloomfield’s report and in particular his extensive and compelling criticism in section 7 of Mr Higgins own report. I have already accepted that I should not weigh competing reports against each other ordinarily, but I am afraid to say that I find Mr Bradshaw’s report totally lacking in substance so that it cannot be said with any credibility that the matters he raises have any real protect of being successful at the trial. The position appears to me to be relatively straightforward. The Claimants, because of the nature of their mortgage book, suffered more than most lenders when the recession came in the late 1980’s early 1990’s. They were not in the market long as established institutions. They were therefore not protected by the cushion of such longer-term borrowers. Thus when borrowers went into default and properties were repossessed the margins were much less and there were greater instances of negative equity which left the Claimants with losses. They addressed these losses by organising their affairs and charging the interest rates so as to enable them first to survive, and second to begin to move the profit. All of this is entirely credible.

170.

One has to contrast that with borrowers who borrow on a self-certified basis which either is not true or which changes and who then find themselves unable to pay the mortgages, which they took out in more stable financial times. It is a popular practice nowadays to believe that merely because circumstances have changed adversely that someone else is to blame. I have had no explanation, for example, as to why the Defendants have not paid any mortgage payments for many years. I have had no explanation as to why they fell into arrears in the first place. They had the benefit of a three year cap at 12.9% (when NHL’s rates were actually higher during that period) and thereafter the rates have fallen below the initial agreed rate at 12.9%. It follows therefore, that they ought to have been in a better position over the passage of time to service the loan. Their failure to service the loan (massively after 1995) is completely unexplained. There have been clearly some difficulties, but I do not see it can be said that those difficulties have been visited upon them by reason of the breach of this implied term. I do not see that Mr Higgins’s report has any real prospect of persuading a trial judge that that would be the case.

I therefore do not accept that item (c) raises any matters, which should lead me to allow the Defendant’s appeal.”

The judge then turned to the extortionate credit bargain issue. He began by referring to section 138 of the 1974 Act, which provides as follows:

“138 When bargains are extortionate

(1)

A credit bargain is extortionate if it-

(a)

requires the debtor or a relative of his to make payments (whether unconditionally, or on certain contingencies) which are grossly exorbitant, or

(b)

otherwise grossly contravenes ordinary principles of fair dealing.

(2)

In determining whether a credit bargain is extortionate, regard shall be had to such evidence as is adduced concerning-

(a)

interest rates prevalling at the time it was made,

(b)

the factors mentioned in subsections (3) to (5), and

(c)

any other relevant considerations.

(3)

Factors applicable under subsection (2) in relation to the debtor include-

(a)

his age, experience, business capacity and state of health; and

(b)

the degree to which, at the time of making the credit bargain, he was under financial pressure, and the nature of that pressure.

(4)

Factors applicable under subsection (2) in relation to the creditor include-

(a)

the degree of risk accepted by him, having regard to the value of any security provided;

(b)

his relationship to the debtor; and

(c)

whether or not a colourable cash price was quoted for any goods or services included in the credit bargain.

(5)

Factors applicable under subsection (2) in relation to a linked transaction include the question how far the transaction was reasonably required for the protection of debtor or creditor, or was in the interest of the debtor”

The judge then referred to paragraphs 67 and 68 of Dyson LJ’s judgment in Nash and Staunton and to his subsequent judgment in Broadwick Financial Services Ltd v. Spencer [2002] 1 All ER 446 (“Broadwick”) in which he concluded (at paragraph 80, after quoting with approval a passage in Professor Goode’s Consumer Credit Law and Practice at para 27.26) that:

“… the statutory test of ‘extortionate’ is a high one: the payments required to be made must be grossly exorbitant, and/or the bargain must otherwise grossly contravene the ordinary principles of fair dealing”.

In paragraph 182 of his judgment the judge said this:

“The cap imposed by the administrative agreements has not operated in an extortionate way, because the margins between the Halifax rate, for example, and the Claimants are not so wide as to be capable of being categorised as harsh and oppressive within the ambit of Section 138.”

The judge accordingly rejected Mr Page’s submissions on the extortionate credit bargain issue.

Finally, the judge turned to the human rights issue which Mr and Mrs Pender sought permission to raise on appeal. He noted that Mr Page had not pressed this issue, but in any event he concluded that there was no infringement of Mr and Mrs Pender’s human rights in the instant case.

On 29 July 2004 Jacob LJ granted permission to appeal to this court on the three issues raised in Mr Aaron’s witness statement, viz: the title to sue issue, the implied obligation issue, and the extortionate credit bargain issue. He refused permission to appeal on the human rights issue.

The arguments presented on behalf of Mr and Mrs Pender

The title to sue issue

Mr Page substantially repeats the submissions he made to the judge. He submits firstly that, on its true construction, section 34(1) of the Land Registration Act 1925 (quoted in paragraph 63 above) is intended to protect third parties relying on the register and not to affect rights as between assignor and assignee, or between mortgagor and mortgagee. Secondly, he submits that in any event the right to sue for possession is not one of the ‘powers conferred by law on the owner of a legal mortgage’ within the meaning of section 34(1).

He seeks support for both the above submissions in the terms of the Land Registration Act 2002 and in the Law Commission Report which preceded its enactment (Law Commission Report No 271, entitled ‘Land Registration for the Twenty-first Century’). He also relies on section 87(1) of the Law of Property Act 1925, which provides that a chargee under a charge by way of legal mortgage “… shall have the same protection, powers and remedies (including the right to take proceedings to obtain possession …)” as if a mortgage term had been created. He submits that, on its true construction, section 87(1) treats the right to sue for possession as a remedy, as distinct from a power.

He submits that the judge ought to have found that the rights of an equitable mortgagee are defined by section 114 of the Law of Property Act 1925 (quoted in paragraph 63 above), since the section applies alike to unregistered and registered land. He submits that the wording of section 114 is significant because the right to sue for possession is an incident of the estate and interest of the mortgagee in the mortgaged property.

Mr Page further submits that if the judge is correct in his conclusion that section 114 only applies to unregistered land, there is an inconsistency between that section and section 34(1) of the Land Registration Act 1925. In support of this submission he relies on an observation of Lord Oliver of Aylmerton in City of London Building Society v. Flegg [1988] 1 AC 54 (“Flegg”) at 84G-H, where he said:

“… the philosophy behind both the Land Registration Act 1925 and the Law of Property Act 1925 was that they should operate in parallel, and it would, therefore, be surprising if it were found that the two systems were not constructed so as to dovetail into one another.”

As to the judge’s finding of a contrary intention sufficient, in any event, to disapply section 114, Mr Page relies on the fact that by the administration agreements the SPV conferred authority on Paragon to exercise the powers of the mortgagee under the Legal Charge “in its name and on its behalf” (see clause 2.1 of the 2002 Agreement, quoted in paragraph 65 above).

Relying on Barclays Bank Ltd v. Bird [1954] 1 Ch 274, he submits that an equitable chargee has an immediate right to possession, subject only to his obtaining an order for possession from the court.

In his written skeleton argument Mr Page stresses that Mr and Mrs Pender’s case is not that SPV should be joined as an additional claimant; rather, it is that only the SPV can sue for possession of the Property. However, in the course of is oral submissions, if I have understood them correctly, he modified his position somewhat, submitting in the alternative that if Paragon could sue at all it could only do so as trustee for the SPV; and that the proceedings are defective since they contain no statement to the effect that Paragon is claiming possession in that capacity.

As an alternative argument, Mr Page submits that the administration agreements contained a statutory assignment of Paragon’s right to recover possession, pursuant to section 136 of the Law of Property Act 1925.

The implied obligation issue

Mr Page challenges the judge’s finding that the implied term was not breached in the instant case. He submits, relying on Mr Higgins’ report, that Paragon set interest rates for some or all of the following improper and unreasonable purposes:

He submits that in rejecting Mr Higgins’ report the judge embarked upon an illegitimate exercise of weighing one expert report against the other. He points to Mr Higgins’ experience in building society management, and to the fact that Paragon’s repossession rate was high. He submits that the inference is that this reflected Paragon’s policy of restoring value for its shareholders by repossessions. He submits that it is neither proper nor reasonable for Paragon to discriminate between different categories of borrower by, in effect, subsidising one category at the expense of another.

The extortionate credit bargain issue

Relying once again on Mr Higgins’ report, Mr Page submits that in taking the Legal Charge Paragon grossly contravened normal principles of fair dealing in that it failed to inform Mr and Mrs Pender at the outset that it had a policy of securitisation which prevented it from setting a rate of interest below the minimum rate of interest prescribed by the relevant administration agreements, with the consequence that the rate of interest charged under the Legal Charge could not follow market rates if they fell below that minimum level.

In support of the above submission he relies on a passage from Dyson LJ’s judgment in Broadwick where he said this(at paragraph 56):

“Accordingly, subject to the qualification I am about to express, I remain of the view … that the way in which a discretionary variation of rate clause is operated in fact is not a factor to be taken into account in determining whether a credit bargain is extortionate. But it does not follow that the existence of such a clause can never be relevant to the question whether a credit bargain is extortionate. Such a clause has the potential to make the bargain extremely burdensome for the borrower if a wide gap opens up between the interest rates payable under the bargain and market rates prevailing from time to time. If the lender has a policy of operating the clause in a certain way, or (as in the present case) of not operating the clause at all whether market rates go up or down, then it seems to me that ordinary principles of fair dealing require the lender to inform the borrower of that policy before the bargain is made. Failure to inform the borrower may, therefore, be a factor to be taken into account in determining whether there has been a gross contravention of ordinary principles of fair dealing, and therefore whether the credit bargain is extortionate.”

The arguments presented on behalf of Paragon

The title to sue issue

Mr Malek submits that the proposition that the registered proprietor of a legal charge has no right to claim possession of the mortgaged property is, on its face, a startling one. He points out that there can be no transfer of legal ownership until registration, and he submits that Mr Page’s reliance on section 114 of the Law of Property Act 1925 is misplaced. In support of this last submission he relies on the decision of this court in Credit & Mercantile plc v. Marks [2004] 3 WLR 489 (“Marks”).

In Marks there was a registered charge and a registered sub-charge. The mortgagor fell into arrears under the charge, and the mortgagee obtained an order for possession. The mortgagor appealed against the possession order on the ground that by granting the sub-charge the mortgagee had divested himself of his right to possession of the mortgaged property in favour of the submortgagee. The Court of Appeal held that the existence of the registered subcharge did not divest the mortgagee of his right to possession, neither did it have the effect of suspending it during the lifetime of the subcharge. Clarke LJ, giving the judgment of the court, said this (in paragraphs 49 to 54 of his judgment):

“49.

Before the recorder some reference was made to section 114(1) of the LPA, which provides:

“A deed executed by a mortgagee purporting to transfer his mortgage or the benefit thereof shall, unless a contrary intention is therein expressed, and subject to any provision therein contained, operate to transfer to the transferee –(a) the right to demand, sue for, recover, and give receipts for, the mortgage money or the unpaid part thereof, and the interest then due, if any, and thenceforth to become due thereon; and (b) the benefit of all securities for the same, and the benefit of and the right to sue on all covenants with the mortgagee, and the right to exercise all powers of the mortgage; and (c) all the estate and interest in the mortgaged property then vested in the mortgagee subject to redemption or cesser, but as to such estate and interest subject to the right of redemption then subsisting. ”

In a recent case, Paragon Finance Plc v Pender [2003] EWHC 2834 (Ch), it was held by Peter Smith J that section 114 has no application to registered land.

50.

We have no reason to doubt Peter Smith J’s conclusions but in any event, as he observed, section 114 provides for a transfer “unless a contrary intention is expressed” in the mortgage. Thus if section 114 applies, all depends upon the true construction of the mortgage and, in our judgment, for the reasons given earlier, on the true construction of the sub-charge, there was no such transfer in this case.

51.

In any event any such transfer would be governed by section 33 of the LRA 1925, which provides so far as relevant:

“(1)

The proprietor of any registered charge may, in the prescribed manner, transfer the charge to another person as proprietor.

(2)

The transfer shall be completed by the registrar entering on the register the transferee as proprietor of the charge transferred, but the transferor shall be deemed to remain proprietor of the charge until the name of the transferee is entered on the register in respect thereof.”

In the instant case, as already indicated, the respondent was entered and remains on the register as proprietor of the principal charge and the sub-chargee was entered and remains on the register as the proprietor of the sub-charge. It follows that the effect of section 33(2) is that no transfer has been completed on the facts of this case.

52.

Moreover, there was no transfer “in the prescribed manner”. The true position is that already stated, namely that there was no transfer to the sub-chargee of the respondent’s rights against the appellant under the principal charge, either under the terms of the sub-charge (or any of the other contractual documents) or by reason of the provisions of any relevant statute.

53.

Nor, as we see it, is there any other basis on which it could be held that the respondent was divested of its right to claim possession of the property. In the course of his judgment the recorder analysed the provisions of the LRA 1925 and of the Land Registration Rules 1925 as amended (the Rules”) in order to identify the powers of a sub-chargee. Thus, in addition to section 27 of the LRA 1925 referred to above he referred to rule 163 of the Rules. Rule 163(1) provides:

“The proprietor of a charge or encumbrance may at any time charge the mortgaged debt with the payment of money in the same manner as the proprietor of land charged and such charges are in these rules referred to as sub-charges.”

Rule 163(2) provides that the proprietor of a sub-charge shall, subject to any entry to the contrary in the register, have the same powers of disposition in relation to the land as if he had been registered as proprietor of the principal charge. The recorder observed that that rule is concerned with powers of disposition whereas this case is concerned with the power to take possession. That is so, although we have no reason to doubt that, subject to the terms of the particular sub-mortgage, a sub-mortgagee in principle has a right of possession.

54.

However, let it be supposed, contrary to our view of the true position under the sub-charge in this case, that the sub-chargee has a present right to possession of the property, that would not as we see it affect the respondent’s right of possession under the principal charge as between the respondent and the appellant. As Miss Olley was in our view correctly, constrained to accept in the course of the argument, there is no reason in principle why both a mortgagee and a sub-mortgagee should not have rights of possession.”

In any event, submits Mr Malek, in the instant case the administration agreements are clearly not intended to divest Paragon of its right to possession.

As to the position of the SPV, Mr Malek submits that whether or not SPV also has a right to sue for possession, Paragon retains its right to possession as an incident of its legal ownership of the Legal Charge. He submits that this result follows from section 33(2) of the Land Registration Act 1925.

Mr Malek submits that Mr Page’s attempted distinction between a power and a remedy is also misconceived. He submits that on its true construction section 87 of the Law of Property Act 1925 draws no such distinction.

Mr Malek further submits that the Land Registration Act 2002 provides no support for Mr Page’s submissions.

As to Mr Page’s reliance (in the alternative) on section 136 of the Law of Property Act 1925, Mr Malek submits that given that there was no legal assignment of the Legal Charge itself (see section 33(2) of the Land Registration Act 1925) there can have been no legal assignment of the right to recover possession. He further submits that section 136 is concerned with the assignment of debts, and that is not relevant to the transfer of securities, and to the exercise of rights thereunder.

The implied obligation issue

Mr Malek accepts the existence of an implied term in the same terms as that found to exist by Dyson LJ in Nash and Staunton, but he submits that there is no credible evidence in the instant case that the implied term was breached. As to the suggestion that Paragon was encouraging its borrowers generally to redeem their mortgages, Mr Malek submits that even if that suggestion were well-founded (and he contends that it is not) its policy could not be described as capricious or discriminatory.

In support of this submission, Mr Malek relies in particular on paragraph 7.26 of Mr Bloomfield’s report (quoted in paragraph 55 above) and on paragraph 169 of the judge’s judgment (quoted in paragraph 75 above).

As to Mr Higgins’ reference to Paragon’s priority being to repay its creditors and thereby restore value for its shareholders, Mr Malek submits that there is nothing whatever wrong with that; still less can it be characterised as discriminatory or capricious. Overall, he submits that it is extraordinary for Mr and Mrs Pender to suggest that they have suffered from a capricious policy of repossession in circumstances where Paragon has refrained from enforcing the Legal Charge for many years.

As to the complaint of cross-subsidisation, Mr Malek submits once again that there is no evidence to support this complaint. He reminds us of the judge’s conclusion (in paragraph 169 of his judgment, quoted in paragraph 75 above) that Mr Higgins’ report is “totally lacking in substance”. He submits that in reaching that conclusion the judge was not indulging in any illegitimate weighing exercise; rather, his conclusion was inevitable given that Mr Higgins had not produced any evidence.

The extortionate credit bargain issue

In the first place, Mr Malek submits that there is no evidence that any minimum rate provision was in force at the date when the Legal Charge was granted. He points out that the first administration agreement affecting the Legal Charge was the agreement dated 9 March 1990 (whereas the Legal Charge is dated 1 August 1989).

In any event, he submits, the instant case is not one in which (as in Broadwick) the mortgagee had “a policy of operating the [clause containing the power to vary interest rates] in a certain way, or … not operating the clause at all” (see ibid. per Dyson LJ, quoted in paragraph 93 above). There is, he submits, no evidence that Paragon had or operated such a policy, and the strong inference from the interest rates actually charged is that it did not. He submits, further, that Broadwick does not decide that a failure to disclose the existence of such a policy at the date when the mortgage is granted automatically renders the bargain an extortionate credit bargain for the purposes of section 138 of the 1974 Act: on the contrary, Dyson LJ said merely that it “may be a factor to be taken into account” (emphasis supplied).

In the instant case, he submits, it is unarguable on the available evidence that there has been any contravention of ordinary principles of fair dealing by Paragon, let alone a gross contravention.

Finally, he submits that even if the bargain were found to be extortionate, there would be no grounds in the instant case for re-opening the transaction; still less would there be any ground for preventing Paragon from asserting its right to possession of the Property.

In my judgment Mr and Mrs Pender’s case on this issue is misconceived. It is common ground that Paragon, as registered proprietor of the Legal Charge, retains legal ownership of it. One incident of its legal ownership – and an essential one at that – is the right to possession of the mortgaged property. I can see no basis upon which it can be contended that an uncompleted agreement to transfer the Legal Charge to the SPV (that is to say an agreement under which, pending completion, the SPV has no more than an equitable interest in the mortgage) can operate in law to divest Paragon of an essential incident of its legal ownership. In my judgment as a matter of principle the right to possession conferred by the Legal Charge remains exercisable by Paragon as the legal owner of the Legal Charge (i.e. as the registered proprietor of it), notwithstanding that Paragon may have transferred the beneficial ownership of the Legal Charge to the SPV.

It follows, in my judgment, that Paragon, so long as it remains the registered proprietor of the Legal Charge, is a necessary party to any claim to possession of the Property in right of the Legal Charge.

The only question then is whether the SPV should have been joined in the proceedings as an additional claimant. In my judgment, the answer to that question is plainly: No. On the assumption that the consideration for the transfer of the Legal Charge has been paid in full, Paragon has since retained its legal ownership of the Legal Charge as trustee for the SPV (see Whiteley v. Delaney [1914] AC 132 at 141 per Viscount Haldane LC). But it does not follow that in that situation the SPV, as the owner of the Legal Charge in equity, is a necessary party to the claim; and on the facts of the instant case joinder of the SPV is wholly unnecessary. There is, after all, no issue between the SPV and Paragon as to the exercise of the mortgagee’s rights under the Legal Charge: indeed the SPV has, by virtue of the administration agreements, expressly authorised Paragon to exercise such rights on its behalf.

In my judgment, therefore, there is no substance in the contention that the SPV should have been joined as an additional claimant in the proceedings. Nor, in my judgment, can the fact that Paragon has failed to describe itself as suing in its capacity as trustee affect the validity of the proceedings or of the orders made in the proceedings (in particular, the possession order). In any event, even if that failure could be said to amount to a formal defect in the proceedings (and I do not regard it as such) the court has ample powers under the CPR to correct such defects (e.g. under CPR Pt 17).

In my judgment Mr Page’s reliance on section 114 of the Law of the Property Act 1925 is wholly misplaced, for the reason which the judge gave: viz. that section 114 is concerned with transfers of mortgages of unregistered land (transfers of mortgages of registered land being dealt with by section 33 of the Land Registration Act 1925). To interpret section 114 as applying also to transfers of mortgages of registered land would produce a fundamental and wholly illogical conflict between the two regimes in relation to transfers of mortgages. Bearing in mind what Lord Oliver of Aylmerton said in Flegg (quoted in paragraph 85 above), I can see no conceivable basis for interpreting section 114 in a way which produces that result and every reason for not doing so. Accordingly I respectfully agree with the observations of this court in Marks with reference to the instant case (see paragraph 95 above).

Nor, in my judgment, can Mr Page find any support for his submission in the Land Registration Act 2002, or in the Law Commission Report which preceded it. In my judgment it is verging on the absurd to seek to interpret a provision in a statute by reference to a provision in a different statute enacted some eighty years later.

In any event, I agree with the judge that the administration agreements demonstrate a clear contrary intention, sufficient to disapply section 114 if (contrary to the conclusion which I have just expressed) the section would otherwise apply.

As to Mr Page’s reliance on section 136 of the Law of Property Act 1925, that too is in my judgment misplaced. He fails to distinguish between the right to sue at law for the mortgage debt and the proprietary interest created as security for its repayment. Section 136 applies only to the former.

Accordingly in respectful agreement with the judge I reject Mr Page’s submissions on the title to sue issue.

As noted earlier, Mr Malek accepts that the power to vary interest rates conferred on Paragon by condition 3.3 of the 1990 Conditions (quoted in paragraph 11 above) is subject to an implied qualification that it will not be exercised improperly, capriciously or arbitrarily, or in a way which no reasonable mortgagee, acting reasonably, would do (see the headnote to Nash and Staunton).

In Nash and Staunton (at pp.699H-700A) Dyson LJ cited, as an example of an improper purpose, a case where:

“… the lender decided that the borrower was a nuisance (but had not been in breach of the terms of the agreement) and, wishing to get rid of him, raised the rate of interest to a level that it knew he could not afford to pay.”

In citing that example, Dyson LJ was describing a situation in which there could have been no bona fide (genuine) commercial reason for exercising the power to vary the interest rates applicable to a particular borrower in such a manner. On the other hand, I do not understand him to be saying that a lender may not, for a genuine commercial reason, adopt a policy of raising interest rates to levels at which its borrowers generally, or a particular category of its borrowers, may be expected to consider refinancing their borrowings at more favourable rates of interest offered by other commercial lenders. Save as otherwise expressly agreed with its borrowers, a commercial lender is in my judgment free to conduct its business in what it genuinely believes to be its best commercial interests. As Dyson LJ said in Nash and Staunton (at paragraph 47, quoted in paragraph 73 above):

“The claimant is not a charitable institution. Its aim is to make a profit by lending money. It follows that if it encounters financial difficulties, it may feel obliged to raise the interest rates paid by its borrowers. In deciding whether to raise interest rates, it will have to make fine commercial judgments. But if it decides to take that course in order to overcome financial difficulties, it is not acting dishonestly, capriciously or in an arbitrary manner.”

Turning back to the facts of the instant case, I respectfully agree with judge (see paragraph 165 of his judgment, quoted in paragraph 75 above) that there is in any event no evidence that Paragon has embarked on a policy of forcing its borrowers to redeem their mortgages, still less that Mr and Mrs Pender have been singled out for special treatment in that respect. Indeed, as my earlier summary of the factual background clearly shows, Paragon has been extremely patient with Mr and Mrs Pender, in the face of increasing arrears.

As to the complaint of discrimination against the ‘old book’ borrowers, Mr and Mrs Pender rely on Mr Higgins’ report, and on the opinions which he there expresses. However, even if it be the fact that the ‘old book’ borrowers have financed Paragon’s more recent borrowers (and there is no direct evidence that they have), that fact in itself cannot, in my judgment, found a claim for breach of the implied term referred to above. As the judge says (in paragraph 166 of his judgment, quoted in paragraph 75 above):

“If I accept that the old borrowers have financed the new borrowers that seems to me a perfectly legitimate commercial reason, which the Claimants could enter into to help recover itself from the losses that it has sustained over a period of time.” (Emphasis supplied)

Nor, in my judgment, is there any substance in the complaint that in reaching his conclusions on this issue the judge embarked on the “illegitimate task” of weighing Mr Higgins’ report against that of Mr Bloomfield. Rather, he proceeded (as he was fully entitled to do) on the basis that there was no evidence to support the complaint which was being made, or the opinion which Mr Higgins had expressed in relation to it.

I accordingly reject Mr Page’s submissions on the implied obligation issue.

In the first place, there is no evidence that as at the date when the Legal Charge was granted securitisation arrangements were in place which had the effect of qualifying Paragon’s (on the face of it) unqualified power to vary interest rates by imposing a minimum rate. Accordingly the allegation of failure to disclose the existence of that qualification at that date is not made out on the facts.

In any event, I cannot accept Mr Page’s submission that such a failure, had it occurred, would in itself have rendered the bargain an extortionate credit bargain within the meaning of section 138 of the 1974 Act. There are two reasons for this. Firstly, in contrast to Broadwick there is no evidence in the instant case that as at the date of the Legal Charge Paragon had policy of operating the power to vary interest rates in a particular way, or of not operating it at all, such that the apparently unqualified terms of that power misrepresented the true position in that respect, with the result that ordinary principles of fair dealing required disclosure of the policy. Secondly, in the passage in his judgment in Broadwick on which Mr Page relies (quoted in paragraph 93 above) Dyson LJ did not conclude that the failure to disclose automatically rendered the bargain an extortionate credit bargain: rather, he said that it was:

“… a factor to be taken into account in determining whether there has been a gross contravention of ordinary principles of fair dealing”.

Lastly, I agree with the judge (see paragraph 182 of his judgment) that a consideration of the rates of interest actually charged by Paragon does not provide any support for the allegation that such rates were grossly exorbitant or that they otherwise grossly contravened ordinary principles of fair dealing.

On the available evidence, therefore, I can see no basis on which the Legal Charge could be characterised as an extortionate credit bargain within the meaning of section 138 of the 1974 Act.

I accordingly reject Mr Page’s submissions on the extortionate credit bargain issue.

I would dismiss this appeal.