Mortgage Express v Loi & Anor

THE JUDGE: This is an application by Mortgage Express arising out of what appears to have been a very unfortunate conveyancing situation. Mortgage Express was approached for an advance by the first defendant Mr Loi on the security of a property at 255 Old Oscott Lane, Perry Barr. So far as Mortgage Express was aware, at the time of its advance Mr Loi was the sole freehold owner of the property and, accordingly, the advance was made to him and he executed a charge in favour Mortgage Express over the freehold interest. What Mortgage Express was not aware of at the time was that Mr Loi had originally purchased the property in 2002 as a joint purchase with his wife, the second defendant Mrs Loi, and that the title they acquired at that time was a separate freehold title and a leasehold interest in the same property. They bought both titles on the same day from the same vendor with the benefit of a mortgage from TMB which was expressly secured on both titles.

When the time came to enter into what was referred to as a remortgage with Mortgage Express, however, that transaction appears from the evidence before me to have been conducted without direct involvement of Mrs Loi and it appears to have been lost sight of that the title was separated between the freehold and the leasehold interests.

Mr Loi having defaulted on payment of the mortgage amounts, Mortgage Express has obtained judgment against him for the amount of the outstanding loan and a charging order over his beneficial interest in the leasehold title which is not charged in Mortgage Express’s favour. They obtained also an order for possession of the property and, subsequently, an order for sale of both the freehold and leasehold interests. Those interests have now been sold in accordance with an order made by DJ Dowding, which order provided that having paid the expenses of the sale of the property, the proceeds of sale of the leasehold interest would be divided into two equal shares, one share to be paid to Mrs Loi, who remains the joint registered owner of the leasehold title, and the other half to be paid to Mortgage Express as the holder of the charging order over Mr Loi’s beneficial interest in that leasehold title.

The property as a whole was sold for £110,000 of which on valuation advice Mortgage Express have apportioned £3,240 to the freehold interest that was charged to them and that, of course, they have taken under their security. The balance after the costs of sale is just over £100,000, of which they have taken 50 percent as the holder of the charging order over Mr Loi’s interest and the remaining 50% amounting to £50,438.63 is presently held by Mortgage Express’ solicitors for the benefit of Mrs Loi pursuant to DJ Dowding’s order.

DJ Dowding gave permission to the parties to apply to vary her order and the present application takes the form of an application to vary that order with a view to securing for Mortgage Express the proceeds of sale that are presently held for Mrs Loi. Mrs Loi has been served with this application at her last known addresses, but has not responded and no communication of any kind has been received from her.

There are two arguments advanced on the application. The first arises from the fact that it has now become apparent to Mortgage Express that when their funds were advanced to Mr Loi in 2004, they were used to discharge the prior mortgage on both the freehold and leasehold titles in favour of TMB. On the evidence, a sum of just over £65,000 was paid by Mr Loi to TMB to release their security. That security was expressly taken over both the freehold and the leasehold titles and it is said, therefore, that Mortgage Express should be entitled to be subrogated to the security that TMB held over Mrs Loi’s interest in the property. Mr Dean submits that the benefit of the subrogated security would entitle Mortgage Express to the whole of the remaining proceeds held in Mrs Loi’s name.

The second argument is based on the intention it is said I should find of Mr and Mrs Loi to merge together the two titles that they acquired so that although the charge in favour of Mortgage Express was stated to be only in respect of the title number appropriate to the freehold title, it was in fact a charge granted over the unencumbered freehold title, the separate leasehold interest having merged in the freehold.

Taking the second argument first, Mr Dean accepts that where a freehold and leasehold title have been acquired in the same right by the same owners, the question of whether the titles are merged at law and in equity is governed by the intention of the parties and the court is required to draw inferences as to their intention where it is not expressly taken. He seeks an order declaring that the titles merged in 2002 when Mr and Mrs Loi acquired them but he recognises that there is force in the argument that the indications are against merger at that time because the titles were separately maintained at the Land Registry and were expressed to be charged as separate titles in favour of TMB.

In my view, that is a strong indication that there was no intention to merge the titles at that time. There is no reason apparent why Mr and Mrs Loi may have wanted to keep them separate but it appears from the documents that they must have done. Those documents being the only evidence available, it seems to me that I cannot infer that they had an intention to merge when they not only chose not to express it in the documents but appear to have indicated to the contrary by the documents that they did execute.

Mr Dean submits, alternatively, that there was an intention to merge the titles when the property was sought to be remortgaged to Mortgage Express in April 2004. The evidence as to what happened on that occasion available to me today, however, is very slender indeed. There are, I should not be surprised to note, claims which have been advanced by Mortgage Express against the solicitor who acted for them on that occasion. Those claims have not yet reached the stage of proceedings so there has not yet been any disclosure order and I do not have available to me today the whole of the papers that are on the solicitor’s file from that time. Those few documents that have been provided have been sent, it seems, by solicitors now representing the solicitor who acted on that occasion in response to a pre-action protocol letter.

What I have is a copy of one letter, which is at page 70 in the bundle before me, sent by those solicitors to Mrs Loi on 8^th April 2004 referring to the property at Old Oscott Lane and a second property at 69 Stanford Avenue. That letter says:

“We write to advise that we have received instructions to act on behalf of your husband in connection with the proposed remortgage of the above properties. Mortgage instructions have been received in your husband’s sole name. We note from the title deeds that the properties are jointly owned. Our instructions are that you are agreeable to transfer your interest in both properties to our client without any payment. We would be grateful if you would please confirm that our instructions are correct by signing and returning one copy of this letter. Before replying, we must advise you in the strongest terms that you should consult a solicitor before you reply.”

I have no evidence of any answer to that letter, whether by way of signing and returning the copy of the letter or otherwise.

The only other document I have is a Land Registry TR1 transfer form which appears at page 65 in the bundle dated 24^th May 2004, signed by Mr and Mrs Loi as the transferor and by Mr Loi as the transferee, the signatures of Mr and Mrs Loi being witnessed by a member of the firm acting at the time for Mr Loi, that being the transfer by which Mrs Loi transferred her interest in the freehold title without any reference to the leasehold title.

Mr Dean submits that I should infer that in fact Mrs Loi’s intention must have been to transfer her interest in both estates, the freehold and the leasehold estate, to Mr Loi in order that he could remortgage them. That is certainly one possible explanation. I am bound to say, however, that it seems to me that the evidence that I have is insufficient for me to reach the conclusion that that is the only possible explanation and, therefore, that that is the explanation that must be correct. I have no evidence, for instance, as to the circumstances in which Mrs Loi executed this transfer, as to whether when she did so she thought she was transferring her interest in the freehold and the leasehold estate or whether she was aware of any difference between the two, or as to whether she was aware that Mr Loi was seeking to remortgage both estates and whether she consented to that.

The solicitors at the time must, it seems to me, have been aware or at least have had the means of being aware that there were two titles and yet for some reason not explained before me they prepared a transfer in respect of only one of them. The explanation may be that they did not notice that there were two titles or it may be that they were instructed to prepare a transfer of only one of them. It seems to me I simply cannot say what the position was at that time from the few documents I have.

Furthermore, the principle of merger operates normally at the point at which two titles are acquired in the same ownership. That happened in 2002. If the titles are intended not to be merged at that time, which in my view is the implication to be drawn from the fact that they were maintained separately, it seems to me that some positive evidence is required of a change of intention if the position is to change after that time. Now, the documents I have before me are, it seems to me ambiguous. They do not really point to the inference that Mrs Loi intended to transfer her leasehold interest or she intended by the transfer of the freehold to merge her leasehold interest in the freehold and transfer the combined interest. On the issue of merger, I would not be prepared to grant a declaration that the titles were merged and that Mortgage Express have security over the merged title and I would not be prepared to vary the district judge’s order on that ground.

As to the question of subrogation, the principles on which the court will grant a declaration that a lender is subrogated to a discharged security have been expressed in a number of cases and, as lenders seek to mitigate the effects of the downturn in the property market, have come before this court on a number of occasions. Mr Dean draws my attention to the decision of the Court of Appeal in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, in which a review of the authorities was undertaken by Neuberger LJ, as he then was, resulting in 13 principles as expressed in that judgment at paragraph 32 onwards. The most common situation in which subrogation is sought and, indeed, granted, is one in which a lender bargained for and intended to obtain and thought it was acquiring security over a title but for some reason it did not obtain the security that it anticipated it would be given. The principle on which subrogation is ordered is that the owner of the interest that was intended or was expected to be charged has been unjustly enriched by the discharge of a security previously binding on that interest using the funds of the new lender in circumstances in which it would be unjust for a holder of that interest to retain the whole value of that interest freed from the previous security at the expense of the new lender. To remedy that injustice, the new lender is granted an order entitling him to be subrogated to the security which has been discharged.

Insofar as Mortgage Express’s funds have been used to discharge the security affecting Mrs Loi’s interest in the leasehold estate, this seems to me to be a straightforward application of the principle of subrogation. Mrs Loi would, if Mortgage Express were not entitled to be subrogated to the discharged security, be unjustly enriched by receiving the whole value of her interest in the leasehold estate freed from the security in favour of TMB to which she was a party. In principle, therefore, it seems to me that an order for subrogation should be granted.

The question arises as to what entitlement that gives Mortgage Express as the subrogated holder of the security. Mr Dean submits that when £65,000 was paid to TMB, Mrs Loi was relieved of her joint and several liability to pay that amount and that Mortgage Express should therefore be entitled to the whole of the proceeds of the sale of the leasehold estate now held for her benefit. That in my view is not the way in which the matter should be approached. Were it not for the discharge of the TMB security, when the leasehold estate was sold, Mrs Loi would have been entitled to 50 percent of the proceeds net of the payment of the amount secured by the TMB charge. The total amount secured was £65,000. That would have been deducted from the total sale proceeds of the freehold and leasehold estates and Mrs Loi would have been entitled to 50 percent of the remainder (apportioned between the freehold and leasehold interests). The unjust enrichment that she would suffer were subrogation not ordered is therefore not half the proceeds of sale minus the whole value of the TMB charge, but half of the whole proceeds of sale minus the whole value of the TMB charge, in other words half of the net proceeds of sale having paid off notionally the amount secured by the TMB charge. What falls to be deducted from the £50,000 now held on her behalf is therefore effectively half of that amount of TMB’s secured debt that has been paid off by Mortgage Express's advance.

In order to ascertain that amount, there are two calculations that need to be done because, of course, the TMB charge was secured over both the freehold and leasehold estates. Had those estates both been sold when subject to that charge therefore, part of the proceeds of sale would have been apportioned to the freehold estate. That apportionment, it seems to me, must still be done because the essence of the subrogation is that the separate titles were maintained until the point at which Mortgage Express have sold the combined title.

It seems to me that on the evidence before me, the amount of TMB’s security which can be taken to have been discharged by payment out of the proceeds realised on the remortgage of the freehold can fairly be taken as being the proportion which the valuation evidence available to Mortgage Express on the subsequent sale by them attributable to the freehold interest bore to the total price. On that evidence, £3,240 was apportioned to the freehold interest out of a total sale price of £110,000 and it seems to me that whatever proportion £3,240 bears to £110,000 should be treated as being the proportion of TMB’s secured debt of £65,000-odd discharged on the remortgage to Mortgage Express of the freehold interest. The balance was discharged out of the advance funded by Mortgage Express and intended to be secured by a mortgage over the leasehold interest and that is the value to which Mortgage Express is entitled as the holder of a subrogated entitlement to the TMB mortgage over the leasehold interest.

So the two steps are, firstly, to apportion the £65,000 in those proportions, then to divide the amount attributable to the leasehold interest between Mr & Mrs Loi's shares. In my judgment, Mortgage Express is entitled to be subrogated to TMB to the extent of Mrs Loi's half and there should be an order varying DJ Dowding’s order and providing for payment out to Mortgage Express of that amount. The balance in my judgment on the evidence before me is still held for the benefit of Mrs Loi and no doubt in due course, unless there is a further application to vary, there is likely to be an application to pay that amount into court for Mrs Loi’s benefit should she choose to claim it.

I should mention before closing, Mr Dean very properly raises a number of points which might have been taken against the subrogation argument, the first of which is by reference to Burston Finance v Spierway [1974] 1 WLR 164 and reference in Atkins Court Forms to a principle that conduct inconsistent with the continuance of the subrogated right, for example taking a new security inconsistent with its continuance, will defeat any such claim unless the security is from its inception wholly invalid. In Burston Finance v Spierway, the lender took a charge over a property held by a company which subsequently became void because it was not registered within the required period at Companies House. That, of course, was not a security that was wholly void from its inception. It became void or it became invalid against the liquidator by not being registered within the required period and it was held in that case as one of the grounds for the decision that a security which became invalid in that circumstance was not to be equated with an intended security which was in fact wholly invalid from inception. Neuberger LJ makes clear in Cheltenham & Gloucester v Appleyard that it is not an objection to entitlement to subrogation either that the would-be lender has sought to obtain security which was ineffective - indeed, that is the circumstance in which the subrogation claim arises - or that the attempt to obtain security has been successful to the extent of achieving some security, as it has in this case because valid security was obtained over the freehold interest but not the leasehold estate.

The principle referred to seems to me not to be applicable. The security that Mortgage Express sought to acquire is wholly invalid in respect of the leasehold estate when what was intended to be obtained was a security valid over an unencumbered freehold. Burston Finance v Spierway, it seems to me, is not an authority against the grant of subrogation here because there is a difference, as was at the basis of that decision, between a charge which was intended to be obtained but was invalid at the start and a charge which was in fact valid on grant but was subsequently invalidated for failure to comply with formalities.

Secondly, he draws my attention to the fact that a claim for subrogation may be barred by the application of a principle of lachesbut it seems to me that there can be no conceivable argument that laches would operate to bar a claim in these circumstances. The facts giving rise to the potential claim for subrogation have only become apparent to Mortgage Express on receipt of a letter from the professional indemnity solicitors of their original solicitors in April of this year. They have previously sought remedies in possession and by way of charge over the leasehold interest having discovered the invalidity of their security but, on the evidence before me, they were not aware of the proceeds having been used to discharge a prior security and did not appreciate the possibility of making a claim for subrogation until the information that came to them in April of this year, so while it was very proper of him to draw those matters to my attention, they are not in my view reasons why I should not make the order based on subrogation.