JL Homes Ltd v Mortgage Express & Anor

This is an application by Mortgage Express (the First Defendant, to whom I shall refer as “ME”) and Messrs Diakiw and Heap (the Second Defendants, to whom I shall refer as “the Receivers”) for summary judgment and/or to strike out a claim by JL Homes Ltd (“JL”) and for an extended civil restraint order.

It is common ground that JL is the owner of 6 buy-to-let properties (“the Properties”), of which 3 were mortgaged to ME and 3 were initially mortgaged to Keystone Mortgages, but the mortgages were subsequently assigned to ME. On 4 May 2012 ME appointed the Receivers as LPA receivers over all the Properties (I shall refer to the Law of Property Act 1925 as “the LPA”). I am told that the Receivers have obtained possession orders in respect of all the Properties, save for 17 Beck Street.

Both Defendants apply to strike out the claim under CPR Rule 3.4(2) (a) and (b) and/or for summary judgment under Rule 24(2). In order to strike out, the Defendants have to show that there are no reasonable grounds for bringing the claim or that the proceedings are an abuse of process. In order to obtain summary judgment, the Defendants have to show that the claim has no real (meaning realistic) prospect of success and that there is no other compelling reason for a trial. I shall proceed on the basis that the hurdle which they have to overcome under Rule 24(2) is as high as under CPR 3.4(2) (a), save that I am permitted to look at evidence for the purpose of summary judgment but not on the application to strike out.

The Particulars of Claim (“POC”) were settled by Mr Patterson, who appears for JL on the basis of direct access. Paragraph 4 pleads that the Receivers were “wrongly appointed” as LPA Receivers. No particulars are given. The Defendants rely on 2 bases for the appointment. The first relates to mortgage arrears. Paragraph 4 of the POC admits that there were arrears, but does not admit how much or for how long. Paragraph 5 of Section C (the loan conditions) of the ME mortgage terms provides for the full mortgage debt to be repaid immediately if the mortgagor is late in paying at least 2 total monthly payments. (It is common ground that the Keystone mortgage conditions are in substantially the same terms; accordingly I will refer only to the ME terms.) Mr Patterson argued that ME had failed to give 2 months’ notice of the appointment, but he accepted in the course of submissions that this was not a precondition to the appointment of a receiver; he also accepted the accuracy of the schedule attached to ME’s Defence, which showed that each mortgage was at least 2 months in arrears at the date of the appointment of the Receivers. At one stage Mr Patterson sought to rely on LPA section 103(i) but he had to accept that this was inapplicable, firstly because there are alternative gateways under section 103(ii) and (iii) and secondly because section 103 was expressly disapplied in the mortgage terms. I am therefore satisfied that the Receivers were validly appointed on the basis of arrears of interest.

The second basis of appointment related to the granting of tenancies. Paragraph 2 of the POC avers that JL sublet the Properties to Jubani Properties Ltd (“Jubani”). Paragraph 5 of Section C of the mortgage terms provides that the entire debt is repayable immediately if there is any breach of any condition of the agreement (other than for payment of money). Paragraph 3(f) of Section D prohibits the mortgagor from granting any tenancy without the written consent of the mortgagee. Mr Patterson sought to argue that there was an implied relaxation of this requirement because ME knew that the Properties had been bought on a buy-to-let basis. I have not been taken to the mortgage offer. If this was a mortgage offer on a buy-to-let basis, it might well be that it expressly authorised, and indeed required, the borrower to let on defined terms (which I would expect to be an assured shorthold tenancy). Since I have not seen the mortgage offer, I shall deal with the point on alternative bases.

If the mortgage offer did not authorise and require JL to let the Property, then it was a breach to do so without consent. Even if ME contemplated that there would be a letting, it nevertheless had a real interest in knowing, and having the right to vet, the terms of any tenancy. ME in its Defence expressly denied that any consent had been sought or obtained in relation to the tenancies. Mr Moraes, for ME, referred to Taylor v. Ellis[1960] Ch. 368 at 375, where Cross J held that the burden of proof was on the mortgagor to show that consent had been granted. JL made no attempt to discharge that burden.

If, in the alternative, the mortgage offer authorised and required JL to let, I would not expect the permitted letting to include a letting to a company, let alone a company associated with the borrower.

Mr Patterson argued that the formal demand and the letter notifying JL that the Receivers had been appointed both referred to the mortgage arrears and not to the granting of tenancies. However, Mr Patterson was unable to cite any authority, and I am satisfied that there is nothing in the general law or in the mortgage conditions, which required ME to specify the reasons for appointing receivers or which limited ME to reasons which had been given (if, indeed, the letters should be construed as giving reasons).

I therefore conclude that there were 2 valid reasons for appointing a receiver, either of which by itself would have been sufficient, and that the allegation to the contrary in POC paragraph 4 stands no realistic prospect of success.

Paragraph 6 alleges that ME “failed to follow the statutory procedure” for the appointment of a LPA Receiver. Once again, no particulars are given. The allegation is expanded in Mr Patterson’s skeleton argument (which I did not receive until the start of the hearing). He argues that the appointment is defective because of non-compliance with LPA section 103. However, as already stated, section 103 is expressly disapplied by the mortgage conditions. Accordingly I have seen no basis for attacking the mechanics of the appointment and I therefore conclude that this argument stands no realistic prospect of success.

Paragraph 8 alleges that the Receivers purported to act before being appointed. The basis of this allegation is not clear from the pleading, but Mr Patterson explained in his submissions that he was relying on a letter dated 17^th April 2012 notifying JL of the appointment. The letter enclosed a copy of the deed of appointment, which was dated 4^th May 2012. It is clear on the face of the letter that something has gone wrong, the most obvious explanation being that the letter was wrongly dated and should have borne a date on or after 4^th May. This is confirmed by paragraph 9 of the witness statement of Mr Diakiw. No evidence in response has been served by JL. In particular, JL has not stated in evidence whether it received the letter dated 17^th April 2012 before 4^th May 2012. In these circumstances I am satisfied that the allegation in paragraph 8 stands no realistic prospect of success.

I cannot conclude on the face of the pleading that paragraphs 6 and 8 disclose no reasonable cause of action, since no particulars were sought or given. However, I am satisfied that it is an abuse to make these sweeping allegations when there is plainly no basis for doing so.

Paragraph 10 of the POC alleges that ME had previously appointed Mr Heap as receiver of 2 of the properties in 2010 and had done so wrongly. The Defendants’ case is that the Receivers were properly appointed in respect of one property but their appointment was subsequently terminated, and that they were not appointed over the other. No loss has been alleged by JL as flowing from these historic appointments, nor is it alleged that the current appointments are in any way rendered void by what happened in 2010. In addition, no basis has been alleged for saying that the Receivers were improperly appointed in 2010.

Paragraph 12 alleges that the Receivers have “systematically gone about obtaining possession of the properties and evicting the tenants, thereby depriving [ME and the Receivers] of the income whereby the mortgage payments could be met”. Paragraph 13 alleges that ME has “deliberately adopted the policy of using [the Receivers] to obtain possession as [a] ‘soft target’, bypassing Jubani Properties altogether” and has “thereby evaded the provisions of the law for granting relief from forfeiture”.

As Mr Moraes and Mr Lewis submitted, these allegations reveal a very serious misunderstanding of the powers and duties of a mortgagee. It is (or should be) elementary law that a mortgagee is not a trustee of the power of sale or of the power of appointing a receiver. He is entitled to act in his own interests, so long as he does not act in bad faith, and he has a very limited duty of care (see, for example the recent summary by Eder J in Saltri III Ltd v. MD Mezzanine SA Sicar[2013] 2 BCLC 217 at [127] and [128]). Mr Patterson shrank from alleging bad faith, but I find it difficult to see how else to read the words “deliberately” and “thereby evaded”. Any allegation of bad faith should, of course, be properly particularised; this allegation was not. Further, the rules as to relief from forfeiture have nothing to do with this case, because no tenancy has been forfeited; what the Receivers did was to seek possession.

Paragraph 8 of Section D of the mortgage conditions expressly empowers ME to appoint a receiver “to repossess the property and manage it (as well as collect the income from it)” and “if the property is let, we may end the tenancy”. It goes on to say that ME and the Receivers might rely on this extended right only if they reasonably thought it necessary to protect their security or to increase the income from the Property. It is clear in the circumstances of this case, where the overall debt amounts to some £1.3 million, that they are acting reasonably, and the contrary has not even been suggested.

Paragraph 14 pleads that the Receivers have “compounded the situation” by refusing to notify JL or Jubani of the possession actions which they have brought. (Mr Junid Borishade is the company secretary of JL and is also associated with Jubani. I was not told the precise connection, but it is clear from paragraph 14 that JL and Jubani are associated companies.) Mr Patterson accepted, when pressed, that the Receivers had no duty, either at common law or under the mortgage conditions, to notify JL.

Paragraph 16 pleads that the power of appointing a receiver is “for the purpose of protecting the mortgagee from the accumulating arrears of interest.” Not surprisingly, Mr Patterson was unable to point to any authority for this extraordinary proposition. This is plainly contradicted by the terms of the mortgage, which provide that the entire debt becomes due upon default, not merely the accumulated arrears.

Paragraph 17 of the POC moves to a different topic and attacks ME’s power to consolidate the mortgages. Paragraph 15 of Section D says that the right to combine mortgages is not restricted by LPA section 93 and that the mortgagee has the right to stop the borrower from paying off one mortgage in isolation. Subparagraph 7(a) of Section B (the general conditions) permits the mortgagee to transfer its rights. Subparagraph 7(f) adds that “this will not affect your legal rights or responsibilities under the agreement”. Under the general law, the mortgagee’s power to consolidate extends to consolidating mortgages which have been transferred from a different mortgagee (see Pledge v. White[1896] AC 187 and the other cases cited in Fisher & Lightwood’s Law of Mortgages paragraphs 46.3 and 46.6). Mr Patterson accepted this general proposition but argued that the position was changed by subparagraph 7(f).

I am satisfied that this is a hopeless argument, for 2 reasons. The first is that subparagraph (f) was not intended to cut down subparagraph (a) but merely to ensure that it was not to be used to create further rights or responsibilities; the consequences set out in Pledge v. White flow from the general law and are not additional. The second is that the consolidation of the mortgages does not affect JL’s legal rights or responsibilities. The power of consolidation is (from JL’s perspective) a restriction rather than a “right or responsibility”. Further, the exercise by ME of its power of consolidation might have a commercial effect on the borrower but does not affect his legal rights.

Although Mr Patterson’s skeleton argument was cast in wider terms, he made it clear in his oral submissions that the argument on consolidation was limited to the application of surplus moneys as between ME mortgages on the one hand and Keystone mortgages on the other. It is clear from the schedule attached to ME’s Defence that the surplus to which this applies is limited to about 1% of the overall debt.

Paragraphs 18 and 19 allege that ME has refused to enter into discussions with JL. There is also reference to an assurance. The allegation is not particularised. However, paragraph 12 of the prayer for relief seeks an order that ME be estopped from continuing to act in breach of the agreement to negotiate. This is yet another truly hopeless allegation. In the first place, there are no particulars of the alleged agreement or assurance. Secondly, it is difficult to see how any agreement to negotiate could amount to a binding contract, in view of Walford v. Miles[1992] 2 AC 128, as Mr Patterson accepted in his oral submissions. Thirdly, insofar as this is said to amount to an estoppel, JL is seeking to use the estoppel as a sword and not a shield, but does not (and could not properly) allege that it is a proprietary estoppel. Fourthly, there is no clear representation. Fifthly, no detriment is alleged, since JL was under a duty to pay the mortgage debt in any event. I asked Mr Patterson to tell me what kind of estoppel he was alleging, but he was unable to do so.

Finally, paragraph 20 seeks to rely on sections 140A and B of the Consumer Credit Act 1974. In the course of his submissions Mr Patterson accepted that these sections apply only to individuals and not to companies. He argued somewhat faintly that the sections might apply by way of analogy but was unable to explain whether this gave rise to statutory, common-law or equitable rights. In the end I understood him to be saying nothing more than that the powers given to a mortgagee are Draconian and that the court should not seek to construe the terms in favour of the mortgagee and should hesitate before granting any equitable remedy to the mortgagee. Mr Patterson was understandably careful not to go further and allege that the corporate veil should be lifted, since this would have had obvious adverse consequences for his client. He had no authority whatsoever for his proposition that sections 140A and 140B applied by way of analogy. I am satisfied that this is hopeless, but in any event it does not arise because (i) I have seen nothing to indicate any ambiguity as to the construction of the mortgage terms, (ii) I have seen no evidence that the mortgage conditions are unusual and (iii) ME is not asking the Court to do anything other than strike out an obviously hopeless claim.

There are a few paragraphs in the POC which I have not specifically addressed, but these either purport to lay the foundations for the allegations I have considered or they merely repeat those allegations.

I am therefore satisfied that the entire claim discloses no reasonable cause of action, that there is no other compelling reason for a trial and that I should exercise my discretion by granting summary judgment to the Defendants. If that is wrong, then I strike out the entire claim. I have indicated that paragraphs 6 and 8 will be struck out as an abuse in formulating an unparticularised claim which has no factual foundation; the rest will be struck out as disclosing no reasonable cause of action.

On 9 January 2013 JL issued an application in the Portsmouth County Court against ME and Walker Singleton (Property Management) Ltd seeking (inter alia) a declaration that the appointment of the Receivers was unlawful and an injunction to stop all actions of the Respondents in exercising their alleged rights under the mortgage. The application was served under cover of a letter addressed to Messrs Diakiw and Heap, Walker Singleton (Property Management Ltd). I am told that the Receivers are directors or employees of this company. Mr Patterson realistically accepted that JL’s intention was to join the Receivers. I am therefore satisfied that these proceedings were against the current parties. If that is wrong, there is a sufficiently close connection to bring the matter within the broad merits-based test set out by Lord Bingham in Johnson v. Gore Wood[2002] 2 AC 1 at 31A-F.

On 11 January 2013 District Judge Wilson ordered that “the Applicant’s application for interim relief order Part 23 of the Civil Procedure Rules 1998 is dismissed as being totally without merit” and he ordered the Respondents costs “of the application” to be paid pursuant to the mortgage covenant. Mr Patterson focused on the words “interim relief” and sought to argue that the District Judge merely dismissed the application for an injunction. He told me on instructions, but without any evidence, that there were no outstanding warrants for possession on 11 January, and hence that the District Judge’s statement that the application was totally without merit related solely to the injunction and not the declaration which was sought. It was plainly unsatisfactory to expect this Court to decide the point without evidence. Accordingly I permitted Mr Moraes in reply to take me to the witness statement of Ms Ruth Spankie of Drydens Fairfax dated 11January 2013, which was before the District Judge. This witness statement stated that a warrant for possession had been issued but not yet executed in relation to one of the Properties and that a warrant had been applied for in relation to another. It is clear from this evidence that, when the District Judge said that the application was totally without merit, he did not mean simply that the application was premature. I permitted Mr Patterson to address me in reply to Mr Moraes but he said that he could add nothing.

The term “interim relief” clearly needs to be read in its context. The context in this case was that JL had made a free-standing application, i.e. not in the course of any existing proceedings. The County Court gave JL the benefit of the doubt and assigned it a new number (3PO00027). The application included final as well as interim relief. The whole application was dismissed with costs and the District Judge certified that it was totally without merit. In the circumstances it is clear that this was a final decision on the merits.

Meanwhile, the Receivers brought further proceedings (No. PO5826) against the subtenants for possession of 2 of the Properties. On 11 March 2013 JL sought to intervene in those proceedings by seeking 35 heads of relief. This clearly went way beyond any normal form of interim relief and effectively sought to reopen the same issues as had been dismissed on 11 January. On 22 April 2013 District Judge Ackroyd made an “unless” order requiring that the application be served on the Receivers by 7 May 2013. This did not happen, and JL’s application was therefore struck out. This was not a strike-out on the merits. Nevertheless it is clear that the basis of the relief sought was the same as the relief sought in the January proceedings. I asked Mr Patterson in the course of his submissions in what way the basis of the relief was different. His answer was that the basis for the grant of an injunction became stronger, the more times the Receivers took possession of JL’s Properties. I find that entirely unconvincing. On the contrary, the more times a thoroughly bad point is raised, the more it becomes an abuse.

The Receivers also brought separate proceedings against the subtenants for possession of 3 of the other Properties (Case No. 2PO0828). JL issued an application, both in these proceedings and in the second proceedings (PO5826) for an order suspending execution of the warrant for possession. On 22 May 2013 the application in relation to PO5826 was dismissed by District Judge Ackroyd following the strike-out for non-compliance with the “unless” order. On 11 July 2013 the District Judge dismissed JL’s application for an adjournment in relation to Claim 2PO0828, but he stayed enforcement of the orders for possession in that case pending determination of the current proceedings. Mr Patterson’s skeleton argument sought to explain the District Judge’s reasons, but there was no admissible evidence to this effect.

Although the various proceedings in Portsmouth do not all relate to the same Properties and give rise to slightly different considerations, all of them relate to one or more of the 6 Properties which are the subject of the current proceedings and all of them are predicated upon the Receivers having been improperly appointed or improperly exercising their powers. The first proceedings were struck out on the merits. The second proceedings were struck out on a procedural point but had no more merit than the first. The third were also dismissed. I am amply satisfied that the current proceedings are an abuse of process in attempting to relitigate hopeless allegations that have previously been struck out.

In the circumstances I declare that these proceedings are totally without merit. I am required by CPR Rule 3.4(6) to consider whether it is appropriate to make a civil restraint order. I will hear Counsel on this and any other consequential orders.