Mcguinness V Norwich & Peterborough Building Society 2
CONTENTS
McGuinness v Norwich & Peterborough Building Society 2
[2011] EWCA Civ 1286
Guarantees – construction – liability in debt - bankruptcy
Berrisford v Mexfield Housing Cooperative Ltd 4
[2011] UKSC 52
Mortgage rescue scheme – sale and leaseback – construction of occupancy agreement
Sinclair v Glatt 5
[2011] EWCA Civ 1317
Receiver – court appointed – duties on sale
National Westminster Bank Plc v Hunter 8
(unrep) Ch D 23 Nov 11
Mortgage – sale of land – order for sale – s 91 Law of Property Act 1925 – sale by receiver
Kojima v HSBC Bank Plc 9
(unrep) CA 9 Nov 11
Finality of orders – application to withdraw admissions – second appeals
Publication 10
CML Guidance on Arrears/Possession sales of Shared Ownership Properties
Publication 10
FSA/OFT Guidance on Payment Protection Insurance
CASE REPORT
McGuinness v Norwich & Peterborough Building Society
[2011] EWCA Civ 1286
LEGAL POINTS
Guarantees – construction – liability in debt - bankruptcy
SUMMARY
As a matter of construction, a guarantee given to secure mortgage repayments was held to create a liability in debt upon which the lender could petition in bankruptcy.
FACTS
M provided a guarantee to NPBS in respect of a mortgage loan to his brother, secured on a flat. The brother failed to meet the monthly instalments due upon the mortgage and under the mortgage conditions, became liable for the principal sum plus interest. The flat was regarded as unsaleable so NPBS proceeded to enforce the guarantee, not by action but by serving a statutory demand and then petitioning for M’s bankruptcy. As at the date of demand, the mortgage debt was £1,206,867.17. This was not in dispute.
M did not apply to set aside the statutory demand (failure to comply therefore established his inability to pay, which is one of the conditions to be satisfied on a creditor’s petition under s 267(2)(c) Insolvency Act 1986). However, at the hearing of the bankruptcy petition, M took the point that his liability to pay under the guarantee was not a debt for a liquidated sum as required under s 267(2)(b) in order to found a creditor’s petition. He argued that his liability was in unliquidated damages (relying on Moschi v Lep Air Services Ltd [1973] AC 331).
The deputy bankruptcy registrar accepted NPBS’s argument that on the true construction of the guarantee, M’s liability was as a debtor rather than in damages. He therefore made the bankruptcy order.
M’s appeal to Briggs J [2010] EWHC 2989 (Ch) was dismissed.
The Court of Appeal gave permission for a second appeal on the basis that the question whether a liability under a guarantee was a debt for a liquidated sum within the meaning of the Insolvency Act 1986 raised an issue of general importance.
HELD
A guarantee for a loan may impose one or more of the following types of liability:
(1) A “see to it” obligation, ie. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor;
(2) A conditional payment obligation, ie. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal debtor fails to make those payments;
(3) An indemnity; and
(4) A concurrent liability with the debtor for what is due under the contract of loan.
The obligations in classes (2) and (4) create a liability in debt. An indemnity is enforceable by way of an action for unliquidated damages. A guarantee of the “see to it” type has also been held by the House of Lords to create a liability in damages – the obligation undertaken by the guarantor is not one to pay the debt but consists of a promise that the debt will be paid by the principal debtor: Moschi v Lep Air Services Ltd [1973] AC 331.
Under s 382 Insolvency Act 1986, a “bankruptcy debt” includes not only a liability in debt properly so-called, but any claim for damages, whether in contract or tort including a contingent or future liability. It does not matter whether the debt or liability is liquidated or remains to be ascertained.
But the qualifications for petitioning as a creditor as more restricted. S 267 does not refer to “bankruptcy debt” as such. The word used in s 267 is “debt” which is to be construed in accordance with s 382(3) which does not include a liability. S 267(2) requires the petition debt to be for a liquidated sum. Whether that includes a damages liability depends on the practice and decisions of the court as to what constitutes a debt in a liquidated sum for the purposes of a creditor’s petition.
The authorities indicate that a debt for a liquidated sum must be a pre-ascertained liability under the agreement which gives rise to it. This can include a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, will produce a figure.
The liability under a guarantee of the ‘see to it’ type would not constitute a debt for a liquidated sum. In the present case, the guarantee contained the following clauses:
2.2 You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due.
4.2 Your obligations under this Guarantee are those of principal, not just as surety. We will not be obliged to make any demand on, or take any steps against, the Borrower or any other person before enforcing this Guarantee.
As a matter of construction, clause 4.2 operates to confirm that clause 2.2 creates a liability in debt upon which NPBS could petition in bankruptcy.Appeal dismissed.
COMMENT
This decision contains a helpful review of the principles and authorities involved in construing guarantee agreements and the extent to which any particular guarantee liabilities give rise to a debt upon which the creditor could petition in bankruptcy without first obtaining a money judgment in a damages claim.
CASE REPORT
Berrisford v Mexfield Housing Cooperative Ltd
[2011] UKSC 52
LEGAL POINTS
Mortgage rescue scheme – sale and leaseback – construction of occupancy agreement
SUMMARY
On its true construction, an ‘Occupancy Agreement’ expressed to be “from month to month”, entered into under a sale and leaseback arrangement in a mortgage rescue scheme, created a tenancy for 90 years.
FACTS
M Ltd was formed by a bank to operate a mortgage rescue scheme whereby M Ltd would buy mortgaged properties from borrowers in financial difficulty and then let the properties back to the borrowers – a sale and leaseback arrangement.
In 1993, M Ltd purchased B’s property and let it to her under an “Occupancy Agreement”.
Clause 1 provided “[M Ltd] shall let and [B] shall take the [premises] from 13 December 1993 and thereafter from month to month until determined as provided in this Agreement.
Clause 5 provided that the Agreement shall be determinable by B giving M Ltd one month’s notice in writing.
Clause 6 provided that the Agreement may be brought to an end by M Ltd by the exercise of a right of re-entry but only in accordance with certain circumstances. These included arrears of rent for more than 21 days or other breach of the Agreement etc.
Because M Ltd was a mutual housing association, any residential tenancy granted to its members did not attract statutory protection (apart from the Protection from Eviction Act 1977).
B fell into arrears with rent and in 2008 M, having apparently not elected to re-enter under Clause 6) served a notice to quit followed by proceedings for possession – contending that despite the limited circumstances in which it could terminate the Agreement under clause 6, it was nonetheless entitled to terminate the tenancy by serving a notice to quit.
M’s case was that on the authority of Prudential Assurance Co Ltd v London Residuary Body[1992] 2 AC 386, the present arrangement could not give rise to a valid tenancy as a matter of law; that upon paying rent M had become a periodic tenant; and that M was entitled to determine the tenancy by a common law notice to quit (complying with the 1977 Act).
The judge refused M’s application for summary judgment, but on appeal both Peter Smith J [2009] EWHC 2392 (Ch) and the Court of Appeal [2010] EWCA Civ 811 accepted M’s argument and made an order for possession.
B appealed, contending that the present arrangement could not constitute a valid tenancy in law; that prior to 1926 is would have created a term for the life of the tenant; and that by virtue of s 149(6) Law of Property Act 1925, such a term is now a tenancy for 90 years. Since B had not served notice under clause 5, and M Ltd was not relying on re-entry under clause 6, it was not entitled to possession.
HELD
The appeal would be allowed.
(1) The arrangement contained in the Agreement could only be determined in accordance with clauses 5 and 6, and not otherwise.
(2) Such an arrangement cannot take effect as a tenancy in accordance with its terms, but
(3) By virtue of well-established common law rules and s 149(6), the arrangement is a tenancy for a term of 90 years determinable on the tenant’s death by one month’s notice from the landlord, and determinable otherwise in accordance with clauses 5 and 6.
(4) Since B was still alive and has not herself served notice under clause 5, and M Ltd is not relying on clause 6, it follows that B retains her tenancy of the premises and M Ltd is not entitled to possession.
COMMENT
This decision may be of considerable importance to occupiers who, like Mrs B, have entered into various forms of occupancy agreement under a sale and leaseback arrangement as part of a mortgage rescue. An agreement from month to month until determined does not create a term certain, nor does a periodic tenancy with an invalid fetter on the landlord’s right to determine. Both would have created a life interest prior to 1925, and thereafter a term certain for 90 years. This may well have unexpected consequences.
CASE REPORT
Glatt v Sinclair
[2011] EWCA Civ 1317
LEGAL POINTS
Receiver – court appointed – duties on sale
SUMMARY
A receiver appointed by the court owes the same duties as a mortgagee or receiver appointed out of court. On the facts, the judge had erred in refusing permission to continue a claim for breach of duty where there was a significant discrepancy between the sale price and a re-sale price agreed shortly after, and where there were concerns as to the manner of marketing. However, there was insufficient evidence to justify allegations of sale to a connected party, which was akin to fraud.
FACTS
S was appointed receiver of G’s assets by the court on an application by HMRC pursuant to the Criminal Justice Act 1988, and was subsequently authorised to sell G’s property.
S obtained an open market value of the property at £330,000 and appointed selling agents who received bids of £317,000, £318,000 and £330,000. S agreed to sell at £330,000 but obtained a confirmatory open market valuation from a separate agent also at £330,000.
Completion took place on 18th April 2002. The purchaser immediately advertised the property for re-sale at an asking price of £449,950 and agreed a sale at £455,000 with completion taking place on 1st August 2002.
G brought a claim against S for breach of duty in which, amongst other things, he alleged the selling agents had a connection with the purchaser.
The judge had found that there was no basis for believing that S relied upon valuation evidence that was manifestly flawed or that the selling agents were anything other than competent and honest. The ‘nit-picking’ criticisms about the way S dealt with the sale lay within his fair and reasonable discretion and did not show that he had proceeded in an unreasonable way.
As to the allegation that the selling agents were connected with the purchaser, the judge considered this to be an extremely serious allegation, effectively amounting to fraud, yet was not backed up by any sufficient evidence.
He therefore concluded that the claim had no realistic prospect of success and should not be allowed to proceed [2010] EWHC 3082 (Admin). S’s costs to be a lien in the receivership.
G appealed, contending that the judge fell into error.
HELD
On the law, it was recognised that a receiver owed a duty to those interested in the property over which he is appointed to act in good faith and to take reasonable steps to obtain a proper price (eg. Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295; Medforth v Blake[2000] Ch 86). “Proper price” means the best price reasonably obtainable at the time. Further, that a mortgagee exercising a power of sale, and a receiver appointed by a mortgagee cannot escape liability merely by saying that they entrusted the sale to apparently competent professionals (Raja v Austin Gray[2003] BPIR 725). Although a court appointed receiver has no interest in the property (similar to that of a mortgagee) in general he is under the same fiduciary duties and owes the same duties of care as a receiver appointed out of court.
The court recognised that there was no coherent or convincing explanation as to how the property came to be re-marketed and re-sold in such a short space of time with an uplift of 38%, but this did not directly answer the question whether the judge erred in failing to find that G had genuine grounds for bringing the claim.
G could not be criticised for relying on the initial open market valuation report. However, the court expressed concerns about the manner of marketing – that G had not ascertained the state of the market; he had not discussed a marketing strategy with the selling agents; not considered what would be an appropriate asking price or whether sales particulars should be produced or in what form; how long and in what manner the property should be advertised or any other aspect of the sales strategy to be adopted.
The court was concerned about the rapid acceptance of the offer of £330,000 and whether additional marketing would general interest. It would have been reasonable to see what further offers would have been forthcoming.
Overall, there was little evidence to indicate what G had done to ensure the best price reasonably obtainable was in fact achieved. The advertisements were not produced in evidence and no sales particulars were prepared. The court therefore concluded that there was an issue to be tried and that the judge fell into error.
As to the allegation of sale to a connected person – the son of a business associate of its directors, the evidential basis was very flimsy. The approach taken by the judge in rejecting this part of the claim was entirely correct.
On limitation, there was no dispute that the limitation period for bringing a claim is six years. G had applied to amend his claim after the limitation period had expired by introducing new claims not foreshadowed in the original particulars and which therefore constituted the introduction of a new cause of action. Permission to amend would not be allowed.
Appeal allowed. Order for costs below set aside.
COMMENT
This case concerns the duties owed by a statutory receiver in respect of the sale of property, but the Court of Appeal confirmed that the duties were the same as those owed by a mortgagee or Law of Property Act receiver appointed out of court.
The court was immediately put on notice by the significant discrepancy in value caused by a subsequent sale at a significantly higher price, and having worked through the evidence, significant questions were raised about the manner of marketing.
The leading judgment was given by Kitchin LJ. Importantly, Lloyd LJ made it clear that just because [the receiver] obtains a valuation does not dispense with the need to conduct the marketing properly and to obtain further advice where necessary, including as to asking/guide price, method of selling, which offer should be accepted and when etc.
However, the court clearly expressed a word of caution about making unsubstantiated allegations akin to fraud – in this case of a sale to a connected person at an undervalue. They had to be properly pleaded and capable of being supported by reliable evidence.
CASE REPORT
National Westminster Bank Plc v Hunter
(unrep) Ch D 23 Nov 11
LEGAL POINTS
Mortgage – sale of land – order for sale – s 91 Law of Property Act 1925 – sale by receiver
SUMMARY
Although a mortgagor had standing to apply for an order for sale in preference to a sale entered into by receivers appointed by the bank, on the facts, the mortgagor was bound by the sale contract and the court would not intervene to upset those arrangements.
FACTS
H defaulted in repayment of two mortgages to NWB secured on two parcels of agricultural land and buildings. NWB appointed receivers and subsequently obtained an order for possession. H made proposals to purchase the property through a company owned and controlled by his wife, and entered into two contracts of sale. NWB subsequently sold the property at auction to a third party.
H applied for an order for sale under s 91 Law of Property Act 1925 to enable the sale to proceed under the two separate contracts in preference to the sale arranged by NWB.
HELD
(1) H was a person ‘entitled to redeem’ the mortgaged property for the purposes of invoking s 91 Law of Property Act 1925. This was not a case in which a contract of sale entered into by the mortgagee had suspended the equity of redemption. Here the mortgagor had made the contract of sale. Accordingly, the court had jurisdiction under s 91.
(2) However, H had, through the agency of the receivers, validly contracted to sell the property, despite the fact that the auction sale had been held against his wishes.
(3) The court would not intervene to upset the contractual arrangements entered into by NWB.
(4) In any event, the realization of the property by the receivers was more favourable than under the arrangements entered into by H. There was no evidence to support the suggestion that funding was available to H
(5) Cattle left behind on the agricultural land were chattels personal and therefore “goods” for the purposes of the Torts (Interference with Goods) Act 1977. Although H owned the cattle, they remained in the possession or control of the receivers as bailees and the court was entitled to order their sale under s 13. The court dispenses with the statutory requirement that NWB serve a notice requiring H to remove the cattle.
(6) H had been in breach of court orders and faced committal proceedings.
COMMENT
Section 91 Law of Property Act 1925 is an important but frequently overlooked provision which enables any person interested in the mortgage money or the right of redemption (usually the borrower or other lenders) to apply for an order that the court direct a particular sale of the mortgaged property on such terms as it thinks fit.