England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice The Strand London WC2A 2LL
		26 July 2005

MR JUSTICE LAWRENCE COLLINS:

The Background

1. The claimant, Mr Zaman, and the husband of the defendant Mrs Zoha, were partners trading in the name of Zoha Zaman & Co from 1980-1987. In 1986 they purchased business premises at 65 New Road, London E1 ("the property"), in joint names with the beneficial interest being shared equally between them. The purchase was made with the assistance of a £50,000 loan from Lloyds Bank, secured by a joint mortgage ("the charge") over the property dated 16 June 1986.
2. In late 1987 the partnership was effectively dissolved. It is Mr Zaman's case that he was excluded by Mr Zoha, who then changed the locks. Mrs Zoha says that Mr Zaman left of his own accord. I should emphasise that I am making no findings of fact in this judgment relating to the underlying dispute between the parties.
3. On 2 November 1987, the mortgagees of the property, Lloyds Bank, demanded payment. On 19 October 1988, the bank issued possession proceedings. On 14 April 1989, Lloyds Bank transferred the charge to Mr Zoha by a legal assignment which was registered at the land registry.
4. After 1987 and until his death, Mr Zoha had exclusive occupation of the property and continued to trade there on his own account as Zoha & Co, but apparently paid no occupation rent. Mr Zaman says that he let out part of the property but did not account to Mr Zaman for his share of the rental income. Mr Zaman says that during this time the property was allowed by Mr and Mrs Zoha to fall into disrepair.
5. On 9 May 2001, Mr Zaman issued proceedings against Mr Zoha claiming, among other things, an order that the property be sold with the net proceeds divided equally between them and a share of the occupation rents since his exclusion. In his defence Mr Zoha pleaded that the claims for an account were time-barred and sought to set off sums he had paid out in respect of the property.
6. There was an important order of 15 July 2002 to which I will refer in detail. By this order of Master Bragge, Mr Zoha was ordered to pay occupation rent to Mr Zaman in respect of his occupation of the property since 9 May 1995. The court also ordered that the property be sold and that the net proceeds of sale after deduction of sale expenses be lodged in court to the credit of the case. The relevant provisions of the order read:

"Upon hearing Counsel for the Claimant and .... for the Defendant it is ordered ...

(1)That the property known as 65 New Road, London E1 1HH, registered at HM Land Registry under title number NGL475606 ("the Property") be sold and the claimant solicitors be appointed to convey the same;

(2)That, in default of agreement, the net proceeds of sale of the Property after payment of all proper costs charges and expenses of sale be lodged in Court to the credit of this case;

(3)That paragraphs (1) and (2) of this order be stayed, with general permission to either party to apply to lift the stay;

(4)That the Defendant set forth in a witness statement, to be served and filed on or before 4.00pm on 19th August 2002, full particulars of all expenditure on which he would seek to rely in relation to his claim to a greater than 50% share in the proceeds of sale of the Property, and that he exhibit to such witness statement, to be filed and served at the same time, all documents that he relies upon."

That order was stayed, but the stay was lifted on 29 August 2003.

7. Mr Zoha died on 22 December 2002. Mrs Zoha took out letters of administration and began trading from the property. She was substituted as defendant in these proceedings on 2 June 2003. The highest offer for the property has been made by Mr Zaman for about £346,000. Mrs Zoha has accepted that, pursuant to the court order, the property has to be sold to Mr Zaman.
8. On 24 November 2004, it was ordered that Mrs Zoha allow Mr Zaman into occupation of the basement and ground floors of the property. Mrs Zoha has complied with this order. The remainder of Mr Zaman's application was adjourned to 7 February 2005. At that hearing Mrs Zoha did not resist certain parts of the relief sought by Mr Zaman, namely that it be sold to him for the agreed price of £346,000 and that the net proceeds of sale after payment of the expenses be lodged in court. She resisted only paragraph (iv) of the relief sought, namely that on completion of the sale of the property she should release the charge.
9. Her position is that the charge was and is legal property distinct from the freehold estate in the land. She says the charge was never property owned by the partnership; it was a new property vested in Lloyds Bank from the outset. As it was never property of the partnership, there is no question of Mr Zoha having acquired partnership property. He acquired a quite different property and he acquired it from Lloyds Bank in an arm's length transaction. The charge is unimpeachable in law and in equity. He had an unimpeachable title to the legal and beneficial interest in the charge. On assignment the covenant in the charge and the right to the debt passed to Mr Zoha. Consequently, Mrs Zoha, as personal representative and proprietor of the charge, is now entitled to require redemption of the charge by way of repayment of the debt as a condition precedent to releasing the charge. The sum so required was calculated to 1 June 2004 at almost £450,000 because of the effect of compounding the contractual rate.
10. Master Bragge ordered that the following issues be determined: first, whether the charge was extinguished; and second, if not, whether Mrs Zoha was entitled to require redemption of the charge as a condition precedent to its release on completion of the sale of the property pursuant to the order of 15 July 2002 and the sum she is entitled to require on such redemption or which the court may permit the purchaser to pay into court for the land to be declared free of the charge under section 50 of the Law of Property Act 1925.

The Issues

11. There are two main issues. First, was the effect of the order that the property be sold subject to the charge or conditional on its redemption, as Mrs Zoha contends, or was the order for an unconditional sale subject only to payment of costs and the expenses of sale, as Mr Zaman contends? The second issue relates to limitation: would Mrs Zoha's claim in any event be time-barred?
12. Mr Zaman's position is that the obvious intent was that the property simply be sold neither subject to a charge nor with the requirement of redemption. If Mrs Zoha requires that she be paid the sum she claims before unencumbered title is given to a purchaser, she will be frustrating the court order made on 15 July 2002 and that made on 29 August 2003. No sale of the property could realistically take place. It was implicit in the orders that Mrs Zoha should give unencumbered title on sale by releasing the charge and therefore she is obliged to release it.
13. Mrs Zoha's case is that the order was no more than a routine step in the winding-up of a partnership and that it contemplated that the usual conveyancing processes would apply in order to pass good title to the buyer, which includes redeeming all outstanding charges. Had the charge still been vested in Lloyds Bank there could have been no doubt that the conveyancing solicitor would have been required to pay Lloyds Bank the sum due under the charge and the charge would not have been redeemed until Lloyds Bank had been paid. In principle it makes no difference that the charge is now vested in Mrs Zoha.
14. Mr Zaman's claim involves the proposition that the Master, without consideration of the substance of the claim by Mrs Zoha's chargee, destroyed her legal estate in the land as chargee. That is a proposition that could only be sustained if the words clearly required it. Mr Zaman's case amounts to saying that without any claim for that purpose, and without giving any notice to the court or to the other side, or without any reasoned judgment, the court took the substantive decision to set aside the charge. The only correct interpretation of the order was that the Master was giving a direction to effect the orderly winding-up of the partnership. Such an order, being of a routine nature, would not need to be spelt out in the application notice. If confirmation were needed, it is provided by the word "net" in the order in the phrase "the net proceeds of sale are to be paid into court".
15. Neither counsel was present at the hearing before Master Bragge. There is no note before this court of the hearing. Different solicitors were instructed on behalf of the defendant, but I was told that although the order is not said to be a consent order, it did not follow on a formal decision, determination or judgment by Master Bragge but was hammered out between the parties and those advising them at the hearing. Mr Zoha was then alive. Mrs Zoha has no knowledge of what took place at that hearing.
16. To determine the question in the absence of any note of the proceedings, it is important to consider the history of the matter and the role that the charge took in the course of those proceedings. The claim was issued in May 2001. In the particulars of claim, as well as asserting that Mr Zoha had refused, despite Mr Zaman's claims to account to Mr Zaman for the profits made by the partnership or share of rents, paragraph 8 stated:

"Further, the Defendant has refused, despite the Claimant's requests, to agree that the property be sold."

The fifth prayer was for an order that the property be sold and that the net proceeds of sale thereof be divided equally between the parties. By this time it had been more than twelve years since the charge had been assigned.

17. In paragraph 14 of the defence it was said:

"Save for the remedy pleaded at Subparagraph (5) of the Prayer to which no admissions are made in the absence of evidence of the Trust Deed, the remaining remedies pleaded by the Claimant are barred by the Limitation Act 1980. Further or alternatively, if (which is denied) the claimant's pleaded remedies are not time-barred, they are denied or opposed by the Defendant save as indicated below."

In paragraph 17 it was said:

"The Defendant denies as a matter of equity that the Property should be sold. Further or alternatively, the Defendant would invoke the Court's equitable discretion to postpone any said Order. Further or alternatively, should the Court make an Order for Sale it is respectfully requested that such Order be stayed pending an account of all monies that the Defendant has paid in respect of the Property, including but not limited to mortgage repayments and council tax, so that the amount determined by way of account may afford an equitable set off against any profits claimed."

18. On 31 October 2001, Mr Zaman applied for summary judgment in respect of all of the relief claimed in the particulars of claim. In response to the application for summary judgment Mr Zoha said in a witness statement of 28 January 2002, under the heading "Mortgage Payments" that he had encountered difficulty when Lloyds Bank had brought an action in October 1988 against him and Mr Zaman for default on the mortgage and when judgment was obtained. He goes on to say that he would observe that Mr Zaman did nothing whatsoever in relation to defending this claim and it was only by re-mortgaging the matrimonial home that he was able to discharge the judgment debt and avoid the bank seizing the property. He goes on to say:

"I eventually paid off the Mortgage on the Property in full. I paid Lloyds three instalments of £15,000, £40,000 and £42,000. These payments were arranged by my former solicitors, Paul Bond & Co. The charge over the Property granted to Lloyds Bank on 16 June 1986 (and registered on 2 October 1986) was transferred to me on 14 April 1989."

19. The order of Master Bragge of 15 July 2002 had required Mr Zoha to set forth in a witness statement to be served and filed on or before 4pm on 19 August full particulars of all expenditure on which he would seek to rely in relation to his claim to a greater than 50% share in the proceeds of sale. He made a witness statement on 21 August 2002. Under the heading "The Mortgage and The Charge" he says in paragraph 8:

"The first matter that I believe should be taken into account is the fact that I alone have repaid the mortgage on the Property. The Property was purchased on 16 June 1986 for £78,000.00. This price was paid by way of two loans from Lloyds Bank."

He then goes on to give particulars.

20. These documents show without the slightest doubt that the whole question of the mortgage was fully before the Master, was fully explored in the documents and the whole thrust of Mr Zoha's case was that the repayment of the mortgage should be taken into account in relation to his claim to a greater than 50% share in the proceeds of the sale of the property. His whole case was entirely inconsistent with the new theory that the underlying intention was that he should keep his charge and that this matter was never before the Master.
21. If I should be wrong in that, it seems to me to be plain that this is a matter which should have been raised in those proceedings and would clearly have been covered by the principles in Henderson v Henderson, as recently developed in Johnson v Gore Wood [2002] 2 AC 1. I need say no more about that because I am quite satisfied, looking at the case as a whole, what the order intended to do. I am quite satisfied that the intent and effect of the order was that the property should be sold free of the charge and that Mrs Zoha was not entitled to require redemption of the charge as a condition precedent to its release.
22. If I were wrong on that, I would then have to consider the question of limitation. This was very fully dealt with in the skeleton arguments, but I will deal with it as briefly as I can. Mr Zaman's position is this. First, Mr Zaman and Mr Zoha were jointly and severally liable to Lloyds Bank for the debt under clause 12 of the mortgage. Mr Zoha has no right to enforce the charge or the bank debt against Mr Zaman. His right, and that of Mrs Zoha as his personal representative, on payment of the balance was merely to claim contribution from Mr Zaman. In the absence of any agreement to the contrary, each co-debtor is liable for an equal share and therefore Mrs Zoha's right would be to claim from Mr Zaman only such sum as Mr Zoha had paid in excess of the half share for which Mr Zoha was himself liable. The limitation period on the right to contribution between joint debtors is six years and any claim for contribution would, therefore, have become time-barred in May 1995.
23. The second point is that Mrs Zoha's position, according to Mr Zaman, is not improved if she seeks to bring the claim by way of partnership account. The partnership agreement was not under seal and such a claim has to be brought within six years of dissolution and therefore became time-barred in December 1993. He also draws attention to the decision in Marshall v Bullock (27 March 1998, unreported) in which Peter Gibson LJ stated that the authorities showed that unless the case was an exceptional one, the court would not allow one partner to seek to recover from another partner a sum which was referable to a partnership asset, save through an action for an account.
24. Thirdly, Mr Zaman says that any claim that Mrs Zoha could bring under the transfer charge would also be time-barred because of section 20 of the Limitation Act 1980, which provides:

"No action shall be brought to recover any principal sum of money secured by a mortgage after the expiration of twelve years from the date on which the right to receive the money accrued."

The obligation under clause 1 of the mortgage was to pay on demand. Time runs from the date of demand, that is 2 November 1987. The claim became time-barred in November 1999. Section 20(5) provides:

"No claim to recover arrears of interest payable in respect of sums secured by mortgage shall be brought after the expiration of six years from the date on which the interest became due."

Once the bank's right to the principal was time-barred, so too was its right to bring a claim for interest. So far as the enforcement of the mortgage is concerned, Mr Zaman relies on section 17 of the Limitation Act 1980 which provides:

"At the expiration prescribed by the Act for any person to bring an action to recover land, the title to the land shall be extinguished at the end of that period."

25. For Mrs Zoha it is contended that the relevant provisions are section 16, namely the time limit for a redemption action and the limitation period for recovery of land for which it is contended that paragraphs 1 and 8 of Schedule 1 to the Act are relevant. By Schedule 1 time does not accrue in favour of a person not in possession. From 1987 Mr Zoha was in sole possession of the land to the exclusion of Mr Zaman and in view of the fact that Mr or Mrs Zoha was in sole possession, not only did Schedule 1 stop time running, but no action was possible for possession as there was no one else in possession against whom to take action. Accordingly, Mrs Zoha's right to require redemption is not time-barred. As the right of redemption is not time-barred, nor is her claim to require payment of all interest accrued regardless of time.
26. If it were necessary to decide this point, I am quite satisfied that the only relevant provision is section 17 which provides:

"In any event at the expiration of the period prescribed by this Act for any person to bring an action to recover land the title shall be extinguished."

27. In Kibble v Fairthorne [1895] 1 Ch 219 it was held by Romer J that the effect of barring the mortgagee's title is to vest the legal estate in the mortgagor. In Lewis v Plunkett [1937] Ch 306, Farwell J held that where the owner of a legal estate executes a mortgage and hands over the mortgage and other title deeds to the mortgagee, but fails to pay any interest on the mortgage or give any acknowledgment to the mortgage debt for more than twelve years, the mortgagee loses all title to the land and the mortgagor can recover possession of the mortgage and other title deeds. As I have said, this is not a matter which it is necessary for me to decide. If it had been, it might have been desirable for me to go into these questions of limitation in much greater detail. But since I have reached a very firm conclusion on the first issue, all I will say is that I would otherwise have been satisfied that the rights under the mortgage had been extinguished by virtue of the Limitation Act.
28. I will therefore answer the questions in the sense contended for by Mr Zaman.

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