England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice
		26th January 2007

SIR DONALD RATTEE:

1. On 6^th August 2003 a Company called Tuned Property Management Limited (the "Company") bought a property (the "Property") for £2.1 million. The purchase price was financed by (a) a loan of £1.45 million from two solicitors, a Mr. Madden and a Mr. Younghusband, the Second and Third Defendants in this case, and (b) a loan of £700,000 from Mayfair Estates Property Investments Limited, the First Defendant. Each of these lenders took a charge on the property dated 6^th August 2003.
2. On 5^th December 2003 the Claimant Bank (the "Bank") lent £915,000 – or it may have been £910,000, since the evidence is not entirely clear on the point and I need not decide it – to the Company to be used to pay off in part the loan made by the Second and Third Defendants. At least the great majority of the loan by the Bank was used for this purpose. There is a dispute between the parties as to exactly how much of the Bank loan was so applied. The First Defendant submits that it was only £871,000 odd. I cannot determine the actual amount on the evidence before me, and it matters not for present purposes.
3. On 5^th December 2003 the Bank took a charge over the property to secure its loan. On the same day the Bank and the Second and Third Defendants entered into a Deed of Priority. That Deed defined the Debtor as the Company, the Mortgagee as the Second and Third Defendants, the Priority Sum as £910,000, or such other sum as might be agreed in writing between the Bank and the Mortgagee. Clause 1.1 of the Deed then provided as follows:

"The Mortgagee agrees that the Bank's Charge shall rank in priority to the Mortgagee's Charge as a continuing security for the payment to the Bank of the Debtor's Obligations Provided that the total amount recoverable by the Bank under the Bank's Charge in priority to the Mortgagee's Charge shall not exceed the Priority Sum and in addition Interest thereon (both before and from the date of any demand until payment) and Expenses in each case as defined in the Bank's Charge and the priority of the Bank's Charge shall not be affected by any fluctuations in the amount of the Debtor's Obligations from time to time or by the existence at any time of a credit balance on any current account."

The Debtor's obligations were defined as:

"All the Debtor's liabilities to the Bank of any kind (whether present future actual or contingent and whether incurred alone or jointly with another) including banking charges commissions and interest."

4. The First Defendant was not a party to the Deed of Priority and so was not bound by it in any way. The charges in favour of the Second and Third Defendant, the First Defendant and the Bank were registered against the property in that order, so that, apart from the effects of the Deed of Priority, they would have ranked in that order.
5. The property was sold on 27^th April 2006 for £1.9 million. The proceeds of sale are insufficient to satisfy all three charges and this litigation relates to the order of priority in which the three chargees are entitled to the available money.
6. Proceedings were started by the Bank issuing a claim under CPR Part 8 on the same day as the property was sold, 27^th April 2006. By the claim the Bank sought the following relief:

"The Claimant seeks a declaration that on a proper construction of the Deed of Priority (the 'Deed') dated 5^th December 2003 (and made between Tuned Property Management Limited (the 'Company'), the Claimant, and the Second and the Third Defendants) the proceeds of sale of the property registered at the Land Registry under Title number HP534101 and being Rexam Dispenser, Fitzherbert Road, Portsmouth, are to be applied first in discharge of the indebtedness of the Company to the Claimant in the amount provided for in the Deed and that the balance of the proceeds of sale be applied subsequently as the court sees fit."

7. The matter came before Warren J. on 23^rd May 2006. I am told by Mr. Isaacs, counsel for the Bank, that it came before the judge for directions in the ordinary interim applications list. In fact it appears that there was no argument addressed to the judge and he was asked to, and did, make an order in a form agreed by counsel for the parties. In order to explain the significance of parts of that order, I should say that on 25^th July 2005 administrative receivers of the Company had been appointed. The order of Warren J. included a declaration to the following effect:

"IT IS DECLARED that on the proper construction of the Deed of Priority between the Claimant and the Second and Third Defendants dated 5^th December 2003 ('the Deed'), the proceeds of sale of the property referred to in the Deed ('the Property') are to be applied first in priority to the Claimant in the lesser amount of (i) the amount due and owing by the Company to the Second and Third and Third Defendants and secured by the Second and Third Defendants' charge on the Property; and (ii) £910,000 plus interest and expenses as defined in the Deed."

The order went on to provide that the administrative receivers of the Company should be joined in the proceedings as Fourth and Fifth Defendants for the purpose of determining how their remuneration, costs and expenses of the sale of the property should be dealt with. That question has been decided by agreement and the Fourth and Fifth Defendants take no further part in the proceedings.

8. Warren J.'s order went on to give directions for the filing of evidence and directed that the claim be listed for hearing on the first available date after 25^th June 2006. Finally, the order provided for the Bank's costs of the hearing before Warren J. to be paid out of the proceeds of sale of the property on an indemnity basis. For reasons that have not become apparent to me the date eventually fixed for the hearing was not until yesterday. The Bank took no active steps to hasten the hearing. Indeed, in a letter of 15^th August 2006 from the Bank's solicitors to the solicitors acting for the First Defendant the Bank's solicitors said this:

"You will be taking immediate steps to restore our client's application for hearing next term by the Court, although we anticipate that our client will merely wish to have a watching brief on the dispute given its position as reflected in the Order of Mr. Justice Warren dated 23 May 2006. We should be grateful if you would keep us advised of progress on the restored application and in particular when a date has been fixed for determination."

9. It is clear that the Bank regarded the whole question of its Priority as having been determined by the declaration made by Warren J. Indeed, following the hearing before Warren J. the Bank was paid the sum of £650,000 from the proceeds of sale of the property, it being then agreed between all parties that that sum was due to the Bank under the terms of Warren J.'s declaration, and it was less than the minimum amount owed by the Second and Third Defendants under their charge.
10. The present position as it appears from the material now before the court is as follows:

(1) The sum still owing from the Company to the Bank is some £324,000.

(2) The Second and Third Defendants claim that the sum owed to them by the Company is some £970,000. The First Defendant asserts that the true figure is, in fact, only £40,000 odd.

(3) The First Defendant claims that the sum owed to it by the Company is some £1,023,000, plus future costs and interest.

(4) The balance of the proceeds of sale of the property is some £1,264,000.

11. In his original submissions, summarised in his original skeleton argument, Mr. Isaacs, counsel for the Bank, submitted that I should make a declaration in the same terms as that made by Warren J. to take account of the fact that under the latter the Bank is entitled to priority only in respect of so much of the sum owing to the Bank under its charge as is equal to the amount due to the Second and Third Defendants under their charge as at the date of Warren J.'s declaration – that is 23^rd May 2006 – whereas now the amount owing under the latter charge is greater by virtue of the accrual of interest since 23^rd May 2006. However, in a supplement skeleton argument, and before me, Mr. Isaacs argued that I should make a declaration in the terms sought by the original claim form, namely that the Bank is entitled to priority in respect of all monies due to it under its charge, subject to the £910,000 limit imposed by the Deed of Priority, but not subject to any limit by reference to the amount owing to the Second and Third Defendants under their charge.
12. The change of claim is because at a very late stage Mr. Isaacs sought to rely on the doctrine of subrogation that where a person advances money to a mortgagor which is used to pay off a mortgage and the money lent is in fact so applied, that person is subrogated to the rights of the mortgagee paid off as against the mortgagor and subsequent incumbrancers (see, for example, Fisher and Lightwood's Law of Mortgage, 12^th Ed. p.443, para.24.21).
13. In the present case, of course, only part of the debt comprised in the charge to the Second and Third Defendants was paid off by the Bank's loan. As stated in para.24.21 of Fisher and Lightwood, the effect of the law of subrogation in such a situation is that "the lender", i.e. the Bank, "is subrogated to the rights of the first chargee" (that is to say the Second and Third Defendants), "as against a second chargee" (the First Defendant), "but the first chargee retains priority over the lender". In the present case Mr. Isaacs submitted that the absence of priority for the Bank as against the Second and Third Defendants is dealt with by the Deed of Priority. Up until the hearing it had been accepted by the Bank that the Deed of Priority could not have the effect of giving the Bank priority over the First Defendant in respect of more than the amount for the time being owing to the Second and Third Defendants – that is to say the amount owing after the partial repayment to the Second and Third Defendants made from the Bank's loan – for otherwise the Deed of Priority would have prejudiced the position of the First Defendant, which was not a party to it. This is reflected in the terms of the declaration sought from and made by Warren J.
14. Before me, however, Mr. Isaacs submitted that this acceptance was erroneous for by virtue of the application of the doctrine of subrogation, to which I have just referred, the Bank has priority over the First Defendant quite apart from the Deed of Priority. Therefore, runs the submission, the joint effect of subrogation and the Deed of Priority is that the Bank has priority over the First Defendant and the Second and Third Defendants up to the limit of £910,000 set by the Deed of Priority; and priority over the First Defendant, but not over the Second and Third Defendants, for the whole of the Bank's debt. Hence the form of the declaration as to the Bank's priority now sought by the present claim.
15. The claim contains no prayer for relief in relation to the priority as between the Second and Third Defendant's charge and the First Defendant's charge in respect of the proceeds of sale of the property remaining after satisfying the amount in respect of which the Bank is entitled to priority. However, all parties ask me – and I propose to do so – to determine the priorities in principle as between the Second and Third Defendants and the First Defendant, though it is common ground that I cannot, on the evidence presently available, determine the actual amounts due to each party.
16. Turning now to the submissions made by Ms. Sleeman on behalf of the First Defendant, I hope I do them justice by summarising them as follows.

Ms. Sleeman submits that the Bank's new argument based on subrogation is misconceived. First, she submits that the doctrine of subrogation cannot be invoked so as to put the Bank in a better position than it bargained for. For this proposition Ms. Sleeman relies on Paul v. Speirway Ltd. (in liquidation) [1976] Ch. 220, and Cheltenham & Gloucester Plc v. Appleyard & Anor. [2004] EWCA (Civ), 291, para.41, where Neuberger L.J. (as he then was), giving the judgment of the court said that:

"… subrogation cannot be invoked so as to put the lender in a better position than that in which he would have been if he had obtained all the rights for which he had bargained …"

Ms. Sleeman also relied on paras.38 and 42 of the court's judgment which appear in a passage in which the court was stating various principles of subrogation and which read as follows:

"38. Seventhly, a lender cannot claim subrogation if he obtains all the security which he bargained for, as in Burston Finance (applying Capital Finance Co. Limited v. Stokes [1969] 1 Ch. 261) or where he has specifically bargained on the basis that he would receive no security as in Paul v. Speirway Limited (in liquidation) [1976] 1 WLR 220.

"42. Eleventhly, it is difficult, and may be impossible, for a lender who has obtained security to invoke subrogation where the security he has obtained gives him all the rights and remedies to which he claims to be subrogated (see Burston Finance at 1653D-E), or is a security in which the original security would naturally merge (see Burston Finance at 1653C and per Lord Diplock in Orakpo at 105B-C."

17. According to Ms. Sleeman's submissions, the Deed of Priority shows what the parties to it, and particularly the Bank, intended, and overrides any application of the equitable doctrine of subrogation. The Deed of Priority shows that what the Bank bargained for was priority over the Second and Third Defendant's charge up to the sum of £910,000 plus interest and expenses subject to that amount remaining outstanding under the Second and Third Defendants' charge, the amount to be paid to the Bank in priority being obtained from any monies to which the Second and Third Defendants might be otherwise entitled under their charge.
18. To apply subrogation so as to give the Bank priority over £910,000 plus interest, etc., over the First Defendant, regardless of the amount due to the Second and Third Defendants under their charge, would give the Bank more than it bargained for. Ms. Sleeman relied on, as evidence of the Bank's intentions in this respect, the fact that in June 2004 Addison Madden, solicitors in which the Second and Third Defendants were the only partners, and which acted for the Company, asked the First Defendant also to execute a Deed of Priority in favour of the Bank, which the First Defendant declined to do. Apparently, as well as the Second and Third Defendants being interested as holders of their charge over the property, their firm also acted for the First Defendant and the Company in relation to the borrowings made by the latter to finance the purchase of the property. Ms. Sleeman also relied on some letters written in December 2004 and in 2005 by Addison Madden to the First Defendant as evidence that the Bank did not intend to subrogation principle to apply.
19. Thus Ms. Sleeman submitted that this is not a case for the application of the doctrine of subrogation. The result of its non-application is, according to Ms. Sleeman, that the Bank's prior entitlement in respect of the proceeds of the property is limited to the amount outstanding under the charge held by the Second and Third Defendants because only to that extent could the Deed of Priority give the Bank priority over the First Defendant. Therefore, submitted Ms. Sleeman, once an amount equal to the sum due under the Second and Third Defendants' charge has been paid to the Bank, the First Defendant's charge becomes the first in priority, and the First Defendant is entitled to the amount owing to it before the Second and Third Defendants can claim any amount still owing to them on the charge. Otherwise, submitted Ms. Sleeman, the effect of the Deed of Priority would be to prejudice the First Defendant, a non-party to it.
20. The true effect of the Deed of Priority, she submitted, was that the Second and Third Defendants thereby passed to the Bank their rights to priority over the First Defendant's charge, thereby depriving themselves of those rights.
21. Mr. Cole appeared on behalf of the Second and Third Defendants. In the light of the last mentioned submission of Ms. Sleeman for the First Defendant, Mr. Cole, not surprisingly, supported Mr. Isaacs' submission that the doctrine of subrogation does in fact apply, so as to preserve the priority over the First Defendant's charge of the charge held by the Second and Third Defendants to the full extent of the original loan by the Second and Third Defendants to the Company, though as to £910,000 the Bank also took priority over the Second and Third Defendants by virtue of the Deed of Priority.
22. Mr. Cole submitted that Ms. Sleeman's submission for the First Defendant that, after payment of the amount due to the Bank under Warren J.'s declaration (that is limited to the amount owing to the Second and Third Defendants' charge), the First Defendant's charge would take priority over that of the Second and Third Defendants was wrong in principle, because it would unjustly enrich the First Defendant by promoting its charge over that of the Second and Third Defendants, when, under its own charge, the First Defendant was entitled to a rate of interest inflated to take account of the fact that it was postponed to a charge of £1.455 million, the loan made by the Second and Third Defendants.
23. Indeed, Ms. Sleeman accepted, as she had to, that her submission would result in a bonus to the First Defendant in reducing the amount of the charge having priority over its, the First Defendant's, charge from £1.455 million to the amount owing to the Second and Third Defendants after deducting so much of the loan made by the Bank as was paid to the Second and Third Defendants in reduction of the Company's indebtedness to them.
24. In my judgment, this is just the sort of uncovenanted benefit to a second mortgagee that the equitable doctrine of subrogation is intended to counteract. I do not accept Ms. Sleeman's objection to its application in this case. In my judgment, it is clear from the Deed of Priority that the bargain the Bank intended to make in relation to its loan of £910,000 to the Company was that it should rank first in order of priority in respect of that £910,000. Application of the principle of subrogation so as to give such priority to the Bank over the First Defendant's charge would give the Bank no more than that.
25. The Deed of Priority also gave the Bank priority over the Second and Third Defendants' charge, which it would not have had by subrogation. The deed was necessary, consistently with subrogation, to regulate the priority as between the Bank and the Second and Third Defendants which would not be affected by subrogation.
26. Accordingly, Ms. Sleeman failed to persuade me that the application of the doctrine of subrogation would give the Bank any more than it bargained for. What it bargained for was the priority ahead of the Second and Third Defendants' charge and therefore ahead of the First Defendant's subsequent charge in respect of £910,000 plus interest and expenses. The Deed of Priority without the First Defendant being a party to it could not give the Bank such priority except to the extent of the amount owing to the Second and Third Defendants on their charge, i.e. the original loan of £1.455 million less the amount paid to the Second and Third Defendants out of the Bank's loan. Therefore, it cannot be said that the Bank got all it bargained for without subrogation. I do not see how the fact that Addison Madden asked the First Defendant to execute a Deed of Priority in favour of the Bank is any evidence of the intention on the part of the Bank that the principle of subrogation should not apply; nor do I see how letters written in December 2004 and in 2005, long after the Deed of Priority, by Addison Madden, on whose behalf is not clear, to the First Defendant, which were relied on by Ms. Sleeman, afford admissible evidence of an intention by the Bank that subrogation should not apply.
27. Accordingly, in my judgment, the joint effect of the principle of subrogation between the Bank and the First Defendant and the Deed of Priority between the Bank and the Second and Third Defendants is as follows:

(a) The Bank's entitlement.

Prima facie, the Bank is entitled to priority in respect of the amount due to it on its charge up to the sum of £910,000 or such lesser sum as was paid to the Second and Third Defendants for the loan made by it to the Company, plus interest and expenses as provided by the Bank's charge. However, although no counsel have taken the point in their skeleton arguments, I queried with Mr. Isaacs on behalf of the Bank whether it was open to the Bank now to go behind the declaration as to its priority made by Warren J. and seek, as it does, a new declaration of further priority. Mr. Isaacs submitted that this was perfectly proper because Warren J.'s declaration was not final but some sort of interim declaration made by consent and without argument pending the filing of evidence and an effective hearing of the Bank's claim.

28. Mr. Isaacs relied particularly on the fact that the limit imposed by Warren J.'s declaration on its entitlement is by reference to the amount "now" – i.e. at the date of the declaration – due to the Second and Third Defendants on their charge, whereas by the time the Bank is paid its entitlement the amount due to the Second and Third Defendants, which was to limit that entitlement, will inevitably be greater by the addition of further interest. This shows, said

Mr. Isaacs, that Warren J.'s declaration was not meant to be final. However, Mr. Isaacs had realistically to accept that such a submission was inconsistent with his own client's understanding of the effect of the order of Warren J. as made plain in the letter from its solicitors to the First Defendant's solicitors of 15^th August 2006, from which I have quoted earlier in this judgment.

29. It is clear that the Bank's solicitors understood that the Bank had no further interest in the proceedings, and that its entitlement had been determined by Warren J.'s declaration made at the request of the Bank and all other parties. I consider that that understanding was correct. The declaration, in my judgment, is in terms apt only to a final determination of the Bank's entitlement to priority. It is impossible to construe it as some sort of interim declaration, although the court does now have power to make such declarations (CPR 25.1(1)(b)).
30. It seems to me clear that the judge was asked to make such a declaration by consent to deal with the question of the Bank's entitlement to priority, leaving the issues as between the Defendants to be determined after further evidence had been filed. That the judge did, as asked. In my judgment, it is not now open to the Bank to seek some other declaration in its place.
31. If the result is to prejudice the Bank by the fact that, because of the lapse of time, its debt is now greater than at the date of Warren J.'s order, then it largely has itself to blame for the delay, since it is clear from the letter of 15^th August 2006, to which I have just referred, that it took no steps to hasten the final determination of the proceedings. The declaration does not reflect the application of the principles of subrogation, but that is because the Bank did not ask Warren J. to apply them in making his declaration.
32. Although none of the Defendants had raised the point as to the final nature of the declaration made by Warren J. before I did, not surprisingly they adopted it. There is no suggestion by the Bank that the order of Warren J. incorporated any mistake. I can see no ground on which I can set it aside or vary it. It does what the Bank asked the judge to do. It declares the Bank's entitlement to priority in terms proposed by the Bank itself. It is, in my judgment, a final declaration and the Bank cannot now seek a different declaration as to its priority.
33. Thus, in my judgment, the proceeds of sale of the property are distributable in the following order:

(1) To the Bank the amount provided for by the declaration made by Warren J. This will require an inquiry as to the amount due and owing by the Company to the Second and Third Defendants at the date of the declaration by Warren J., 23^rd May 2006, secured by the Second and Third Defendants' charge.

(2) To the Second and Third Defendants the amount due and owing to them by the Company and secured by their charge, but limited to the difference between the amount of the Bank's entitlement under (1) and the £1.455 million odd amount of the loan by the Second and Third Defendants to the Company, plus interest and expenses as allowed by the terms of the Second and Third Defendants' charge. On further consideration, I realise that the suggestion I made to Mr. Cole in the course of argument that he need not accept this limit was misconceived on my part, for the First Defendant cannot be postponed to more than the amount of the original charge to the Second and Third Defendants, plus interest and expenses.

(3) To the First Defendant the amount due and owing to it by the Company and secured by the First Defendant's charge.

(4) To the Second and Third Defendants any amount by which the amount due to them under (2) above is less than the full amount due and owing to them by the Company and secured by the Second and Third Defendants' charge.

(5) To the Bank any balance of the amount due and owing to it by the Company secured by the Bank's charge.

34. I shall make a declaration to that effect and direct inquiries to be taken in chambers as to (i) the amount due and owing by the Company to the Second and Third Defendants and secured by their charge as at 23^rd May 2006, the date of Warren J.'s declaration; (ii) the amount due and owing to the Bank by the Company and secured on its charge; (iii) the amount now due and owing to the First Defendant by the Company and secured on its charge; and (iv) the amount due and owing to the Second and Third Defendants by the Company and secured on their charge.
35. I shall adjourn the matter back into chambers so that a master can give directions to the making of the inquiries, and I shall give the parties liberty to apply in respect of the implementation of my order.