England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
CHANCERY APPEALS LIST (CHANCERY DIVISION)

		Rolls Building Fetter Lane, London, EC4A 1NL
		12 November 2018

MR JUSTICE ARNOLD :

Introduction

1. This is an appeal by the Second Defendant ("Westminster") against an order of Chief Master Marsh dated 16 January 2018 vesting a lease dated 23 December 1993 ("the Lease") of a flat on the ground floor of 122A Westbourne Terrace, London W2 6QJ ("the Property") in the Claimant ("Mr Leon") pursuant to section 1017 of the Companies Act 2006 ("the 2006 Act") for the reasons given in the Chief Master's judgment dated 11 December 2017 ([2017] EWHC 3148 (Ch)). By a subsequent order dated 16 May 2018 the Chief Master determined that the vesting order should be on terms that Mr Leon was subject to the same liabilities and obligations as the lessee and was precluded from resisting any demands for payment of outstanding service charges by Westminster. Permission to appeal was granted by Rose J.

The facts

2. The Lease was granted by Westminster to Baronfield Ltd ("Baronfield") on 23 December 1993 for a term of 125 years from 10 October 1988. The Lease was assigned by Baronfield to Kingley Properties Ltd ("Kingley") in 1997 and by Kingley to Frinton Ltd ("Frinton") in 2007. All three companies were associated with Mr Leon or his wife Brenda Leon. In the case of Frinton, Mr Leon owned 99% of the shares and the remaining 1% were held on trust for him by one David Hare. Mr Leon was also a director of Frinton until 9 November 2005; after that date Mrs Leon was a director of the company.
3. On 21 October 2002 iGroup Mortgages Ltd ("iGroup") entered into a mortgage with Frinton as mortgagor and Mr Leon as co-mortgagor ("the Mortgage") securing an advance of £472,500 repayable at the end of 25 years on 56 Flanders Road, London W4 1NG ("Flanders Road"). Flanders Road was at that stage Mr and Mrs Leon's home.
4. The Mortgage provided:

"A The mortgagor charges the property by way of legal mortgage with payment of all the money mentioned in condition 2.1 of the Mortgage Conditions. The mortgagor gives this charge with full title guarantee.

B The co-mortgagor charges any right or interest in the property or its proceeds of sale which he/she may have which is not charged by clause A above as further security for the payment of the money mentioned in condition 2.2 of the Mortgage Conditions.

…

11 The Co-Mortgagor

Condition 4 to 10 apply to the co-mortgagor (if any) in the same way that they apply to the mortgagor.

This means that:

• any obligations which apply to the mortgagor under those conditions also apply to the co-mortgagor;

• the lender can enforce its rights and remedies under those conditions against the co-mortgagor as well as the mortgagor;

• the lender (and any receiver appointed by the lender) will be the attorney of the co-mortgagor as well as the mortgagor to do the things mentioned in condition 7.12;

• the lender may give notice to the co-mortgagor in the same way as it may give notice to the mortgagor under condition 9 (except that the notice must be sent to the co-mortgagor's address as set out in this deed or to any other address which the co-mortgagor later gives to the lender in writing) and the co-mortgagor gives the same guarantee as the mortgagor gives under condition 10."

5. iGroup subsequently changed its name to GE Money Mortgages Ltd ("GE"). On 27 March 2007 Frinton, Mr Leon and GE entered into a deed of substituted security whereby the Lease was substituted as security under the Mortgage in place of Flanders Road. At around the same time Mr Leon sold Flanders Road.
6. Frinton was dissolved on 17 February 2009 as a result of its failure to comply with its statutory filing requirements. No application for the restoration of Frinton to the register was made within the period of six years allowed for such an application pursuant to section 1024 of the 2006 Act.
7. The consequence of Frinton's dissolution was that "all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution (including leasehold property, but not including property held by the company on trust for another person)" were deemed to be bona vacantia, and hence to belong to the Crown, pursuant to section 1012 of the 2006 Act.
8. From at least 2009 onwards Mr Leon paid the mortgage payments and received the rental income from the Property.
9. On 23 May 2016 GE transferred the Mortgage to Kensington by form TR4.
10. Westminster discovered on 30 June 2016 that Frinton had been dissolved and that no application had been made for its restoration. It notified the Treasury Solicitor, representing the Crown, of the dissolution on 5 July 2016. On 30 August 2016 the Treasury Solicitor served a notice of disclaimer in respect of the Lease on behalf of the Crown pursuant to section 1013 of the 2006 Act.
11. The current value of the Lease on the open market is somewhere between £800,000 and £1 million, The redemption figure under the Mortgage was about £392,000 at the time of the hearing before the Chief Master. I am told that it is now over £427,600. Therefore there is significant equity in the Lease of between about £370,000 and about £570,000.

The proceedings

12. On 5 May 2017 Mr Leon commenced a Part 8 claim claiming a vesting order in respect of the Lease on three alternative grounds:

i) Frinton held the Lease on trust for him and it should be vested in him pursuant to section 44 of the Trustee Act 1925:

ii) he would have been entitled to the Lease but for the dissolution of Frinton and it should be vested in him pursuant to section 181 of the Law of Property Act 1925; and

iii) he had an interest in the Lease and/or was a person under a liability in respect of the Lease by virtue of his position as co-mortgagor and it should be vested in him pursuant to section 1017 of the 2006 Act.

13. The First Defendant, the Attorney General, filed an acknowledgement of service stating that the Crown did not oppose the making of an order provided the court was satisfied that it is a proper case. The Attorney General has not participated in the proceedings subsequently.
14. Westminster defended the claim on the basis that Mr Leon was not entitled to a vesting order. Westminster's position was that a vesting order should be made in favour of Kensington. This remains Westminster's position.
15. Kensington filed an acknowledgement of service stating that it wished to remain neutral as against Mr Leon's claim, but that it would seek its own vesting order pursuant to sections 1017 and 1018 of the 2006 Act in the event that Mr Leon's claim failed. This remains Kensington's position, which has served a respondent's notice on the appeal.
16. Notwithstanding the fact that the claim was a Part 8 claim, the Chief Master heard oral evidence from Mr Leon and other witnesses over the course of a two-day trial.

Sections 1015, 1016 and 1017 of the 2006 Act

17. Section 1015 of the 2006 Act provides as follows:

"(1) The Crown's disclaimer operates so as to terminate, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed.

(2) It does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person."

18. Section 1016 provides, so far as relevant, as follows:

"(1) The disclaimer of any property of a leasehold character does not take effect unless a copy of the disclaimer has been served (so far as the Crown representative is aware of their addresses) on every person claiming under the company as underlessee or mortgagee, and either–

(a) no application under section 1017 (power of court to make vesting order) is made with respect to that property before the end of the period of 14 days beginning with the day on which the last notice under this paragraph was served, or

(b) where such an application has been made, the court directs that the disclaimer shall take effect.

(2) Where the court gives a direction under subsection (1)(b) it may also, instead of or in addition to any order it makes under section 1017, make such order as it thinks fit with respect to fixtures, tenant's improvements and other matters arising out of the lease.

…"

19. Section 1017 provides, so far as relevant, as follows:

"(1) The court may on application by a person who–

(a) claims an interest in the disclaimed property, or

(b) is under a liability in respect of the disclaimed property that is not discharged by the disclaimer,

make an order under this section in respect of the property.

(2) An order under this section is an order for the vesting of the disclaimed property in, or its delivery to–

(a) a person entitled to it (or a trustee for such a person), or

(b) a person subject to such a liability as is mentioned in subsection (1)(b) (or a trustee for such a person).

(3) An order under subsection (2)(b) may only be made where it appears to the court that it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer.

(4) An order under this section may be made on such terms as the court thinks fit.

…"

The judgment of the Chief Master

20. In his judgment the Chief Master dismissed Mr Leon's claim on the first two grounds, but decided to make a vesting order in favour of Mr Leon pursuant to section 1017 of the 2006 Act on two bases:

i) by virtue of his position as co-mortgagor under the Mortgage, Mr Leon had an interest in the Lease "and an order should be made under section 1017(1)(a)" as the Master put it at [48]; alternatively

ii) by virtue of his position as co-mortgagor under the Mortgage, Mr Leon was under a liability in respect of the Lease which was not discharged by the disclaimer within section 1017(1)(b) and he was "amply able to meet the test contained in section 1017(3)" as the Master put it at [49].

The appeal

21. Westminster contends that the Chief Master fell into error within respect to both bases for his decision under section 1017. So far as the first basis is concerned, Westminster contends that the Chief Master misconstrued the relevant provisions. As to the second basis, Westminster acknowledges that the Chief Master was exercising a discretion, but contends that the exercise of his discretion was flawed because he failed to explain how section 1017(3) was satisfied.

Can Mr Leon obtain a vesting order under section 1017(2)(a)?

22. The Chief Master held at [43] that the word "interest" in section 1017(1)(a) was to be given a broad interpretation. He derived support for this approach from an extempore judgment by Gavin Lightman QC (as he then was) in Re Vedmay Ltd (1994) 26 HLR 70. That case concerned section 181 of the Insolvency Act 1986, which contains provisions where a liquidator has disclaimed onerous property which closely resemble those in section 1017. An application had been made by statutory tenants for a vesting order in respect of the flats they occupied after the liquidator of the landlord had served notices of disclaimer. Mr Lightman said at 73:

"The first question I have to consider is whether the statutory tenant[s] had locus standi to make the application under section 181, i.e. did they have an interest in the disclaimed property. The disclaimed property for this purpose is the Lease. In my judgment, the answer is in the affirmative. The term 'interest' is not, in my view, confined to a proprietary interest. It extends to any financial interest in the subsistence or otherwise of the lease and includes, in particular, any interest that would be adversely affected by the disclaimer.

It is for this reason and on this ground that a landlord himself may be an interested party entitled to make an application under this section: see Re Finley, ex p. Clothworkers' Company (1888) Q.B.D. 475 at 484–485 and Re A.E. Realisations (1985) Ltd. [1988] 1 W.L.R. 200. It seems to me that there is no reason in principle why a statutory tenant, if he may be adversely affected by the disclaimer, should not be qualified to apply notwithstanding that he has no lease himself or other proprietary interest but enjoys merely a personal right to retain possession or, as it has been called, a mere status of irremovability: see Megarry on The Rent Acts, Vol. I, p. 252. It is common ground that on the facts of this case the statutory tenants may be so affected."

23. The Chief Master went on to hold at [45] that Mr Leon's status as co-mortgagor gave him an interest in the Lease. In the alternative, he held at [46] that Mr Leon's interest in the equity of redemption was a sufficient interest for the purposes of section 1017(1)(a).
24. In fairness to the Chief Master, it should be pointed out straightaway that the real point concerning this first basis for his decision only emerged during the course of counsel for Westminster's oral submissions when opening the appeal in answer to questions from the bench.
25. Section 1017(1) provides that the court may make an order on application by a person who "(a) claims an interest in the disclaimed property, or (b) is under a liability in respect of the disclaimed property [emphases added]." Thus, in order to make an application by virtue of section 1017(1)(b), the person must actually be under a liability; whereas, in order to make an application by virtue of section 1017(1)(a), it is sufficient for the person to claim an interest. That does not mean that an order will be made merely because a person claims an interest. On the contrary, section 1017(2) provides that an order may be made in two situations. First, an order may be made under section 1017(2)(a) for the vesting the property in (or its delivery to) a person who is entitled to it (or his trustee). Secondly, an order may be made under section 1017(2)(b) for the vesting of the property in (or its delivery to) the person subject to the liability (or his trustee). In the second situation, but not the first, it is necessary for the applicant to establish that the requirement laid down in section 1017(3) is satisfied. It is clear from the relationship between the provisions that it is not sufficient for the purposes of section 1017(2)(a) that the applicant is under a liability in respect of the disclaimed property which is not discharged by the disclaimer within section 1017(2)(b).
26. Accordingly, the correct question is not whether the applicant has an "interest in the disclaimed property" for the purposes of section 1017(1)(a). The correct question is whether he is "entitled to it" within section 1017(2)(a). To put it another way, does the interest claimed by the applicant entitle him to the property? In my judgment the interest would have to be a proprietary one in order to entitle the applicant to the property, although it is clear from the fact that an order may be made for the vesting of the property in a trustee that a beneficial interest would suffice.
27. In the present case, the only proprietary interest which it is suggested that Mr Leon had in the Lease was the equity of redemption. As is explained in Megarry and Wade: The Law of Real Property (8^th ed) at 24-017 (footnote omitted):

"… the equity of redemption is an equitable interest in land consisting of the sum total of the mortgagor's rights in the property. Although at law the mortgagor has parted with land and has only a limited right to recover it, in equity he is the owner, though subject to the mortgage; the mortgagee, on the other hand, is at the law the owner but in equity a mere incumbrancer."

28. In my judgment the equity of redemption in the Lease belonged to Frinton as mortgagor and then to the Crown following Frinton's dissolution until the Lease was disclaimed. Although Mr Leon would have had the right to redeem the Mortgage by paying off the debt, that does not mean that he owned the equity of redemption. As the Chief Master rightly noted at [7], it was not suggested that Mr Leon had had any legal estate which was capable of being charged to the mortgagee in either 2002 or 2007. Nor, as the Chief Master rightly held at [45], was Mr Leon entitled to the mortgage property within section 105 of the Law Property Act 1925.
29. Accordingly, I conclude that Mr Leon was not entitled to the Lease and thus no order can be made in his favour under section 1017(2)(a) of the 2006 Act.

Should an order be made in favour of Mr Leon under section 1017(2)(b)?

30. It is common ground that Mr Leon is under a liability in respect of the Lease because of the Mortgage. The issue is whether the test imposed by section 1017(3) is satisfied, namely that it would be just to make the order for the purpose of compensating Mr Leon in respect of the disclaimer.
31. The Chief Master held that this test was satisfied for the following reasons:

"i. Mr Leon is liable under the mortgage and he is now the only person with such a liability.

ii. He is out of time for applying to restore Frinton to the register and his only option is to make this application under section 1017.

iii. Mr Leon has met the liability under the mortgage since 2009 at least. He may have been paying the liability for some time prior to that date.

iv. Although Westminster has provided a great deal of evidence about Mr Leon's background, some of which casts him in a bad light, there is no evidence from Westminster about why the court should not make an order in Mr Leon's favour. There is, for example, no evidence to show that Westminster dealt with the property as the freeholder after Frinton was dissolved took steps to end the lease by service of a section 146 notice. In fact, the evidence shows that it continued to deal with Mr Leon for some time.

v. There is no application by Westminster as freeholder for a vesting order. There was only the belated suggestion that Westminster would be willing to discharge the mortgage as a preliminary step to taking back the property.

vi. The application for a vesting order made by Mr Leon is not opposed by Kensington.

vii. The evidence shows that Mr Leon has treated the lease as his own by paying the mortgage and receiving the rental income from the property.

viii. If the court is faced with a choice between Mr Leon or Westminster obtaining a windfall accruing to Mr Leon in view of his historic interest in the property and liability under the mortgage which will continue for the remainder of its term. A landlord may obtain a windfall in certain circumstances, such as where a valuable lease is forfeited. There is, however, no reason why [the] landlord's position should be given preference over that of a co-mortgagor."

32. Although he made a number of other criticisms of this reasoning, the core submission advanced by counsel for Westminster was that the Chief Master had not explained why it would be just to vest the Lease in Mr Leon for the purpose of compensating Mr Leon in respect of the disclaimer. As counsel pointed out, there is no reference anywhere in the Chief Master's eight reasons to compensating Mr Leon, nor is there any analysis of the effect of the disclaimer on him. Instead, the Chief Master's focus appears to have been on whether Mr Leon or Westminster was more deserving of a windfall (and that was so even though the Chief Master went on at [50] (i) to acknowledge that it was Westminster's position that a vesting order should be made in favour of Kensington and (ii) to say that it was far from clear that Westminster would be entitled to the surplus proceeds of sale if Kensington sold the Lease).
33. Counsel for Mr Leon rightly pointed out that the Chief Master had exercised a discretion, and therefore the appellate court was not justified in interfering with his decision unless the Chief Master had erred in law or principle or had failed to take into account a factor he should have taken into account or had taken into account a factor he should not have. Nevertheless, I accept the submission of counsel for Westminster. In my judgment the Chief Master's exercise of his discretion was flawed, because he did not analyse the effect of the disclaimer upon Mr Leon or whether it would be just to compensate him in respect of the disclaimer, as required by section 1017(3). It follows that it is necessary for me to reconsider the matter.
34. The starting point in the analysis is that it is common ground that Mr Leon's liability under the Mortgage was unaffected by the disclaimer of the Lease: he remained liable to repay the sums secured by the Mortgage. The effect of the disclaimer by the Crown was to terminate Frinton's interest in the Lease: see section 1015(1) of the 2006 Act. Absent a vesting order, that would remove Kensington's security under the Mortgage. It follows that it is in Kensington's interest for a vesting order to be made, whether in favour of Mr Leon or Kensington. As it happens, Kensington is content for a vesting order to be made in favour of Mr Leon, because Mr Leon has kept up the payments due under the Mortgage: Kensington has no desire to realise its security so long as it receives the return its predecessor in title bargained for as lender.
35. It does not follow that Mr Leon is entitled to be compensated in respect of the disclaimer by a vesting order, however. What would Mr Leon be being compensated for if an order was made in his favour? He would not be being compensated for the loss of the Lease, because that was not his property before the disclaimer, it was Frinton's and then the Crown's. This is unaffected by the fact that, beneficially, he was the sole owner of Frinton. Frinton was a separate legal person, and Mr Leon failed to establish that it held the Lease on trust for him.
36. Nor would Mr Leon be being compensated for his liability under the Mortgage. As noted above, that was unaffected by the disclaimer: once Frinton was dissolved, Mr Leon became liable as co-mortgagor under the terms of the Mortgage. (Moreover, so far as his past liability was concerned, the fact that Mr Leon received the rental income from the Property meant that Mr Leon was not necessarily out of pocket as a result of making the mortgage payments from 2009 onwards.)
37. Accordingly, in my judgment, an order in favour of Mr Leon under section 1017(2)(b) would not satisfy the requirement imposed by section 1017(3).
38. The Chief Master was sceptical as to Westminster's position in these proceedings. I share his scepticism, because it is not at all clear how or why Westminster expects to benefit from the denial of Mr Leon's claim. Counsel for Westminster suggested that, if a vesting order was made in favour of Kensington, Mr Leon was likely to default on the Mortgage and Kensington was likely to exercise its power of sale of the Lease. That is a matter for speculation, however. Moreover, I agree with the Chief Master that, even in that event, it is far from clear that Westminster would be entitled to the net proceeds of sale as counsel for Westminster suggested. Nevertheless, this does not affect the issue under section 1017(3).

Conclusion

39. For the reasons given above, the appeal is allowed and the Chief Master's orders dated 16 January 2018 and 16 May 2018 are set aside. It is common ground that, in those circumstances, a vesting order should be made in favour of Kensington on terms that it is to account as mortgagee to the person next entitled in accordance with section 105 of the 1925 Act (whoever that may be). I will hear counsel as to the terms of that order if they cannot be agreed, costs and any other matters arising.