REF/2010/1144 and 1147

 

PROPERTY CHAMBER, LAND REGISTRATION

FIRST-TIER TRIBUNAL

LAND REGISTRATION ACT 2002

 

IN THE MATTER OF A REFERENCE FROM HM LAND REGISTRY

 

BETWEEN

 

THE LORD CHANCELLOR

(as successor to the LEGAL SERVICES COMMISSION)

 

APPLICANT

 

and

 

1.       GEOFFREY COOKE

2.       SANDRA COOKE

 

RESPONDENTS

 

Property Address: 9 Wotton Road, Kingswood, Wotton-under-Edge, GL12 8RA

Title Number: GR93161

Before: Judge Mark

Sitting at: Bristol Magistrates Court

On: 6 December 2013

 

Applicant Representation: Mr. Michael Rimer

Respondent Representation: In person

___________________________________________________________________________­

 

 

Where a party obtains public funding of litigation as to the amount secured by a mortgage or charge and that results in a reduction of the amount claimed by the mortgagee, the Legal Services Commission is entitled to a charge over the funded party’s beneficial interest in the property under section 10(7) of the Access to Justice Act 1999 at least to the extent to which the value of the claimant’s beneficial interest has been enhanced by the outcome of the litigation.

 

Also, where a settlement offer of damages, over which the Legal Services Commission would have an undisputed statutory charge, has been rejected, and in place of damages it is agreed that an undisputed liability secured on the property should be released, then the Legal Services Commission will also have a statutory charge over the property or the funded party’s beneficial interest in it at least to the extent to which the value of the equity of redemption or the funded party’s beneficial interest has been enhanced by the settlement.

 

Hanlon v The Law Society, [1981] AC 124, Morgan v Legal Aid Board, [2000] EWHC 462 (Ch) and McPherson v Legal Services Commission , [2008] EWHC 2865 (Ch) considered and applied.

 

1. The Lord Chancellor (as successor to the Legal Services Commission) is substituted for the Legal Services Commission as Applicant. This follows from a statutory re-organisation of public funding of litigation but for convenience I shall continue to refer to the Applicant as the Legal Services Commission.

 

2. For the reasons given below, I shall direct the Chief Land Registrar to give effect to the applications of the Legal Services Commission dated 27 April 2010 to enter two form JJ restrictions in respect of the beneficial interests of the Respondents in the property.

 

The facts

3. In September 1997, the Respondents, (“the Cookes”) borrowed £76,500 from a mortgage company, a subsidiary of a bank. The loan was secured by a mortgage over their home in Gloucestershire (Mill House). The mortgage was a shared appreciation mortgage, a term of which was that to redeem the mortgage the Cookes would not only have to repay the capital loaned but also a share of the increased value of the property at that stage as certified by the lender’s valuer.

 

4. In March 2002 the Cookes sought a redemption figure from the lender. A figure was provided, based on a valuation by the lender’s nominated valuer, of £230,000. On that basis the total required to redeem was over £125,000, including an appreciation amount of nearly £50,000. Four other reputable valuers at the time, instructed by the Cookes, produced valuations of between £180,000 and £195,000, giving rise to a much lower appreciation amount but the lender would not accept any of those valuations.

 

5. Eventually, with the assistance of legal insurance, the Cookes commenced proceedings against the lender claiming a declaratory relief and damages in respect of the terms of the loan contract. The matter proceeded slowly, with the Cookes changing solicitors three times while the case was being funded by the insurers. In the process the Cookes’ Particulars of Claim were amended and re-amended. The Re-Amended Particulars of Claim (hearing bundle 1, pp.274-288), which was verified by the Cookes with a statement of truth, contained the following allegations against the lender

 

(1)    The lender was in breach of contract in failing to permit the Cookes to redeem on the basis of an exit valuation of £191,500.

(2)    Certain terms of the mortgage were unfair terms by reason of regulation 5 of the Unfair Terms in Consumer Contracts Regulations 1994 and were therefore not binding on the Cookes.

(3)    Alternatively those terms involved provision to the lender of an unfair collateral advantage and were therefore unenforceable.

(4)    The lender was only entitled to the agreed share of the actual increased value of the property, that share being a little over £25,000 and the lender was in breach of the agreement in refusing to allow the Cookes to redeem the mortgage on the basis of the true appreciation amount, causing the Cookes loss and damage.

 

6. In paragraph 20 of the Re-Amended Particulars of Claim the Cookes claimed an enquiry as to the actual increase in value of the property and an order that they were entitled to redeem the mortgage for that sum, or alternatively damages for breach of agreement. The Cookes further claimed rescission of the agreement in respect of the mortgage as being induced by misrepresentation or damages for misrepresentation, a declaration that the terms which provided the method of calculation of the extent of the lender’s entitlement to share in the appreciation in value of the property were unenforceable, a declaration as to the extent of the Cookes’ obligations towards the lender under the terms of the mortgage, damages, an enquiry as to the actual increase in value of the property together with an order that the Cookes should be entitled to redeem the mortgage for that sum and a declaration that no part of the appreciation amount was at any time payable by the Cookes as a precondition of redemption of the mortgage. Statutory interest was also claimed.

 

7. These allegations and claims were later repeated in Re-Re-Amended Particulars of Claim which were also verified by the Cookes with a statement of truth (Bundle 1, pp.289-309).

 

8. By February 2006, it would appear that the limit of the costs to be provided by the insurance company had been reached. Unfortunately both the Cookes were by that time in poor health and neither was working. They applied for legal funding to the Legal Services Commission and on 30 September 2006 each of them separately was granted a legal aid certificate to assist them in the proceedings. Initially, once legally aided, they were represented by a firm of solicitors called Bevans which had not previously acted for them, but they became dissatisfied with the way Bevans conducted the case and in January 2008 their representation was taken over by another firm, Wards.

 

9. As there were a number of other borrowers experiencing a similar problem with shared appreciation mortgages, it was at one point hoped that some of these would finance this litigation as a test case, but this did not materialise.

 

10. In December 2008 a settlement offer was received from the lender. Under the terms of that offer, the Cookes were to receive £115,000 towards damages and costs. The sum of £115,000 was to be paid to the Cookes’ solicitors as required under legal aid legislation. This offer was acceptable to the Cookes provided that the only costs paid out of this sum were the sums advanced by the Legal Aid Commission of £39, 930 + VAT, which would have left £68,880 for the Cookes . However, the solicitors claimed to be entitled to recoup for themselves and for Bevans out of the £115,000 additional costs which they had incurred or claimed to have incurred beyond what was recoverable by them from the Legal Aid Commission.

 

11. The Cookes were not prepared to accept this, and I note that there appears to have been a clear conflict of interest at this stage between them and the solicitors in that, as eventually happened though in a slightly different form, the offer could have been restructured by the lender, at no extra cost to itself, agreeing to release the Cookes from all or part of the mortgage debt, and reducing the damages by the amount released. The damages would then have been £38,500 and there would have been no question but that there was nothing that the solicitors could claim for themselves beyond what they could get from the Legal Services Commission which would then have had a clear charge over the £38,500 which would have used up that sum and a claim for a charge over the property for the remaining sums expended by them which would have been similar to the claim before me.

 

12. Instead the solicitors reported to the Legal Services Commission that the Cookes had unreasonably refused the offer and in February 2009 the legal funding certificate was discharged. The Cookes were then acting for themselves. At that stage the lender itself, together with its parent bank, produced a new offer which the Cookes accepted and an order was duly made on 27 July 2009 staying the proceedings on the terms of that agreement. The agreement, which was expressed to be confidential, was that no sum should be payable by the Cookes to either the lender or to the parent bank pursuant to either the 1997 arrangements or the subsequent charge by the Cookes of their property to the parent bank to secure a further loan of £16,300. Both the lender and the parent bank were to release the Cookes from their obligations under both loans and charges within an agreed timeframe and the lender was to pay £15,633.16 to the Legal Services Commission.

 

13. I note that the Cookes fought to prevent the disclosure to the Legal Services Commission of the settlement terms and the use of the settlement agreement in these proceedings. At a preliminary stage I had ruled against them on every point they raised in this respect, giving reasons, and no appeal was brought from any of my decisions in this respect. Despite this the Cookes sought to re-argue the point in their skeleton argument at the hearing, but I refused at the hearing to entertain any further argument on a matter that had already been determined.

 

14. The end result of the settlement financially was that the Cookes did not get any damages as such but were released from obligations that they had not contested, and which were secured on the property. These obligations totalled over £90,000, and were thus equivalent to a payment of damages of over £90,000 but using that money to discharge the two charges at no cost to the Cookes. This, together with the payment of the £15,663.16, was plainly more beneficial to the Cookes than a payment of damages of £115,000 at least if the solicitors were entitled as they had claimed to recover additional costs beyond those recoverable by the Legal Services Commission. I am not clear whether the previous offer had involved the abandonment by the lender of any claim to anything other than the capital of the mortgage loan, but if under that offer the Cookes had remained liable for all or even some of the additional sums claimed to be payable in respect of the increased value of the property, then the release of those sums was an additional benefit to the Cookes that had not previously been available. I proceed, however, on the basis that under the December 2008 offer they would only have remained liable for the original capital lent.

 

15. The Cookes contend that the Legal Services Commission is not entitled to statutory charges over their respective beneficial interests in the property to secure the balance of the sums expended by it after giving credit for the £15,663.16 paid to it under the settlement. The Legal Services Commission contends that it is entitled to such charges. It has not at this stage sought to register a statutory charge or charges, but has sought to register restrictions at the Land Registry in form JJ. These provided that no registered estate, other than a disposition by the proprietor of any registered charge registered before the entry of the restriction was to be registered without a certificate signed by the applicant for registration or their conveyancer that written notice of the disposition was given to the Legal Services Commission. Two separate restrictions were required against the Respondents’ separate beneficial interests because they had had the benefit of separate legal aid certificates.

 

The Law

16. Section 10(7) of the Access to Justice Act 1999 provides:

 

“Except so far as regulations otherwise provide, where services have been funded by the Commission for an individual as part of the Community Legal Service –

(a)     sums expended by the Commission in funding the services (except to the extent that they are recovered under section 11), and

(b)    other sums payable by the individual by virtue of regulations under this section,

 

shall constitute a first charge on any property recovered or preserved by him (whether for himself or any other person) in any proceedings or in any compromise or settlement of any dispute in connection with which the services were provided.”

 

17. Section 10(8) provides that regulations may make provision about the charge including provision as to whether it is in favour of the Commission or the body or person by whom the services were provided and provision about its enforcement.

 

18. Services funded as part of the “Community Legal Service” are defined in section 4 of the Act, and it is sufficient for present purposes to say that the work done for the Cookes by their last two solicitors in relation to the litigation with the Bank fell within that definition. The issues raised by the Cookes as to the adequacy of those services do not affect this. Any breach of duty by the solicitors may give rise to a claim by the Cookes against them, but could not mean that the work done was work which the Legal Services Commission, which would normally have no means of knowing how competently or properly work was done when it made payments on account, had no statutory power to fund the work.

 

19. The leading authority is the decision of the House of Lords in Hanlon v The Law Society, [1981] AC 124, which concerned the meaning of a similar provision in section 9 of the Legal Aid Act 1974. This also provided for a charge in respect of legal aid costs on property recovered or preserved in the proceedings. The proceedings in that case had been matrimonial proceedings in which ownership of the matrimonial home had been in issue. The home was owned in equal shares by both spouses, and each had sought the transfer to him or her of the share of the other of them. Both parties had been legally aided. The wife had been successful in obtaining an order for the transfer of the husband’s half to her, so that she became owner of the whole house. The House of Lords upheld the decision of the lower courts that the Law Society had a charge over the whole house for the legal aid costs on the basis that the wife’s share had been preserved and the husband’s share had been acquired, both shares having been in issue in the proceedings.

 

20. The leading judgment was delivered by Lord Simon of Glaisdale. At p.176H to 177A, he considered the words “property recovered or preserved” by reference to decisions in relation to similar words in the Solicitors Acts giving solicitors charges over such property. He stated –

 

“The words in the Solicitors Acts have been liberally construed, consonantly with the obvious Parliamentary intention of promoting the interest of a solicitor whose activity has resulted in a proprietary benefit to his client. But the same liberal approach to construction is not appropriate in a measure imposing a charge for a social service: the word should certainly not be extended beyond the ordinary sense which is appropriate in the circumstances.”

 

21. At p.180G-181C, Lord Simon continued –

 

“In other words property has been recovered or preserved if it has been in issue in the proceedings – recovered by the claimant if it has been the subject of a successful claim, preserved by the respondent if the claim fails. In either case it is a question of fact, not of theoretical “risk”. In property adjustment proceedings, in my view, it is only property the ownership or transfer of which has been in issue which has been “recovered or preserved” so as to be the subject of a legal charge. I can see no reason for extending the words to items of property the ownership or possession of which has never been questioned.

 

I think this interpretation also accords with the structure of the legal aid scheme. Items of property the ownership of which is not questioned and which are not the subject of dispute fall (subject to disregards) to be taken into account for the initial contribution from the legally aided litigant. It would seem to be contrary to the general scheme to take them into account again for the purpose of the legal aid charge.

 

Although no doubt the subject matter in part determined the change of wording of regulation 18(10)(c) in 1976, that change also marginally supports the construction which I venture to favour. The 1971 regulation referred to “any property affected by an order. These are the very words used by counsel for the respondent as one of the tests for “property recovered or preserved. But in the 1976 amendment these words disappear.”

 

22. In Hanlon it was the share in a matrimonial home which was in issue. That case did not deal directly either with a dispute as to a mortgage debt or with the terms of a settlement in which other property was brought into account.

 

23. The position in relation to both a mortgage debt and such a compromise was considered by Neuberger J, as he then was, in Morgan v Legal Aid Board, [2000] EWHC 462 (Ch). The relevant provision giving what was then the Legal Aid Board a charge over property recovered or preserved in the proceedings was in that case section 16 of the Legal Aid Act 1988. In that case the claimants, the Morgans, had charged to a bank two properties which they owned to secure bank lendings to a family partnership. Subsequently, they had purported to grant annual tenancies of the two pieces of land to a family company which took over a farming business previously run by the family partnership in which they had been engaged. The bank claimed £818,000 due on the partnership current account and there was a counterclaim by the Morgans for damages for breach of contract, negligence and misrepresentation. The bank sought summary judgment but the Morgans obtained permission to defend the claim on terms. There were then separate proceedings by the company against the bank claiming that the tenancies existed and were binding on the bank. There was a counterclaim by the bank against the company and the Morgans.

 

24. Subsequently, the Morgans obtained legal aid in both actions. The actions were eventually compromised by an order in Tomlin form. That is, they were stayed on terms set out in a schedule to the order which the parties had permission to apply to enforce. The bank accepted £230,000 in two instalments, with it agreeing to release the charges once the first instalment of £200,000 had been paid. Each party was to bear its own costs. On the same day the Morgans transferred the two pieces of land to the company for a total of £230,000, and the company mortgaged the whole of the land to another bank to raise the funds to pay for the land, that money then being used by the Morgans to pay the agreed £230,000 to the first bank, which then released its charges.

 

25. Neuberger J set out the Board’s contentions as follows:

 

“18. The Board's case, as presented on its behalf by Miss Jane Collier, may be summarised in the following propositions:



(1) It is accepted that, in a case to which Section 16(6) alone applies, "property" can only normally be treated as "recovered or preserved...in the proceedings" if it was in issue in the proceedings;



(2) However, the present case is within Section 16(7) because it involved a "compromise or settlement" of each of the two actions;



(3) Accordingly, the Board's rights under Section 16 can extend to any right in property, which, although not in issue in the proceedings, was included as part of the settlement or compromise agreement;



(4) Property belonging to a legally aided person which was subject to an encumbrance, but which is released from the encumbrance, is property which is "recovered" within the meaning of Section 16(6), and therefore is within the ambit of Section 16(7);



(5) As the land was subject to the mortgages in favour of Barclays until the settlement agreements in August 1993, as the terms of the settlement agreements specifically provided that Barclays would release the land from the mortgages, and as the land was owned by the Claimants who were legally aided, the effect of Section 16(7) is to give the Board a charge over the land in respect of its unrecovered costs in the first and second actions;



(6) The fact that the land was transferred to the Company in no way affects this conclusion.”

 

26. The first and second propositions were not in dispute. With regard to the first proposition, Neuberger J stated as follows:

 

        “20. The Board accepts that it follows from this that, if either or both actions had gone to judgment, in which case Section 16(6) would have applied, the Board would have had no right to a charge over the land, because the question of its ownership or possession had not been at issue, at least as between the Claimants and Barclays. In particular, there was no challenge to the Claimants' freehold ownership of the land, or as to the validity of the mortgages over the land. It is true that, if the counterclaim in the first action had succeeded, the amount charged on the land would (albeit as an indirect consequence) have been reduced or even, conceivably, extinguished. It is true that Barclays' right to possession of the land as against the Company (rather than as against any of the Morgans) could be said to have been in issue in the second action. However, neither of these points is relied on by Miss Collier to suggest that the Board could have claimed a charge over the land under Section 16(6) if the actions had gone to judgment.”

         

27. It is clear that in that case the Legal Aid Board was not contending that a successful cross-claim that had the effect of reducing or extinguishing the amount secured by an undisputed legal charge would not give the Board any charge over the land. Neuberger J emphasised, however, that there was no challenge to the Morgans’ ownership of the land or to the validity of the mortgages.

 

28. The fourth proposition does not appear to have been disputed by counsel for the Morgans. Neuberger J put the position as follows:

 

“22. As I understand it, Mr. Stephen Jourdan, who represents the Claimants, does not dispute the fourth of the propositions. He accepts that, where the question of whether or not land owned by a person should be released from a mortgage is in issue in proceedings, and the Court orders the release, then the land would be "recovered or preserved for" that person, within the meaning of Section 16(6). That would appear to accord with the reasoning and decision in Jones -v- Frost (1872) L.R. 7 Ch. App. 773. That case was decided under Section 28 of the Solicitors Act 1860, which provided a solicitor with a lien over his client's property in certain circumstances. The wording of that provision, referring as it did to "property recovered or preserved", and the purpose of that provision, were similar to the wording and the purpose of section 16 of the 1988 Act.

 

23. In Jones at 777, James LJ said this:

 

            "I am of opinion that the property was property recovered by the instrumentality of the solicitor. It was freed from that charge... which affected it, by the suit; and therefore the solicitor is entitled to the charge he asks for."

            24. It seems clear from what Lord Simon said in Hanlon at [1981] A.C. 180D-H that cases on provisions such as Section 28 of the 1860 Act "are of value" when considering the effect of Section 16 of the 1988 Act. However, at 177A he said that the "liberal approach to construction [of the Solicitors Acts] is not appropriate for a charge for a social service" where the words should be accorded their "ordinary sense which is appropriate in the context"; I also note that Lord Lowry doubted the value of subjecting cases under the Solicitors Acts to "detailed analysis" in this context- see at 190E. Even taking into account these latter observations, I consider that the reasoning of James LJ in Jones applies to cases under Section 16 of the 1988 Act.”

 

29. It is clear from paragraph 24 of his judgment that Neuberger J held that if a property was freed from a mortgage or charge by an order in the proceedings and the question whether it should be released was in issue in the proceedings, then the Legal Aid Board would have a statutory charge over that property by virtue of section 16 of the Legal Aid Act 1988.

 

30. Neuberger J then went on to consider the third and fifth propositions made on behalf of the Legal Aid Board. At paragraph 26, he stated that considering the issue free of authority it appeared to him that the Board’s charge under section 16 did not extend to the land in issue. He continued:

 

“27. It seems to me that Section 16(7), in so far as it is dealing with compromises or settlements, is essentially directed towards extending the scope of Section 16(6) to substitutions, i.e. to property which is included in the terms of settlement and which, while not in issue itself, in some way represents or replaces property or, I believe, rights, in issue. To take a simple example, if a legally aided claimant was seeking to recover £200,000 from a defendant, and the claim was compromised by the defendant transferring a house to the claimant, the effect of Section 16(7) would be to ensure that the Board's charge would extend to the house even though there would have been no question of the house being in issue in the proceedings: absent Section 16(7), it would fall outside the ambit of Section 16(6). It is true, as Miss Collier argues, that there is no express qualification in Section 16(7) to the general words "rights of a person under any ... settlement arrived at to [bring] the proceedings...to an end". However, those words cannot be construed in isolation. Indeed, they do not merely take their colour from Section 16(6); they are governed by the words "for the purposes of sub-section (6)", and they are specifically introduced by the words "the charge includes", which also takes one back to Section 16(6), and its scope.

             

28. As I have mentioned, Section 16(6) has been interpreted by the House of Lords in Hanlon [1981] AC 124 as being limited to property "in issue in the proceedings". In those circumstances, it seems to me legitimate, indeed appropriate, to treat the relevant words of Section 16(7) as applying to property which, as part of the settlement, has been recovered or preserved by the legally aided person, either because it was in issue in the proceedings or because it was, directly or indirectly, substituted in whole or in part for such property as part of the settlement. Such an extension is necessary in the case of settlements because, unlike where a case goes to judgment, parties are free to include terms in the order which extend to property and rights not "in issue" in the litigation. While one can easily see why it is appropriate to extend the charge to substitutions, it is hard to discern any justification in extending the charge to assets which, while included in the overall agreed terms, are really extraneous, or no more than incidental, to the issues in the proceedings in respect of which legal aid has been granted.

         

        29. If this approach is correct, then, where a legally aided person settles an action, and the Board contends that it is entitled to a charge over property which is recovered or preserved by the legally aided person as part of the settlement, a two stage process may be involved. The first stage is the same as the process involved in a case which goes to judgment, namely to consider whether the property concerned was in issue in the proceedings. If it was, then no further inquiry is needed: subject to any special factors, the Board has a charge over it. If the property concerned was not in issue in the proceedings then one moves to the second stage: the Board will nonetheless be entitled to a charge over it if it can fairly be said that the property concerned was effectively recovered or preserved by the claimant in substitution for property (or even, I believe, rights) in issue in the proceedings. In most cases, I believe that this second stage will be relatively easy, and, at least in general, it should not raise any greater difficulties than the first stage. In some cases, however, more detailed investigation may be required. However, a risk of a more detailed investigation of the facts surrounding a settlement seems to me to be inherent in what is envisaged by the relevant part of Section 16(7) in any event. In a case which goes to judgment, one would normally not expect to look further than the "pleadings, evidence, judgment and/or order" as Lord Simon said. However, where the parties have settled the action, then, as I see it, irrespective of how widely one construes the relevant words of Section 16(7), it may in some cases be necessary to consider matters more widely. Thus one may have to investigate whether, at the same time the parties entered into the consent order, they also agreed other terms, not included or even referred to in the order, which conferred other benefits on a legally aided party, which included property being preserved or recovered by him.

         

        30. In other words, as I read Section 16(7), where proceedings to which a legally aided person have been settled, one should look at all the terms of settlement and, in some cases the negotiations leading up to the settlement (and not merely the formal order recording settlement and documents referred to in it). One then considers what property can be said to have been preserved or recovered by the legally aided party, and one then asks whether that property was either in issue in the proceedings, or can be said to have been substituted in some way for rights, property or claims which were in issue in the proceedings. That appears to me to be the proper construction of the relevant provision in Section 16(7), if one reads it in the context of Sections 16(6) and 16(7) as a whole, particularly in light of the way in which Section 16(6) has been interpreted by the House of Lords.”

 

31. Neuberger J then considered how to apply his approach to the facts of the case before him, starting from the agreed position that the land was not in issue in either of the actions, so that it did not fall within section 16(6) of the Legal Aid Act 1988, and then consider whether the release of the land from the mortgages was in substitution for any rights, claims or property which were in issue in the first or second action (para.31). He continued:

 

“It might be argued that any benefit accorded to a legally aided person (whether it is preserved or recovered) as part of a settlement, either must have been in issue in the proceedings concerned, or, almost by definition, it must have been in substitution for something in issue in the proceedings, as otherwise it would not have been accorded to the legally aided person as part of the settlement. In most cases where property has been recovered or preserved by a legally aided person as part of a settlement, that argument would, I expect, be unanswerable, but in some cases, it would not. An example might be where the terms of settlement extend not only to what was in issue in the proceedings in question, but also to another dispute or potential dispute which existed between the parties but which had not yet become litigious (or which even had been the subject of other proceedings).”

 

32. He went on to find that there was considerable force in the argument that the discharge of the mortgages once the settlement sum had been paid was no more than an inevitable by-product of the settlement, since if the court had found after a hearing that the amount owing was £230,000, once that had been paid the land could have been released from the mortgages and no charge could have been claimed by the Legal Aid Board (para.32). He then rejected two further points relating to the terms of the settlement in that case.

 

33. At that point in his decision, Neuberger J had not yet considered the authorities. He then proceeded to do so, and concluded that they did not prevent him from coming to his conclusion that “One still had to decide whether it can be said that the property was in any meaningful way “in issue” according to the test laid down in Hanlon, or, I would respectfully add, whether it can be said to have been in substitution for such property.” (para.47)

 

34. Then at para.52, he stated “whether property has been recovered or preserved fior a legally aided person is not, I think, to be determined by reference to technicalities, let alone legal artifices, but by looking at the realities.” On his assessment of the realities in the case before him, he concluded that unless the transfer of the land to the company was at an undervalue, the Morgans had not in reality recovered or preserved the land, or the proceeds of sale of it which had been paid to the bank. Had it been at an undervalue then he considered that there may have been an argument that in reality the Morgans recovered something which they chose to forego in favour of the company.

 

35. The position where legal aid was granted to enable a person to defend proceedings arising out of a charge on property was further considered by Morgan J in McPherson v Legal Services Commission , [2008] EWHC 2865 (Ch). That was an appeal by Mrs. McPherson from a decision of Mr. Owen Rhys sitting as Deputy Adjudicator to the Land Registry. She and her husband had purchased a property with the assistance of a mortgage. In December 1997 an assignee of the mortgage had brought mortgage possession proceedings against them. The claim was for possession and for payment of outstanding arrears. Both Mr. and Mrs. McPherson separately obtained legal aid to defend the proceedings. Mrs. McPherson did not deny that there was a mortgage but denied her liability under a facility letter which she said she had not signed and she raised an issue as to whether the benefit of the mortgage was vested in the assignee claimant. In April 2001 her legal aid certificate was revoked. In December of that year judgment was entered against her for a sum to be determined and costs, and in January 2002 the whole proceedings were settled on the basis that the judgment against Mrs. McPherson was set aside, that the McPhersons had paid £265,000 to redeem the mortgage and that neither side would bring any further proceedings against the other.
36. Mr. McPherson subsequently became insolvent and entered into an Individual Voluntary Arrangement, in the course of which the Legal Services Commission (LSC) advised that Mr. McPherson had no liability under his legal aid certificate as he did not recover or preserve anything in the proceedings. Despite this, it subsequently sought to register a statutory charge over the property in respect of Mrs. McPherson’s legal aid costs, and it was an application to register the claimed charge that was referred to the Adjudicator, who concluded that the property had been preserved by the proceedings because the claim was for possession and a compromise had been reached by which that claim was abandoned against payment of a sum of £265,000. He held that the charge was not limited to the net equity in the property despite the concession of the LSC that it would limit its charge to that excess.

 

37. Morgan J reviewed the earlier authorities, including decisions not cited to Neuberger J in Morgan v Legal Aid Board. He questioned whether, if the mortgage debt was reduced by the settlement or judgment, the property could not have been said to be preserved to the extent of the reduction (paras 50-52) and pointed out in para.68 that the point had been conceded by the Legal Aid Board before Neuberger J (see para.20 of the judgment of Neuberger J) and concluded at paragraph 75:

“As explained earlier, in the case of an unsecured debt, the reduction in the amount of the monetary liability does not involve the recovery or preservation of property. The position is different in the case of a secured debt. That is shown, in my judgment, by the decisions in The Philippine and the Pelsall case [ these cases are considered by Morgan J at paragraphs 54-56 of his decision]. The present case is a fortiori those cases because the property at Woodland Cottage was more clearly the subject matter of the proceedings. If I were to apply those decisions in the present case, I would reach the conclusion that prima facie Mr and Mrs McPherson had preserved property to the extent of £X–265,000, in that they had reduced the incumbrance on Woodland Cottage to that extent. I say prima facie for this reason. If Woodland Cottage were worth more than £X at 30 ^th January 2002, then Mr and Mrs McPherson had preserved property to the extent of £X-265,000 by reason of the settlement. Conversely, if Woodland Cottage were worth less than £265,000 at that date then all that they have achieved was to reduce the unsecured debt by £X–265,000, but they have not preserved any part of the value of Woodland Cottage.”

 

38. Morgan J went on to find that as possession was in issue in those proceedings, he was bound by authority to accept that by preserving possession, the McPhersons preserved the property (para.86) and that what was preserved was the title to the property subject to the obligation to pay £265,000 to redeem the charge. As however, the only beneficial interest of Mrs. McPherson was a half share in the property, in the proceedings against her the LSC could only claim a charge over that share and not over the whole property. I note that in this respect the wording of section 10 of the 1999 Act is different from that of the 1988 Act and that the charge is now expressed to be on “any property recovered or preserved by him (whether for himself or any other person)”. This would appear to be wide enough to include property preserved for all the beneficiaries in similar litigation to that between the McPhersons and the assignee of their mortgage. As no such problem arises here, it is unnecessary for me to consider it further.

 

The application of the law to the facts of the present case

39. It appears to me that, sitting as a tribunal judge, I am bound by the decision of Morgan J to conclude that if the disputed mortgage debt is settled at a level less than that claimed by the mortgagee, then the property charged is recovered or preserved at least to the extent of the reduction in the secured debt below the amount claimed by the mortgagee. That also appears to me to apply to a beneficial interest in the property at least to the extent that the sums required to discharge the debt would have gone to reduce that beneficial interest. It also appears to me that that is the reality of the situation, to apply Neuberger J’s test as set out in paragraph 52 of his decision at least where, as here, the only source for the payment of the debt was the charged property and the issues in the proceedings expressly included the basis on which the claimant was entitled to redeem the mortgage. Further, the issues pleaded in the Re-Amended Particulars of Claim, and the relief sought, clearly relate to the redemption of the mortgage.

 

40. Even if that were wrong, the original settlement, which the Cookes were prepared to accept, required that sums properly expended by the Legal Services Commission were to be repaid to it out of the sum of £115,000 offered by way of damages and costs. It is plain that that settlement would have involved the recovery of damages, even if less than the Cookes had thought they were entitled to, and that the statutory charge would have attached to those damages. That settlement failed because the Cookes were not prepared to see the sum offered further reduced by their solicitors taking from it additional sums beyond those payable to the Legal Services Commission. I note that the net amount the Cookes were prepared to accept in settlement of their claim was £68,880. If they had got this amount, they would not have had enough to discharge the charge to the lender, let alone to pay of the second charge of £15,500 which was not in dispute.

 

41. The revised settlement, which the Cookes explained to me was not their idea but came from the lender, was to write off the whole of two charges, with no money being paid by way of damages. This was rightly more acceptable to the Cookes, and was a better offer even if the Legal Aid Commission was entitled to a charge for up to £39,950 + VAT. Instead of being left with £68,880 less the solicitors’ claimed additional costs of around £35,000 and debts of at least £92,000, they would be left with a charge on the house for £39,950 + VAT but no debt to either the lender or the parent bank.

 

42. Even if their home was not, or their beneficial interests in it were not, recovered or preserved by the litigation, it was, or they were, brought into account in the final settlement when the charges were discharged because that put the Cookes into a better financial position that the original settlement. The discharge of the charges replaced the damages offered by the previous proposal.

 

43. There are issues raised by the Cookes as to the way in which the costs payable by the Legal Services Commission to their solicitors were assessed and that they had no opportunity to contest the amounts. It is unnecessary for me to express any view on these issues and I do not do so. There has been no proper consideration of the issues which would require a detailed examination of the way in which the solicitors conducted the litigation and the way in which the assessment took place, and would involve detailed disclosure in relation to these matters. I note that the assessment in any event took place after the application of the Legal Services Commission for the form JJ restrictions and after that matter had been referred to the Adjudicator. I also note that there is no dispute that the Legal Services Commission had expended sums on account in funding the litigation.

 

44. A form JJ restriction simply requires that there should be no disposal, with certain exceptions, without notice being given to the Legal Services Commission. At the date of the application, and now, the Legal Services Commission had expended sums on account well in excess of the £15.663 paid to it by the lender. It plainly had a claim to a statutory charge and the only remaining question in the light of this decision is as to the amount it had properly expended. Given its claim, it is clear that the Legal Services Commission was entitled to such a restriction to prevent any disposal of the property over the beneficial interests in which it claimed charges without its being able to assert that claim.

 

45. It appears to me that if the Cookes wish to pursue a claim against either firm of solicitors for breach of duty, that is a matter for them, but, unless there was some way that this could have been raised on a legal aid assessment of their costs, and I express no view as to this, I am unable to see how any such breach of duty could give rise to any claim against the Legal Services Commission. If any such issues are to be litigated, and I would not wish to encourage further litigation, that must be done elsewhere.

 

46. So too, any dispute with the Legal Services Commission as to the validity or propriety of the assessment of their solicitors’ costs should be by way of appropriate court proceedings and not by challenging the right of the Commission to notice of any disposition at a time when no such proceedings have even been commenced, or I would add at any time after the commencement of the proceedings unless and until there had been a decision in those proceedings which produced the result that it was established that there was no outstanding sum secured by the statutory charge. Even at that stage the appropriate course would be to apply to have the restriction removed and not to challenge the Legal Services Commission’s right to register it in the first place.

 

By Order of the tribunal

 

dated the 31 ^st day of January 2014