Credit & Mercantile Plc v Feliciangela Marks [2004] EWCA Civ 568

Case No B2/2003/2759[2004] EWCA Civ 568
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE SLOUGH COUNTY COURT
Mr Recorder Chapman
Venue Royal Courts of JusticeDate Thursday 13 May 2004
Strand,
London, WC2A 2LL
Before
LORD JUSTICE CLARKELORD JUSTICE DYSONLORD JUSTICE WALL
Between
CREDIT & MERCANTILE PlcClaimant/FELICIANGELA MARKSDefendant/
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Miss Katherine Olley (instructed by Shah Solicitors) for AppellantMr Geraint Jones QC and Mr Philip Rainey (instructed by Glovers Solicitors) for Respondent
Judgment

Introduction

[1]This is the judgment of the court in an appeal from part of an order made by Mr Recorder Chapman in the Slough County Court (sitting at Uxbridge) on 17 December 2003. The action arises out of a mortgage on Home Farm House, Hockley Lane, Stoke Poges, where the appellant lives with her husband and three children. She acquired the house with the assistance of a loan of £1,305,000 from the respondent which was secured by a first mortgage on the property dated 5 August 2002. Unfortunately she subsequently fell into arrears and on 18 November 2002 and 30 January 2003 the respondent served formal demands upon her for immediate repayment of the monies due under the loan.[2]On 12 February 2003 the respondent issued a claim for possession of the property, which was listed for hearing on 31 March 2003. At that application the appellant was represented by her husband, to whom she had granted a power of attorney in respect of dealings concerning Home Farm. An order for possession was made. No steps were immediately taken to appeal against or otherwise challenge that order. However, on 31 July 2003, shortly after taking legal advice for the first time, the appellant made an application to the court for various directions. On 17 September it was ordered that the application notice of 31 July be treated as an application for permission to appeal and that the application should in any event be heard by a circuit judge. The application finally came before Mr Recorder Chapman on 17 December.[3]Three points which had been taken on behalf of the appellant were considered by the recorder at that hearing as follows: i) that the effect of a sub-charge granted by the respondent to the Bank of Scotland was that the respondent had no right of possession so that the order for possession was either made without jurisdiction and should be set aside on that ground or was wrong in law and should be set aside by way of appeal; ii) that the amount of interest recoverable by the respondent was considerably less than that claimed because the rate of interest provided in the facility letter was so excessive that the agreement amounted to an extortionate credit bargain and because the variable facility fee in the facility letter amounted to an unlawful penalty; and iii) that the appellant would shortly be able to redeem the charge so that possession should be suspended under section 36 of the Administration of Justice Act 1970.[4]In this appeal we are concerned with only the first of those points. The recorder said that the second point essentially raised questions of quantum, and that, since at the possession hearing on 31 March the money claims had been adjourned generally, the appropriate course was to give directions as to the issues relevant to the money claims to include those in point two. As to the third point, the recorder held that he could not be satisfied that the whole of the debt, even if substantially reduced to take account of the appellant’s case on the money issues, would be discharged within a reasonable period. He accordingly dismissed the application under section 36 and refused permission to appeal and no application to appeal in that regard has been made to this court.[5]That leaves the first point. The recorder granted the appellant permission to appeal against the order for possession made on 31 March 2003 but, after considering the point in a careful and impressive judgment to which we wish to pay tribute, he dismissed the appeal. On 2 March 2004 Jonathan Parker LJ granted permission to appeal to this court limited to what may be called the sub-charge point, which we will consider by reference first to the contractual documents and then to the relevant statutory provisions, the authorities (so far as they assist) and the text books. The contractual documents The facility letter and the charge

The contractual documents

[6]There are two relevant contractual documents as between the appellant and the respondent, the facility letter dated 29 July 2002 from the respondent to the appellant and the legal charge dated 5 August 2002. The facility letter sets out the terms on which the respondent was willing to lend the sum of £1,305,000 to the appellant, who accepted its terms by signing a copy of the letter. The purpose of the loan was to assist her to acquire the property and to provide time “to resolve planning opportunities”. The loan was repayable on demand and the facility was expressed to be for the minimum period of six months from drawdown. The security was to be a first legal charge on Home Farm. The letter contained detailed provisions on a number of matters including charges and deductions.[7]It is perhaps only necessary to refer to paragraphs 2 and 3 of schedule 2 to the letter. They provide, so far as relevant, as follows:
“2. Repayment on Default The security as provided for in the Offer Letter shall become enforceable and the facility together with charges thereon and all other monies due under the Facility and Security Documents shall become immediately due and payable upon demand by us at any time following the occurrence of any of the following events 2.1 If you make a default in repayment or payment to any monies due to us from you under this Facility or the Security Documents. … 3. Assignment You hereby agree that we have the right [to] cede assign sub-mortgage or transfer this debt and its securities to any of our subsidiary companies associates bankers or assigns.”
[8]The legal charge contains a covenant to pay in clause 1. It also contains familiar provisions which it is not necessary to set out, except perhaps for part of clause 5 which includes the following:
“5. Enforcement 5.1 This Legal Charge shall become enforceable: 5.1.1 if any of the monies obligations and liabilities secured by this Legal Charge shall not be paid or discharged by the Borrower in accordance with clause 1; or … 5.2 Section 103 of the Law of Property Act 1925 shall not apply and the statutory power of sale and all other powers under that or any other Act as varied or extended by this Legal Charge shall arise on and be exercisable at any time after the Lender shall have demanded the payment or discharge by the Borrower of all or any of the monies obligations and liabilities secured by this Legal Charge.”
[9]It is not as we understand it in dispute that under the terms of the facility letter and the charge the respondent has a right to go into possession if any of the monies due under them is not paid by the appellant. The general principle is that stated by Harman J in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] 1 Ch 317 at 320, namely that a mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right. Again as Harman J put it, he has the right because he has a legal term of years in the property or its statutory equivalent. It is a common law right which is preserved (but not created) by section 95(4) of the Law of Property Act 1925.[10]Although it is not necessary finally so to decide for the purposes of this appeal, it seems reasonably clear to us that there is something in the contract here, either expressly or by necessary implication, which would prevent the respondent from taking possession of the property before the legal charge became enforceable under clause 5, namely the combined effect of paragraph 2 of schedule 2 to the facility letter and of clause 5 of the charge. In any event, there can be no doubt that once the charge became enforceable, as for example by a failure to pay monies due under it, on the true construction of the facility letter and the charge, the respondent had a right of possession of the property.[11]That conclusion is not, as we understand it, in dispute if attention is focused only on those documents. Nor could it be. The question is whether the position is different by reason of the existence and/or terms of the sub-charge, to which we now turn.

The sub-charge

[12]The sub-charge was executed on the same day as the legal charge, namely 5 August 2002. In it the “Borrower” is defined as the respondent and “the Bank” as the Bank of Scotland. We will refer to the Bank of Scotland as “the Bank” or as “the sub-chargee”. The “Property” is defined as Home Farm and “the other assets under clause 3” and “Principal Charge” is defined as the legal charge between the respondent and the appellant “and the principal money secured by that charge and all interest due on it or to become due and the benefit of all securities for the payment of it”. We shall refer to the charge between the appellant and the respondent as “the principal charge”.[13]By clause 2 of the sub-charge, the respondent agreed to pay the Bank “the Debt” when the Bank ”demands in writing”. By clause 1.1, “Debt” is given the same meaning as in the “Bank’s Commercial Charge Conditions (1995 Edition)” most of which were, by clause 5 of the sub-charge, made applicable to the sub-charge. It is in our opinion important to identify the nature of the respondent’s obligations which were being charged to the sub-chargee under the sub-charge. They can be seen from the definition of “Debt” in the conditions.[14]By clause 1.1(e) of the conditions, ““Debt” means all sums of money owed and all liabilities or obligations to be carried out to the Bank at any time and from time to time by a Debtor …” By clause 1.1(f), ““Debtor” means any and every person (whether the Borrower or the Owner or either of them) who has agreed to repay a Debt to the Bank.” Thus by clause 2 of the sub-charge the respondent agreed to pay to the Bank on demand the whole of the indebtedness which it owed to the Bank from time to time and it was thus the whole of that indebtedness which was secured by the sub-charge. That indebtedness might arise out of many different transactions, all of which would almost certainly be wholly unconnected with the appellant.[15]The nature of the sub-charge can be seen from clause 3 of the sub-charge, which provides:
“The Borrower by way of first fixed security for the payment of this Charge with full title guarantee HEREBY CHARGES by way of legal mortgage all of the Borrower’s right, title, interest and benefit, present and future as beneficiary under and in respect of the Principal Charge TO HOLD the same absolutely unto the Bank absolutely for itself.”
It can thus be seen that what are charged by the sub-charge are the respondent’s rights under the “Principal Charge”, which (as stated above) is the charge of the same date between the appellant and respondent in which the appellant charged Home Farm to secure her liability under the facility letter as described above.[16]It can also be seen that there is nothing in clause 3 which purports to transfer to the sub-chargee all the respondent’s rights against the appellant under the charge. The clause is a simple charge to secure the discharge by the respondent of its obligations under the sub-charge. There is in particular nothing in the wording of clause 3 to suggest that it was intended that there should be any transfer of the respondent’s rights against the appellant under the principal charge as soon as the sub-charge was entered into and absent any demand in respect of a “Debt” due under the sub-charge.[17]Moreover, there is, in our judgment, nothing in any of the other provisions of the sub-charge to effect such a transfer. On the contrary, they lead to the conclusion that no such transfer was intended. It is necessary to refer to only a few of them.[18]Clause 4 provides:
“The Borrower hereby applies to the Chief Land Registrar for the following to be entered on the Charges Register of the Property (as is registered under the Land Registration Act 1925) hereby charged: “Except under an order of the Registrar no disposition by the Proprietor of the charge is to be registered without the consent of the Governor and Company of the Bank of Scotland.””
Clause 7 is to similar effect. Home Farm is registered land and the register shows three relevant entries for present purposes. It shows the registration of the principal charge as between the appellant and the respondent, the registration of the sub-charge as between the respondent and the sub-chargee and a restriction in the terms of clause 4 of the sub-charge (quoted above), also in favour of the sub-chargee. We will return below to the relevant provisions of the Land Registration Act 1925 but it seems to us, as a matter of construction of the sub-charge, that clause 4 is inconsistent with the idea that the respondent’s power of sale under the principal charge was transferred to the sub-chargee. The effect of the clause is that the respondent retains its power of sale, subject to a restriction on the way in which it can be exercised involving either the consent of the sub-chargee or an order of the registrar. “Except under an order of the Registrar no disposition by the Proprietor of the charge is to be registered without the consent of the Governor and Company of the Bank of Scotland.””[19]Clause 6 of the sub-charge provides so far as relevant:
“6 The Borrower agrees with the Bank as follows: 6.4 To enforce the prompt payment of the monies due under the Principal charge and to ensure that the chargor under the Principal Charge complies with all of the terms [of the] Principal Charge.”
Clause 8 of the conditions provides so far as relevant:
“8 THE BANK’S POWERS AND THE ENFORCEMENT OF THE CHARGE 8.1 At any time after the Bank has demanded the repayment of the Debt or following a request by the Borrower or the Owner and insofar as the law allows, the Bank may: (a) appoint a Receiver over all or part of the Property; (b) exercise all of the powers conferred upon it as mortgagee by the Law of Property Act 1925 as extended or varied by these Conditions; (c) take possession of the Property and in so doing shall be deemed to be the agent of the Chargor, … ” (a) appoint a Receiver over all or part of the Property; (b) exercise all of the powers conferred upon it as mortgagee by the Law of Property Act 1925 as extended or varied by these Conditions; (c) take possession of the Property and in so doing shall be deemed to be the agent of the Chargor, … ”
[20]It was submitted by Miss Olley in the course of her oral submissions on behalf of the appellant that the effect of the sub-charge was to create the respondent the agent of the sub-chargee for some purposes and, in particular, that the effect of the clause 6.4 of the sub-charge and of clause 8.1 of the conditions was to create the respondent the agent of the sub-chargee for the purposes of making demands under the terms of the principal charge. She further submitted that the demands contained in letters to the appellant dated 18 November 2002 and 30 January 2003 were made by the respondent on behalf of the sub-chargee.[21]We are unable to accept either of those submissions. We see nothing in clause 6.4 of the sub-charge to create any relevant agency. It is simply a provision which requires the respondent to enforce its rights under the principal charge. It seems to us to be plain that it is its own rights which it must exercise. It can of course only exercise its rights if it retains them; so that the clause is inconsistent with any suggestion that it has transferred them to the sub-chargee.[22]As to clause 8.1 of the conditions, we do not see how it assists the appellant’s case. The clause makes it clear that the sub-chargee’s powers to enforce the sub-charge arise only after it has demanded repayment of “the Debt”. There is no evidence whatever that the sub-chargee made any such demand. Moreover, there is nothing in the clause which confers any authority on the respondent to make a claim under the principal charge on behalf of the sub-chargee.[23]In any event, there is nothing in either of the letters to suggest that the respondent wrote them on behalf of the sub-chargee. They are ordinary form demands by the respondent as chargee under the principal charge that the appellant pay the amount due under the facility letter and charge. They can be construed in no other way and there is no evidence that in writing either of them the respondent was doing so on behalf of the sub-chargee. The clear inference is that it was not, especially as there is no suggestion that any of “the Debt” defined in the sub-charge was due.[24]There was some debate in the course of Mr Jones’ submissions on behalf of the respondent as to the way clause 3 of the sub-charge operates. He submitted that it operates as a partial or conditional equitable assignment, the condition being satisfied only if there is a default under the sub-charge on the part of the respondent. He submitted that until then all the respondent’s rights under the principal charge remain vested in the respondent and that the position only changes when there is a relevant default under the sub-charge and notice is given to the appellant, neither of which has occurred on the facts of this case.[25]There was some discussion as to what is assigned when the assignment becomes unconditional and, indeed, as to whether the assignment is then a legal or an equitable assignment. There was also some discussion as to the circumstances in which monies due under the principal charge could safely be paid either to the respondent or to the sub-chargee. It is not, in our judgment, necessary for us to consider those questions in this appeal since they do not arise on the facts. We have reached the clear conclusion that, whether clause 3 is properly described as a conditional equitable assignment or otherwise, it is not enforceable until the sub-charge becomes enforceable under clause 8 of the conditions.[26]As we see it, this is not a case in which the sub-chargee was entitled to possession of the property before the ink dried on the sub-charge, because the provisions of clause 8 of the conditions construed in their context lead to the conclusion that the sub-chargee could only enforce the sub-charge after it had made a relevant demand or there had been a relevant request. It is not necessary to analyse the position thereafter because no such demand or request has been made. At least until then, the respondent retains its powers under the principal charge, including the power to take possession.[27]In all these circumstances we have reached the clear conclusion that there is nothing in the sub-charge to alter the conclusion set out above that the respondent has power under the facility letter and principal charge to take possession of Home Farm provided only that there are monies due under them. The amount due was said to be £1,365,312.56 in the letter of 18 November 2002 and £1,364,575.97 in the letter of 30 January 2003, in each case plus interest and charges. There may be scope for debate about the precise figures but there is, as we understand it, no doubt (as the recorder held) that some monies were due. It follows that, as a matter of construction of the documents, the respondent was entitled to possession of Home Farm and there is nothing in the sub-charge to lead to any other conclusion.[28]However, the question remains whether there is any general principle that, regardless of the true construction of the relevant documents, the granting by a chargee of a sub-charge has the effect of either divesting the chargee of his rights against the chargor by transferring them to the sub-chargee or at least of suspending those rights during the currency of the sub-charge. That was the principal question discussed by the judge and involves a consideration of the relevant statutory provisions, the authorities and the textbooks.

The statutory provisions, the authorities and the textbooks

[29]It is convenient to begin with the textbooks because this case has highlighted a curious feature of the learning on the topic of sub-charges, which seem to be a form of mortgage or charge which have troubled the courts very little in the past. Before the judge and in this appeal reliance was placed upon these sources: an article in The Conveyancer written in 1948, reference Conveyancer and Property Lawyer New Series Vol 12 1948 p 171, Emmett and Farrand on Title 19th edition 2003 para 25.021, Fisher and Lightwood’s Law of Mortgage 11th edition 2002 paras 15.2 and 15.3 and Ruoff and Roper on Registered Conveyancing May 2000 para 24.10.[30]It is fair to say that in those materials there is some support for a suggestion that the making of a sub-charge may at least suspend the chargee’s rights under a principal charge. So for example in the first sentence of paragraph 15.3 of the 11th edition of Fisher and Lightwood it is stated that the effect of a sub-mortgage is to put the sub-mortgage[e] in the position of the transferee of the principal mortgage and in a footnote it is said that the original mortgagee’s power of sale is suspended during the continuance of the sub-mortgage. However, no authority is cited for either proposition.[31]The article in The Conveyancer, which was written by a Mr Woodhouse (who was plainly an experienced conveyancing solicitor), was entitled “Sub-mortgages – their creation, realisation, transfer and discharge”. The principal statement in the article relied upon on behalf of the appellant is on page 175 as follows, under the heading “Powers of the sub-mortgagee”:
“The sub-mortgagee will, of course, be entitled to exercise the ordinary powers of a mortgagee in relation to the subject of his sub-mortgage. In addition, if the mortgage is in one or other of the forms discussed above, the sub-mortgagee will be entitled to exercise the powers conferred by the principal mortgage, as such powers will have been expressly or impliedly transferred to him.”
[32]The recorder rejected the submission that the article supported the broad proposition that any sub-mortgage must necessarily take effect by way of transfer if the principal mortgage was by way of charge by way of legal mortgage. He was, in our judgment, correct to do so. As the passage just quoted makes clear, the proposition that the sub-mortgagee will be entitled to exercise the powers of the principal mortgagee under the principal mortgage or charge depends upon the conclusion that those powers will have been expressly or impliedly transferred to him. The author had previously set out the terms of particular forms of mortgage, which (so far as we can see) expressly provided for such a transfer: hence the proviso in the passage quoted “if the mortgage is in one or other of the forms discussed above”.[33]As we read the article, Mr Woodhouse was making clear that whether there was a transfer depends upon the true construction of the particular sub-charge: hence the importance of the sub-chargee using one of the forms he was proposing. In agreement with the recorder, we do not think that the article provides support for any general proposition not dependent upon the true construction of the particular sub-charge.[34]Paragraph 25.021 of the 19th edition of Emmett and Farrand includes this:
“If … the head mortgage is a charge by way of legal mortage, the sub-mortgage will take the form of a transfer of the benefit of the head mortgage. As there is some doubt whether the LPA, s 114(1), applies to the creation of a sub-mortgage, it is as well to provide also for the transfer of the benefit of all the powers and provisions contained in the head mortgage: see further an article by H Woodhouse … ”
The article was that referred to above.[35]That passage provides little, if any, support for some general principle of transfer of the mortgagee’s rights under the head mortgage. We will return to section 114 of the Law of Property Act 1925 and to section 33 of the Land Registration Act 1925 below, but if that passage would support some such general proposition of transfer regardless of the terms of the sub-charge, we would respectfully disagree with it.[36]Paragraph 24-10 of the May 2000 issue or edition of Ruoff & Roper included the following sentence: “The proprietor of a sub-charge (subject to any entry to the contrary on the register) has the same powers of disposition, in relation to the land, as if he had been registered as proprietor of the principal charge and, so long as the principal charge subsists, the sub-chargee is the only person who can exercise the lender’s remedies under, or discharge, the principal charge.” (Our emphasis) Against the first unitalicised part of that sentence there is a reference in a footnote to rule 163(2) of the Land Registration Rules 1925. As the recorder observed, no authority is given for the italicised part. The recorder added that he did not read those words as inconsistent with the conclusion that the head mortgagee retains a right of possession. That may be so but, if they are, we respectfully disagree with them. It may be noted that the equivalent part of the rewritten work, which was published in 2004 (since the judgment in this case) and in the context of the Land Registration Act 2002, does not contain an equivalent statement to that italicised above.[37]One odd feature of the texts so far referred to is that none of them refers to the only decision on the point, namely Owen v Cornell (1967) 203 EG 29. The only exception is a later paragraph in the 11th edition of Fisher and Lightwood, para 19.1, where the editors are discussing mortgagees’ rights to immediate possession. In a footnote they include the statement that the assignment of rights under a mortgage to a sub-mortgagee does not destroy the right of the head mortgagee to go into possession and cite Owen v Cornell.[38]In all the circumstances we do not think that any of the texts to which we have referred supports a general proposition that, wherever there is a sub-mortgage, the principal mortgagee’s rights against the mortgagor are transferred to the sub-mortgagee and lost by the principal mortgagee or in some way suspended otherwise than as provided in the sub-charge. If any of them does support such a general proposition, we respectfully decline to follow it. In our view all depends upon the true construction of the sub-mortgage in the particular case.[39]Except for a case in the Macclesfield County Court decided in 2000, namely Falco Finance Ltd v Gough, which is of no assistance because the point was conceded, the only authority directly in point is Owen v Cornell. It is true that it is shortly reported and that it is almost certain that the judgment was more extensive than is reported. It was nevertheless a decision reached by Buckley J after hearing argument by distinguished Chancery counsel, Mr Peter Millett and Mr John Knox. The facts are shortly but concisely set out in the report. The mortgage was created by demise for a term of 3,000 years. The plaintiff mortgagee gave notice to the defendant mortgagor calling in the loan. Subsequently the plaintiff created a sub-mortgage to secure his overdraft with his bankers, the sub-mortgage being a sub-demise for a term of 3,000 years less one day. By its terms the plaintiff assigned to the bank his beneficial interest in amounts due under the mortgage. Some considerable time later, by which time the interest payments were up to date, the plaintiff issued a summons for possession of the property.[40]The summons was resisted on the basis that the one day reversion vested in the plaintiff was a conveyancing device which did not leave the plaintiff with any right to possession once he had granted the sub-mortgage. It was said that, the mortgage debt having been assigned to the sub-mortgagee, the right to sue was now vested in the sub-mortgagee, that all the other powers of the head mortgagee were now vested in the sub-mortgagee and that it would be anomalous that the right to possession should still be outstanding in the head mortgagee, if all the other rights against the mortgagor were now rights and powers enforceable by the sub-mortgagee.[41]Buckley J rejected that argument. He referred to the principles stated by Harman J in the Four Maids case referred to above, including the proposition that the mortgagee has a right of possession because he has a legal term of years or its statutory equivalent, and expressed his conclusion thus:
“The fact was that the legal estate in the term of 3,000 years still remained in the head mortgagee, notwithstanding that he had created out of it a sub-demise for a shorter period. There remained a nominal reversion of one day which was in the head mortgagee. The sub-mortgagee had a lesser estate carved out of the head mortgagee’s estate. He [Buckley J] saw no reason in these circumstances why the head mortgagee ought not to be permitted to exercise his rights in respect of the legal estate vested in him to obtain possession of the property. He saw nothing which suggested that Parliament intended any other result.”
[42]Although the brevity of the report has been criticised, the reasoning of the judge seems to us to be clear. It was submitted that the case was wrongly decided but we do not agree. It seems to us to be consistent with principle. We accept Mr Jones’ submission that the ratio of the case may be summarised thus. A mortgagee’s right of possession derives from his estate or interest in land and is not dependent upon fault. Despite the sub-charge, the principal mortgagee retains his estate and, even if he has transferred the right to collect the debt and thus cannot complain of default, that is irrelevant because he can take possession unless he is unable to do so by reason of the terms of the principal mortgage.[43]It appears that in Owen v Cornell there was expressed to be a mortgage by demise for 3,000 years and a sub-mortgage by demise for 3,000 years less one day. The recorder said that it would be very surprising if the position were different if the head mortgage and the sub-mortgage were each a charge by way of legal mortgage. He cited the decision of this court in Regent Oil Co Ltd v JA Gregory (Hatch End) Ltd [1966] Ch 402 in support of his conclusion that no distinction is to be drawn between the two types of mortgage and sub-mortgage. We agree.[44]Owen v Cornell involved non-registered land, whereas this case involves registered land. There is no doubt that the respondent retains its separate estate and interest in the land and, absent a transfer of its rights to the sub-chargee in circumstances in which it has divested itself of its right to possession under the principal charge, which (for reasons given above) it has not done, we see no reason why it should not exercise its right of possession under the principal charge. The importance of the Owen v Cornell case, which in our opinion was rightly decided, is that it shows that the mere fact of a sub-mortgage does not prevent the principal mortgagee from exercising his rights under the principal mortgage or charge.[45]Nor, in our opinion, is there anything in the relevant statutory provisions which leads to any other conclusion. The relevant statutes for present purposes are the Law of Property Act 1925 (“LPA”) and the Land Registration Act 1925 (“LRA 1925”). It is common ground that the LRA 1925 applies for present purposes because, although it has been repealed by the Land Registration Act 2002 (“LRA 2002”) as from 13 October 2003, these proceedings were commenced before that date.[46]In the course of his oral submissions Mr Jones distilled the effect of the LPA and the LRA 1925, so far as relevant for the limited purposes of the arguments in this appeal, as set out in the following paragraphs. They are not significantly in dispute. In any event we accept the analysis as correct.[47]By section 85(1) of the LPA, a mortgage of freehold property takes effect either by a demise for a term of years absolute or by a charge by deed expressed to be by way of legal mortgage. By section 27(1) of the LRA 1925, a registered charge, unless made or taking effect by demise or sub-demise, and subject to any provision to the contrary contained in the charge, takes effect as a charge by way of legal mortgage. By section 87(1)(a) of the LPA, a charge by way of legal mortgage takes effect as if the mortgage term was of 3,000 years.[48]By section 86(1) and (3) of the LPA, a sub-charge takes effect as a mortgage of a mortgage, that is as a charge over the mortgage term. By the combined effect of section 86(1) and section 87(1)(b), a sub-charge takes effect as if it were a mortgage of 3,000 years less one day. Thus, as Mr Jones put it, a sub-charge creates a new mortgage term, not the original mortgage term transferred to the sub-mortgagee.[49]Before the recorder some reference was made to section 114(1) of the LPA, which provides:
“(1) A deed executed by a mortgagee purporting to transfer his mortgage or the benefit thereof shall, unless a contrary intention is therein expressed, and subject to any provision therein contained, operate to transfer to the transferee – (a) the right to demand, sue for, recover, and give receipts for, the mortgage money or the unpaid part thereof, and the interest then due, if any, and thenceforth to become due thereon; and (b) the benefit of all securities for the same, and the benefit of and the right to sue on all covenants with the mortgagee, and the right to exercise all powers of the mortgage; and (c) all the estate and interest in the mortgaged property then vested in the mortgagee subject to redemption or cesser, but as to such estate and interest subject to the right of redemption then subsisting. ”
In a recent case, Paragon Finance Plc v Pender [2003] EWHC 2834 (Ch), 25 November 2003, it was held by Peter Smith J that section 114 has no application to registered land. (a) the right to demand, sue for, recover, and give receipts for, the mortgage money or the unpaid part thereof, and the interest then due, if any, and thenceforth to become due thereon; and (b) the benefit of all securities for the same, and the benefit of and the right to sue on all covenants with the mortgagee, and the right to exercise all powers of the mortgage; and (c) all the estate and interest in the mortgaged property then vested in the mortgagee subject to redemption or cesser, but as to such estate and interest subject to the right of redemption then subsisting. ”[50]We have no reason to doubt Peter Smith J’s conclusions but in any event, as he observed, section 114 provides for a transfer “unless a contrary intention is expressed” in the mortgage. Thus if section 114 applies, all depends upon the true construction of the mortgage and, in our judgment, for the reasons given earlier, on the true construction of the sub-charge, there was no such transfer in this case.[51]In any event any such transfer would be governed by section 33 of the LRA 1925, which provides so far as relevant:
“(1) The proprietor of any registered charge may, in the prescribed manner, transfer the charge to another person as proprietor. (2) The transfer shall be completed by the registrar entering on the register the transferee as proprietor of the charge transferred, but the transferor shall be deemed to remain proprietor of the charge until the name of the transferee is entered on the register in respect thereof.”
In the instant case, as already indicated, the respondent was entered and remains on the register as proprietor of the principal charge and the sub-chargee was entered and remains on the register as the proprietor of the sub-charge. It follows that the effect of section 33(2) is that no transfer has been completed on the facts of this case.[52]Moreover, there was no transfer “in the prescribed manner”. The true position is that already stated, namely that there was no transfer to the sub-chargee of the respondent’s rights against the appellant under the principal charge, either under the terms of the sub-charge (or any of the other contractual documents) or by reason of the provisions of any relevant statute.[53]Nor, as we see it, is there any other basis on which it could be held that the respondent was divested of its right to claim possession of the property. In the course of his judgment the recorder analysed the provisions of the LRA 1925 and of the Land Registration Rules 1925 as amended (the Rules”) in order to identify the powers of a sub-chargee. Thus, in addition to section 27 of the LRA 1925 referred to above he referred to rule 163 of the Rules. Rule 163(1) provides:
“The proprietor of a charge or encumbrance may at any time charge the mortgaged debt with the payment of money in the same manner as the proprietor of land charged and such charges are in these rules referred to as sub-charges.”
Rule 163(2) provides that the proprietor of a sub-charge shall, subject to any entry to the contrary in the register, have the same powers of disposition in relation to the land as if he had been registered as proprietor of the principal charge. The recorder observed that that rule is concerned with powers of disposition whereas this case is concerned with the power to take possession. That is so, although we have no reason to doubt that, subject to the terms of the particular sub-mortgage, a sub-mortgagee in principle has a right of possession.[54]However, let it be supposed, contrary to our view of the true position under the sub-charge in this case, that the sub-chargee has a present right to possession of the property, that would not as we see it affect the respondent’s right of possession under the principal charge as between the respondent and the appellant. As Miss Olley was (in our view correctly) constrained to accept in the course of the argument, there is no reason in principle why both a mortgagee and a sub-mortgagee should not have rights of possession.

CONCLUSION

[55]For all these reasons we have reached the clear conclusion that the recorder was correct to hold that the respondent has a right to take possession of the property and to dismiss the appellant’s appeal against the order for possession. The recorder was correct for the reasons he gave. In short the respondent has a right of possession under the facility letter and the principal charge. The mere existence of a sub-charge does not divest a principal chargee of such a right. Although it is possible for a sub-charge to have such an effect, this sub-charge does not have that effect. There is nothing in the relevant statutory provisions to lead to any other conclusion. It follows that the appeal must be dismissed.

Order:-

[1]That the Appellant appeal is dismissed[2]That the Respondent be at liberty to add its costs of the appeal to its security, and that should the security prove insufficient, that the Appellant do pay the Respondent’s costs of the appeal, such costs to be assessed as mortgagee’s costs on and indemnity basis if not agreed. Time Limit for commencement of detailed assessment of such costs extended until 3 months after the date of realisation of the security.[3]That the order for possession be stayed until 27 May 2004 (Order does not form part of the approved judgment)