Give and Take – How Reliable is your Charging Clause?

In 2007, the Co-op Bank lent sums in excess of £2.1million to a company in which Mr Phillips was a Director. The advance was secured over two properties. The loan facility was repayable upon demand in the usual way. The Co-op’s mortgage deed contained in a typical charging clause, enabling the lender to secure all of if costs, charges and expenses in taking, perfecting or enforcing its securities. The charging clause allowed the lender to charge its costs to the security on a full indemnity basis. Mr Phillips fell into default and the Bank issued demand. Mr Phillips made a proposal for IVA, excluding the securities from his proposal. In his IVA proposal, Mr Phillips noted that there was negative equity in both properties; no value to the lender at all. Notwithstanding the negative equity position, the bank arranged to issue possession proceedings. Mr Phillips defended the claim on the grounds that the action was an abuse of process; possession proceedings, he said, would not result in any recovery for the Bank, arguing that the Bank had ulterior motive in taking the action.

Indeed, and in due course, the Bank discontinued the proceedings for reasons which were never made absolutely clear, though inferences were drawn.
The default position in litigation is that a claimant who discontinues proceedings becomes liable for the defendants costs, and, understandably, Mr Phillips sought to recover his costs from the Bank, on an indemnity basis because, he maintained, the proceedings were issued for a collateral purpose, i.e. not exercise the power of sale, but to coerce the borrower into arranging for payment by alternative means.
The Bank sought to set off any liability for Mr Phillis’ costs against the sums which remained owing to them by him.
The decision of the Court in Co-op Bank v Phillips (2014) is noteworthy in a number of respects.
Power to Enforce
A mortgage confers on a lender a number of powers which are sacrosanct. The powers of enforcement are there to enable the lender to obtain repayment of its loan facility. However “A power of sale is improperly exercised if it is in no part of the mortgagees purpose to recover the debt secured by the mortgage”. Where a mortgagee has mixed motives, one of which is genuine recovery, then he can’t be deemed to be exercising the power of sale illegitimately.
Collateral Purpose
It is notable in this case that the Bank chose to give no direct evidence on its intentions and failed to comply with disclosure. The Court was unable to find any evidence that the Bank truly believed that it would recover the debt from the securities if sought to realise the end of the possession proceedings. Therefore the Court could not find that the Bank’s purpose in bringing the claim was to sell the properties. Further, there was no evidence that the Bank intended to let the properties, which might be a separate and alternative motivation. The inference drawn by the Court was that the sole intention was to apply pressure on the borrower. Indeed at one point, the borrower’s daughter did make an offer of £50,000 as a result.
Costs
Having so inferred and by reason of the discontinuance, the Bank incurred two sets of costs liability. First its own (which it sought to add to the security under the charging clause) by reason that their costs were incurred for the protection or enforcement of the mortgage deed, which the mortgage deed allowed for, and secondly Mr Phillips’ costs, pursuant to the order of the Court and consequent upon the Bank’s discontinuance of the proceedings.
Mr Phillips argued that the Bank should not be able to recover their costs which he said were unreasonably incurred or in an unreasonable amount, whether or not the mortgage deed allowed for this.
The Court determined that the Bank got absolutely nothing from the proceedings nor could have hoped to – these proceedings were a complete waste of time and expense. It followed therefrom that the Bank’s costs were unreasonably incurred, and so, too, the costs that the Bank had made itself liable to Mr Phillips.
The Court refused to allow the Bank to recover their costs and the Bank’s charging clause for all interests and purposes was defeated.
Mr Phillips claimed that his own costs should be paid to him in any event having effectively succeeded in the litigation. The Bank sought to set off Mr Phillips’ costs against his outstanding debt. On these particular facts, the Court refused to allow set off; there being no right to any common law or equitable set off in circumstances where these debts were caught by Mr Phillips’ IVA.
Lessons to be learned
A charging clause remains strong, valuable and necessary, but will have no weight in respect of costs, unreasonably incurred and unreasonable in amount.
A lender must act reasonably in exercising his powers under his mortgage deed and he should exercise those powers in good faith and properly. Motivation, in part at least, must be possession, sale and recovery.
So far as possession proceedings are concerned never start what you cannot finish and if it becomes necessary or sensible to withdraw, carefully consider when, how and on what terms termination of the proceedings should be made.
Attributed to Brightstone Law LLP

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