Bristol and West plc v Bartlett (Halifax plc v Grant, Paragon Finance plc v Banks)

A mortgagee’s sale of the mortgaged property does not extinguish an accrued right to recover the mortgage debt under an express covenant in the mortgage deed. Nor does the sale create a fresh cause of action when the resulting deficiency is calculated.

Limitation Act 1980 section 20 governs the claim where the principal was secured by a mortgage when the right to receive it accrued. The mortgagee has 12 years from that accrual to recover principal, even if the security has since been sold or cancelled. Interest is governed by section 20(5) and is recoverable only within six years of becoming due. These specific mortgage provisions take precedence over the general limitation rules for specialties and simple contracts.

These three appeals concerned lenders seeking mortgage shortfalls after taking possession and selling mortgaged properties. Proceedings were commenced more than six but less than 12 years after the relevant defaults or sales. The lower courts reached differing conclusions about whether the claims survived under the mortgage deeds and whether the applicable limitation period was six or 12 years.

In Bristol & West, the Mercantile Court held that the specialty limitation period applied. In Paragon Finance, the county court held that sale ended the deed-based security, leaving only a time-barred simple-contract claim. In Halifax, the county court held that an express deficiency covenant created a cause of action upon sale and that the claim was timely.

The common issues were whether sale or cancellation extinguished accrued rights under a mortgage covenant, whether a deficiency generated a new cause of action, and whether sections 5, 8 or 20 of the Limitation Act 1980 governed principal and interest.

1. Disposition. The court varied the orders in Bristol & West and Halifax, declaring that each lender was entitled to judgment for principal while permitting the borrowers to contest the interest elements. Paragon Finance’s appeal was allowed, the judgment for the borrower was set aside, and judgment was entered for the lender under Part 24.

2. Lord Justice Longmore delivered the judgment of the court. An accrued right under an express mortgage covenant survives the mortgagee’s exercise of the power of sale and cancellation of the charge. The words defining money secured by the mortgage refer to the position when the debt becomes payable. A subsequent sale does not replace the express covenant with an implied simple-contract obligation.

3. Sections 34(4) and 35(1) of the Land Registration Act 1925 concern cessation or cancellation of the charge over the land. They do not extinguish accrued contractual rights under the mortgage deed. The contrary construction would produce the illogical result that no obligation to pay a shortfall survived.

4. Any antecedent loan contract in Paragon merged with the formal mortgage deed, at least concerning indebtedness existing when the loan was made. Receipt of the funds was conditional upon execution of the deed. Even if two contracts had co-existed, the lender could elect to enforce the deed.

5. The applicable mortgage limitation provision is section 20 of the Limitation Act 1980. Section 20(1) applies where the principal was secured by a mortgage when the right to receive it accrued. It continues to apply although the mortgagee later sells the property. The lender therefore has 12 years from accrual to recover principal.

6. An express promise to pay a deficiency does not generate a fresh cause of action when the deficiency is ascertained. The operative cause of action remains the claim for the mortgage debt arising upon default.

7. Interest is governed by section 20(5), which imposes a six-year period from the date it became due. Because the interest and appropriation issues had not been properly investigated below, the borrowers in Bristol & West and Halifax were permitted to advance those matters at trial.

1. Court of Appeal: In [2002] EWCA Civ 1181, the orders in Bristol & West and Halifax were varied, and Paragon Finance’s appeal was allowed.

2. Queen’s Bench Division, Bristol Mercantile Court: His Honour Judge Havelock-Allan QC held that Bristol & West’s claim arose under the mortgage deed and was brought within the 12-year specialty period.

3. Poole County Court: His Honour Judge Anthony Thompson QC held that Paragon’s post-sale claim could arise only under an underlying simple contract and was time-barred.

4. Leeds County Court: His Honour Judge Altman held that Halifax’s deficiency covenant created a cause of action upon sale and that the proceedings were timely.