Credit & Mercantile Plc v Feliciangela Marks

A principal mortgagee’s right to possession is not displaced merely because it grants a sub-charge. Whether the sub-charge transfers or suspends the principal mortgagee’s rights depends on the construction of the particular instrument.

A sub-charge which merely charges the principal mortgagee’s interest as security, and is enforceable only after a demand for the debt secured by it, leaves the principal mortgagee entitled to enforce the principal charge before that event. A transfer of a registered charge also requires completion by registration. A principal mortgagee and sub-mortgagee may both have rights of possession.

The borrower obtained a loan of £1,305,000 from the lender to buy Home Farm House. The loan was secured by a first legal charge. After arrears arose, the lender demanded repayment and obtained an order for possession on 31 March 2003.

The lender had also granted the Bank of Scotland a sub-charge over its interest in the principal charge. The borrower contended that the sub-charge deprived the lender of the right to possess the property.

Mr Recorder Chapman granted permission to appeal the possession order on that issue but dismissed the appeal on 17 December 2003. The borrower’s further appeal was limited to the effect of the sub-charge upon the lender’s right to possession.

Decision

1. Appeal dismissed. The lender retained the right to possession under the facility letter and the principal charge once monies due had not been paid. Although a mortgagee’s common-law right to possession may arise immediately, the parties’ documents here limited it until the charge became enforceable. That condition was satisfied.

2. The sub-charge did not presently transfer the lender’s rights against the borrower to the Bank of Scotland. Clause 3 created security over the lender’s interest in the principal charge. It did not assign those rights outright. The Bank’s enforcement powers arose only after its demand for the debt secured by the sub-charge, or a relevant request. Neither event occurred.

3. The lender’s covenants to enforce the principal charge did not make it the Bank’s agent for demands upon the borrower. The lender’s demands were made in its own capacity as principal chargee. The Court rejected the contention that a sub-charge, without more, suspends or divests the principal chargee’s remedies.

4. The Court approved the reasoning in Owen v Cornell (1967) 203 EG 29. A mortgagee’s possessory right derives from its estate or interest in the land. A sub-mortgage does not itself remove that right. The same conclusion applies to a charge by way of legal mortgage and to registered land.

5. The statutory provisions did not produce a transfer. Under section 33 of the Land Registration Act 1925, a transfer of a registered charge is completed only by registration of the transferee as proprietor. The lender remained registered as proprietor of the principal charge. Rule 163 concerned a sub-chargee’s powers of disposition, not an exclusive right to possession. Even if the sub-chargee had a current possessory right, that would not exclude the lender’s corresponding right.

The lender was permitted to add its appeal costs to its security, with further costs payable by the borrower if that security proved insufficient. Possession was stayed until 27 May 2004.

• Court of Appeal (Civil Division) — dismissed the borrower’s appeal on the sub-charge issue: [2004] EWCA Civ 568.
• Slough County Court — on 17 December 2003, Mr Recorder Chapman granted permission to appeal the possession order on the sub-charge issue but dismissed that appeal.
• Slough County Court — made an order for possession on 31 March 2003.