Paragon Finance Plc v Pender & Anor

A registered proprietor of a legal charge retains the right to possession despite transferring the beneficial ownership of the charge under an uncompleted securitisation arrangement. The equitable owner need not join a possession claim where the registered proprietor is authorised to enforce the security.

A contractual discretion to vary mortgage interest rates must not be exercised improperly, capriciously, arbitrarily or as no reasonable mortgagee would act. A genuine commercial policy, including differential pricing or raising rates to address financial difficulties, does not without more breach that restriction.

Failure to disclose a policy governing interest-rate variations may be relevant to whether a credit bargain is extortionate, but it is only one factor. The statutory threshold requires grossly exorbitant payments or a gross contravention of ordinary principles of fair dealing.

Paragon Finance plc obtained a possession order against Mr and Mrs Pender under a registered legal charge. The charge had been beneficially transferred through securitisation arrangements, but Paragon remained its registered proprietor and administered it for the special purpose vehicle.

The borrowers unsuccessfully applied to set aside the possession order. HHJ Mayer dismissed their applications in the Barnet County Court. Peter Smith J granted limited permission to appeal but dismissed the substantive appeal in Paragon Finance Plc v Pender [2003] EWHC 2834 (Ch).

The Court of Appeal considered whether Paragon retained title to sue for possession, whether its interest-rate decisions arguably breached an implied contractual restriction, and whether the mortgage was an extortionate credit bargain under section 138 of the Consumer Credit Act 1974.

1. The appeal was dismissed unanimously. Paragon remained the registered proprietor and legal owner of the charge. The right to possession was an essential incident of that ownership and remained exercisable despite the transfer of beneficial ownership to the special purpose vehicle. Paragon was therefore a necessary party to the possession claim. The equitable owner was not a necessary additional claimant because it had authorised Paragon to exercise the mortgagee’s rights. Paragon’s omission to describe itself as trustee did not invalidate the proceedings.

2. Section 114 of the Law of Property Act 1925 concerned transfers of mortgages of unregistered land. Transfers of registered charges were governed by section 33 of the Land Registration Act 1925. Until registration, the transferor remained the registered proprietor. The administration agreements also disclosed a contrary intention sufficient to disapply section 114 if it were otherwise applicable. Section 136 of the Law of Property Act 1925 applied to the legal right to sue for the mortgage debt, not to the proprietary security or the right to possession.

3. The contractual power to vary interest rates was subject to the restriction recognised in Paragon Finance v Nash and Staunton [2002] 1 WLR 685. It could not be exercised improperly, capriciously, arbitrarily or as no reasonable mortgagee acting reasonably would act. A commercial lender may nevertheless conduct its business according to what it genuinely believes to be its best commercial interests. A genuine policy of raising rates, even if borrowers or a class of borrowers might refinance elsewhere, was not inherently improper. There was no evidence that Paragon had sought to force redemptions, singled out the borrowers or improperly cross-subsidised newer lending.

4. The mortgage was not shown to be an extortionate credit bargain under section 138 of the Consumer Credit Act 1974. There was no evidence that a minimum-rate securitisation restriction existed when the charge was granted. Nor was there evidence of an undisclosed policy which misrepresented the apparently unrestricted power to vary rates. Broadwick Financial Services Ltd v Spencer [2002] 1 All ER 446 established only that non-disclosure might be a relevant factor, not that it automatically made a bargain extortionate. The rates actually charged were neither shown to be grossly exorbitant nor a gross contravention of ordinary principles of fair dealing.

1. Court of Appeal (Civil Division): Dismissed the borrowers’ second appeal unanimously in [2005] EWCA Civ 760.
2. High Court, Chancery Division: Peter Smith J granted limited permission to appeal but dismissed the substantive appeal in Paragon Finance Plc v Pender [2003] EWHC 2834 (Ch).
3. Barnet County Court: HHJ Mayer dismissed the borrowers’ application to set aside the possession order and their application for permission to appeal out of time.
4. Barnet County Court: A possession order was made in Paragon’s favour on 5 January 1995, subject to a requirement for permission before enforcement.