Wilton Student Developments (Egerton) Limited v Kin Fan Ip

A mortgagee’s enforcement powers must be exercised to secure repayment of the debt or protect the security. Enforcement is ineffective where recovery of the debt or protection of the security forms no part of the mortgagee’s purpose, even if the mortgagee acts in good faith. Mixed motives do not invalidate enforcement where a proper purpose remains.

A mortgagee’s possession does not itself extinguish the mortgagor’s equity of redemption. A valid sale may do so, but the equity attaches to the sale proceeds. A connected freeholder cannot rely on statutory or contractual protection where it has actual knowledge of the mortgagee’s impropriety. A contractual power to accept surrenders does not, without more, confer a power to surrender leases.

The appeal concerned two long leases of student flats and a mortgage securing a loan owed by the respondent. After default, the mortgage was assigned to Cirrus Property Group Ltd, which took possession of the flats. Cirrus then executed deeds surrendering the leases to the appellant freeholder, a company linked through a common director and shareholder. The appellant subsequently granted new leases for substantial premiums.

The County Court held that the surrenders were ineffective to extinguish the respondent’s equity of redemption and that the appellant remained bound by it. Permission to appeal was granted on the principal issue whether the appellant took the leases free from that equity.

1. Appeal allowed in part as to relief. The Judge’s substantive conclusion was upheld, but the order was varied. The deeds of surrender were declared ineffective for the relevant purposes and were ordered to be set aside, subject to suspension pending assessment and payment of any proceeds due to the respondent.
2. A mortgagee’s powers are limited by the purpose for which security is given. The relevant question is whether repayment of the debt or protection of the security formed any part of the mortgagee’s purpose. Mixed motives do not invalidate enforcement where a proper purpose is present. On the evidence, repayment of the loan formed no part of Cirrus’s purpose. Surrendering valuable 999-year leases for no demonstrated consideration was commercially irrational and was intended to eliminate the respondent’s equity of redemption.
3. The Mortgage did not confer a power on the Security Trustees to surrender the leases. Clause 7.3 conferred powers to lease, make agreements for leases and accept surrenders. Clause 8.3.2(e) expressly conferred a surrender power on a receiver, which reinforced the narrower construction of clause 7.3.
4. Taking possession did not extinguish the respondent’s equity of redemption. Extinguishment would follow from a valid exercise of the power of sale, with the equity then attaching to the proceeds. The deeds were not valid exercises of that power.
5. The appellant had actual knowledge of the relevant impropriety through its common director, who knew that Cirrus was surrendering the leases instead of selling them, discharging the loan and accounting for the respondent’s equity. The appellant therefore could not rely on section 104(2) of the Law of Property Act 1925 or clause 11 of the Mortgage. The court declined to determine alternative issues concerning connected-party sale safeguards and the power of attorney because they had not been properly pleaded.
6. The injunction was continued. The further assessment of the respondent’s equity, including any proper deductions, remained for the County Court.

• High Court, Chancery Division: Appeal from the Sheffield County Court decision of His Honour Judge Baddeley dated 4 September 2024. The High Court upheld the substantive conclusion that the deeds did not extinguish the respondent’s equity of redemption and varied the relief.
• Sheffield County Court: Held that the deeds of surrender were ineffective to extinguish the respondent’s equity of redemption, continued an injunction and directed assessment of the equity.