When can the court override the express wording of a mortgage?

How will costs clauses in mortgages be treated by the courts? Warren Gordon, head of real estate know how at Olswang, comments on ruling in which the High Court was able to override the express wording of the mortgage in deciding that the mortgagor should not pay the mortgagee’s costs because they were unreasonable.

Original news

Co-Operative Bank Plc v Phillips [2014] EWHC 2862 (Ch)

As security for a loan, Mr Phillips, the mortgagor, charged two residential properties in favour of the Co-operative Bank plc, the mortgagee. Following failure to repay the sums demanded by the mortgagee on 30 July 2008, the mortgagee brought possession proceedings on 19 April 2013 for the two properties, asserting its right to possession as charge of the properties.

The charges in favour of the mortgagee were second ranking charges behind charges in favour of another bank and it was argued by the mortgagor, both prior and during the proceedings, that the properties were in negative equity—ie the charges in favour of the Co-operative Bank were out of the money. On 18 June 2014, the Co-operative Bank as mortgagee served notice of discontinuance of its possession proceedings.

The court had previously held that the mortgagee was liable to pay mortgagor’s costs in the proceedings and the latest hearing held:

  1. the mortgagee was not required to pay the mortgagor’s costs of the proceedings on the indemnity basis rather than the standard basis
  2. the mortgagee was unable to add the costs incurred by it in these proceedings (including the sums payable to the mortgagor) to the sums secured by the charges
  3. the mortgagee was not entitled to set off its liability to pay the mortgagor’s costs against sums otherwise due from the mortgagor to the bank

What were the key features of this case?

The judge came to a common sense decision. He rejected awarding costs against the mortgagee on the wider indemnity basis when ultimately the mortgagee (prior to discontinuing the proceedings) was merely exercising its powers as mortgagee in bringing the possession claim. The judge was not swayed by the mortgagor’s argument that the mortgagee would gain no legitimate commercial advantage from enforcing its mortgages, because there was negative equity in the properties and a prior mortgagee.

A common sense approach was also adopted in not requiring the mortgagor to reimburse the mortgagee for the costs awarded in the mortgagor’s favour against the mortgagee. Otherwise, the mortgagor ends up paying, even though it was the mortgagee who discontinued the proceedings and caused the mortgagor’s wasted costs.

What is the significance of this decision?

The fact that the court was able to override the express wording of the mortgage in deciding that the mortgagor should not pay the mortgagee’s costs, because they were unreasonable. The High Court relied on the case of Gomba Holdings Ltd v Minories Finance [1993] Ch 171, [1992] 4 All ER 588 to imply a reasonableness criterion. This may come as a surprise to mortgagors and mortgagees alike, who may look at costs clauses in mortgages in a different light.

What are the interesting features in terms of indemnity costs?

The case did not say anything particularly surprising on indemnity costs, in holding that a mortgagee who discontinued possession proceedings should pay costs on the standard basis, not indemnity. The judge, having analysed the factual context, decided that the mortgagee was simply exercising its powers as mortgagee and not for some collateral purpose. Putting pressure on a mortgagor to pay the mortgage is not an abuse of process. Obtaining repayment and enforcing the security are recognised by law as proper purposes for and being within the equitable constraints on exercising mortgagee’s powers. This is not a surprising decision.

How did the court approach the issue of set-off costs?

The court dealt with this with apparent short shrift. The judge said that there is plainly no right to a common law or equitable set off in this case. Attempts by the mortgagee to invoke the Standard Conditions for individual voluntary agreements (IVAs) failed. Perhaps the judge was unsympathetic to the mortgagee seeking to pass back to the mortgagor the costs awarded against it by the court.

What are the practical lessons that can be learnt from this case?

Mortgagees and mortgagors should be aware of possible implied limitations in costs clauses in mortgages if any costs of mortgagees have been unreasonably incurred or are unreasonable in amount. Even if a mortgagee or other party discontinues proceedings, this does not mean that costs will be awarded against them on an indemnity basis. Mortgagors need good evidence to prove there was an abuse of process by the mortgagee in bringing possession proceedings. After all, it is a mortgage and the mortgagor has not made the payments—what does the mortgagor necessarily expect? The court adopted the same approach whether the debt secured on the properties was due from the owner of the property or a third party.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on enforcement of security over land and recovering costs of enforcement under a mortgage deed:

Enforcement - security over land (Subscriber access only)

Investigating potential beneficial interests in property (Subscriber access only) - recent case where mortgagee unable to recover costs of defending claim by individual with a beneficial interest in the secured property.

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Relevant Articles
Area of Interest