B e f o r e :
LORD JUSTICE SCHIEMANN
LORD JUSTICE BUXTON
LORD JUSTICE LONGMORE
(Transcript of the Handed Down Judgment of
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Lord Justice Longmore:
- This is the judgment of the court.
- On 30th January 1997 this court, in the context of a striking out for want of prosecution application, stated in Hopkinson v Tupper (unreported):-
“it is seriously arguable that when a mortgagee has re-possessed and has sold the security and is seeking to recover the shortfall, his claim is in simple contract whatever the nature of the instrument under which the debt was initially secured”.
This expression of view has caused some concern to banks and other lending institutions who have assumed that any claim to such shortfall lies under the mortgage document by which the mortgage was created and is thus governed by the 12 year limitation period specified either in section 20 of the Limitation Act 1980 for money secured by a mortgage or in section 8 of the Act for a document under seal, there referred to as a “specialty”. These 3 appeals have been brought in order to obtain an authoritative determination of the question whether such claims to a shortfall after a sale by a mortgagee have a 12 year limitation period or only the 6 year limitation period applicable to simple contract debts.
- Before setting out the detailed facts of the cases it is sensible to remind oneself of the various claims which may be open to a mortgagee of real property in the event of a default by the borrower whose obligation will usually be to make a monthly repayment of any loan advanced. The claims will usually include:-
(a) a claim for a monthly instalment which is unpaid. Such instalment may be due partly in respect of principal and partly in respect of interest or wholly in respect of one or the other. The cause of action will usually arise on the date when the instalment is due but is not paid;
(b) a claim to recover the full amount of the sum advanced. The entitlement will depend on the terms of the mortgage contract but, typically, the lender will be entitled to call in the whole loan if any instalment remains unpaid for eg two or three months after the date due for payment; the cause of action will usually arise when the specified period has elapsed;
(c) a claim to be entitled to recover any shortfall after the lender has exercised his right to sell the mortgage property in the event of default by the borrower. It may be a question whether this is a separate cause of action from the claim in (b).
- The relevant provisions of the Limitation Act 1980 are sections 5, 8 and 20. Section 5 provides:
“An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.”
Section 8 provides:-
“(1) An action upon a specialty shall not be brought after the expiration of twelve years from the date on which the cause of action accrued.
(2) Subsection (1) above shall not affect any action for which a shorter period of limitation is prescribed by any other provision of this Act.”
Section 20 provides (so far as is relevant) as follows:
“(1) No action shall be brought to recover
(a) any principal sum of money secured by a mortgage or other charge on property (whether real or personal) . . . .
after the expiration of twelve years from the date on which the right to receive the money accrued.
. . . .
(5) Subject to subsections (6) and (7) below, no action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of land, or to recover damages in respect of such arrears shall be brought after the expiration of six years from the date on which the interest became due.”
- It was agreed that the appeal in Bartlett v Bristol & West Plc should be the lead appeal. We set out the facts of that case first, then those in Paragon Finance Plc v Banks, then Halifax Plc v Grant.
Bristol & West Plc v Bartlett & anr
- On 21st November 1989 Mr and Mrs Bartlett accepted a written offer of advance made by Bristol & West (“the lenders”) to assist in the purchase of a property in Weston-super-Mare. The loan was in the sum of £89,750. On 19th January 1990 the money was sent to the solicitors jointly acting for the parties and on 22nd January a mortgage was signed. This was a document under seal incorporating the lenders’ current (1989) mortgage conditions. It provided for payments by way of interest only, while insurance policies covered the principal debt. The conditions relevantly provided:-
“1(ii)(h) ‘the Mortgage Debt’ means the whole of the moneys outstanding for the time being on the security of the Mortgage whether due on one or more accounts.
3(a) The Borrower covenants with the Society that he will repay the Mortgage Debt with interest:
(i) by such Monthly Payments made in advance on the first day of each month as the Society shall from time to time require; or
(ii) at once upon its becoming due under Condition 12.
4(c) . . . Interest for any Year shall accrue from day to day but shall be payable . . . in equal instalments as part of the Monthly Payments payable in that Year.
12 The Mortgage Debt shall become payable immediately by the Borrower to the Society upon the happening of any of the following events:
(a) The failure of the Borrower to observe or perform any of the covenants and obligations contained in the Mortgage;
(b) Arrears of money due under the Mortgage exceeding in amount the sum of three Monthly Payments.”
Condition 13 then provided for the statutory powers of sale under the Law of Property Act 1925 to be exercisable “upon the Mortgage Debt having become immediately payable”.
- Mr and Mrs Bartlett defaulted in 1993 and the lenders’ cause of action for the mortgage debt will, thus, have accrued at latest when, in that year, 3 monthly instalments were due and unpaid. The lenders obtained possession on 16th March 1994 and sold the property on 1st July 1994 for £63,000. On that date the amount of the debt was £123,154.13 (of which £33,404 was in respect of the interest). Once sale expenses were added, the shortfall was £64,961. It was for that sum that proceedings were issued on 2nd May 2001. There was some argument about the amount of the expenses and the District Judge gave summary judgment only for £63,384.88. The case before the Circuit Judge then proceeded on the basis that a cause of action accrued on 1st July 1994 and became time-barred before 12th May 2001 if it was a simple contract debt. His Honour Judge Havelock-Allan QC held, however, that the claim was on the mortgage deed which was a specialty and was, therefore, brought within the requisite 12 year limitation period. Neither party submitted that section 20 of the Limitation Act had any application.
Paragon Finance v Banks
- On 20th April 1989 Paragon (“the lenders”) advanced £110,000 to Mrs Banks’ solicitors to be secured by a mortgage deed over a property in the Parkstone area of Poole. That mortgage was contained in a deed of 21st April 1989 incorporating the Company’s 1988 conditions. Those conditions provided by condition 2.1 that the Borrower covenanted to make monthly payments and (by 2.1.2) to pay all moneys “then owing” on the expiry of 28 days from the date of the Mortgage (when the power of sale was agreed to arise)
“and all other sums secured to the Company on the security of the Mortgage including interest . . . .”
This obligation was, however, postponed and it was agreed that if no payment was made within 28 days and provided there had been no breach of the Borrower's obligations the company would (condition 2.2)
“accept the payment of the Payment [as defined] and of all other sums secured to the Company on the security of the Mortgage in accordance with the Borrower’s obligations for payment thereof hereunder”
This, it is agreed, meant that Paragon would accept specified monthly payments provided that the Borrower was not in breach of her obligations and the power of sale had not become exercisable. Clause 2.1.3 provided a further covenant to pay:-
“The costs expenses and liabilities and other moneys recoverable from or payable by the Borrower from time to time . . . .”
Clause 7.3 then provided that the lenders’ remedies were exercisable if the Borrower failed to make any two monthly payments.
- The lenders repossessed on 10th September 1991. They sold the property on 17th July 1992 when there was a shortfall of £66,539.28. On 13th September 2000 proceedings were begun for that shortfall, more than 6 years but less than 12 years after the date of sale. It was agreed before us that the lenders’ claim related solely to principal. His Honour Judge Anthony Thompson QC held that, once the power of sale had been exercised, the lenders’ claim was no longer a claim for “any moneys or other sums secured to the Company on the security of the mortgage” and could therefore not be a claim under the deed. The claim could thus only be brought pursuant to the “underlying” contract of loan which was a simple contract and was thus time-barred. The judge further held that section 20 of the 1980 Act did not apply “as the claimants have exercised their right of sale as mortgagees in possession”. The extent to which this was the subject of argument before him is not clear.
Halifax Plc v Grant
- On 16th March 1990 Halifax Building Society (“the lenders”) advanced money in return for a mortgage incorporating the lender’s 1988 mortgage conditions. That mortgage was contained in a deed. Condition 3(a) provided for the borrower to pay a monthly payment. Condition 3(b) provided for the borrower to be obliged to redeem on receipt of 6 months written notice. Condition 3(f) provided:-
“If on realisation of its security by the Society the net proceeds shall prove insufficient to discharge the redemption money, then the borrower will immediately pay the amount of the deficiency with interest until payment”.
Condition 12 provided that the redemption money was to become immediately payable:-
“(a) if there is a default in the payment of any two monthly payments.”
- On 11th June 1991 the lenders obtained a suspended possession order. They took possession on 2nd November 1991 and sold the property on 21st April 1994. Proceedings were started on 21st March 2000. His Honour Judge Altman held (pages 11-12) that the lenders acquired a cause of action on sale and that that cause of action arose pursuant to condition 3(f) of the deed and was not time-barred. That was because the condition was part of the deed and a twelve year limitation period applied. Even if that were wrong, however, and a six year limitation period applied, the cause of action only accrued on sale on 21st April 1994 and the claim, brought on 21st March 2000, was brought within six years from that date. There is no indication in the judgment that section 20 of the Limitation Act played any part in the argument.
The Principal Arguments
- Mr Brock QC for Mr and Mrs Bartlett assumed the burden of presenting the principal arguments on behalf of the borrowers; he submitted:-
(1) that once the legal charge created by the mortgage was discharged (as it had been by Bristol and West when they exercised their power of sale) the covenant to pay in the Mortgage Deed became, on the true construction of the deed, unenforceable; all that was left was an implied obligation to pay the shortfall between the mortgage debt and the sum realised on the sale; that was subject to a six year limit;
(2) that even if, as a matter of construction, the covenant to pay survived the exercise of the power of sale in respect of accrued obligations, there was nevertheless a rule of law in relation to registered land that the discharge of the mortgage discharged the obligations in the covenant contained in the mortgage and, once again, all that remained was an implied obligation to pay the shortfall between the debt and the sale price.
Construction of the Deed
- The argument went as follows:
(1) Clause 3(a) and Clause 12 of the deed imposed an obligation to repay “the Mortgage Debt” with interest once 3 monthly instalments became outstanding and unpaid;
(2) The Mortgage Debt was defined by Clause 1(ii)(h) of the Deed as the whole of the moneys outstanding for the time being on the security of the mortgage;
(3) Once the mortgage was discharged, moneys were no longer outstanding on the security of the mortgage and there was thus no longer a mortgage debt within the definition or within the terms of the covenant to pay which incorporated that definition.
- This is an impossible argument. The words “for the time being” in the definition of the term “Mortgage Debt” look to the time when the Mortgage Debt becomes payable: viz on breach of covenant on the part of the borrower or, more relevantly in this case, the time when the borrower failed to pay a third monthly instalment. The right to sue for the Mortgage Debt arose at the time of that failure and at that time moneys were outstanding on the security of the mortgage. The fact that, at some later time, the power of sale was exercised and the mortgage was discharged does not mean that the mortgage debt ceased to become payable. If Mr Brock’s argument were correct it would be necessary to read the words “for the time being” as meaning “not only at the time when the debt becomes due but also at the time when action is brought” That is not what the definition clause says and not what it means. It would, in any event, be remarkable if the parties were to agree as a matter of contract that accrued rights were to be wiped out; Mr Brock argued that they did not agree they were to be wiped out completely but that they were to be substituted by an implied obligation to pay the debt or to pay the difference between the amount of the debt and the amount realised on sale. But there is still less warrant for construing the deed itself as wiping out express accrued obligations and substituting an implied obligation with a different limitation period.
Operation of Law
- For this purpose Mr Brock relied on section 35(1) of the Land Registration Act 1925 which provides:-
“35 (1) The registrar shall, on the requisition of the proprietor of any charge, or on due proof of the satisfaction (whole or partial) thereof, notify on the register in the prescribed manner, by cancelling or varying the original entry or otherwise the cessation (whole or partial) of the charge, and thereupon the charge shall be deemed to have ceased (in whole or in part) accordingly.”
This sub-section provides merely that the proprietor of the charge can if he wishes arrange for notification on the register of the cessation of the charge by cancellation of the original entry and that, thereafter, the charge shall be deemed to have ceased. That says nothing about the continuation or otherwise of the covenant to pay and there is no reason that we can see for supposing that Parliament intended that accrued rights to sue on the covenant should be cancelled. This is made even clearer by section 34(4) which sets out the powers of the proprietor of the charge when he exercises the power of sale:-
“(4) A sale by the court or under the power of sale shall operate and be completed by registration in the same manner, as nearly as may be (but subject to any alterations on the register affecting the priority of the charge), as a transfer for valuable consideration by the proprietor of the land at the time of the registration of the charge would have operated or been completed, and, as respects the land transferred, the charge and all incumbrances and entries inferior thereto shall be cancelled.”
That expressly provides that the charge is to be cancelled “as respects the land transferred”. Accrued rights arising under the deed of mortgage are not affected.
- The Law Society’s Conveyancing Handbook for 2002 states in paragraph H.2.4.7 that on completion of a sale by a lender the mortgage under which the power is exercised is not “discharged” (although the buyer takes free from it) and that the buyer receives the charge certificate but does not receive a mortgage receipt. We had no evidence in the present case relating to what the buyer received but the Land Registry was asked to and did notify on the deed itself that it was cancelled. It may well be, therefore, that the lenders did cause section 35(1) of the Act to be operated. But in our view that only affects the actual charge itself and not the accrued rights arising under the contractual obligations contained in the covenants set out in the charge.
- If either of Mr Brock’s arguments were correct, the logical result would be that the covenant to pay ceased to be operative and the borrower would have no obligation to pay any shortfall that arose after a sale. That, of course, is not the law: see Rudge v Richens (1873) LR 8 CP 358 and Gordon Grant v Boos  AC 781. Mr Brock submitted that the reason why the borrower does have an obligation to pay is that, although the express covenant is no longer operative, an implied obligation to pay arises from the fact that the loan was made; but such obligation is founded on simple contract and thus has a six year limitation period. In support of this proposition he cited Sutton v Sutton (1883) 22 ChD 511.
- There is no indication in Rudge or Gordon Grant that, once a sale takes place, the express covenant to pay is lost and replaced by an implied obligation to pay. There is no reason of principle why that should be so and it would be highly artificial (as well as quite unnecessary) for rights given expressly by the mortgage deed to be taken away and replaced by implied rights. The issue in Sutton was whether an action to recover sums secured by way of mortgage was barred after 12 years under the equivalent of section 20 of the 1980 Act or only after 20 years which was then the time limit for specialties. In deciding that 12 years was the operative period Sir George Jessel MR and Bowen LJ considered both cases when there was an express covenant to pay in the mortgage deed and cases where there was no such express covenant. They both said that in the latter type of case there would be an implied obligation to pay arising from the fact of the loan but there was no suggestion of any situation in which an express covenant could be in some way replaced by an implied covenant. That is what Mr Brock contended for but, for the reasons we have given, that is an unnecessary and illogical assertion.
- This court said in Hopkinson v Tupper that Mr Brock’s contentions were seriously arguable. Now that they have been argued with the benefit of full citation of authority we consider that the arguments are wrong and must fail. Insofar as the borrowers appeal in Bristol & West relates to the claim for principal, it will be dismissed.
Paragon Finance v Banks
- In this case the judge found in favour of Mrs Banks on the construction of the Mortgage Deed for much the same reasons as those advanced by Mr Brock on the construction of the Bristol & West deed. The critical obligation in the Paragon Finance deed was that the Borrower would pay:-
“all monies then owing and all other sums secured to the Company on the security of the Mortgage including interest”.
The judge held that, if the power of sale had been exercised, sums due were no longer secured on the security of the mortgage. For the reasons we have already given, we do not agree. The cause of action arose once there was a failure to make any two monthly payments. At that time the sums due were secured on the security of the mortgage; that accrued right was not taken away by the lenders’ subsequent exercise of the power of sale.
- Mr Dutton QC for Mrs Banks, however, had a separate argument not available to Mr Brock. He submitted that there was an underlying contract of loan which had not merged with the contract contained in the formal mortgage deed of 21st April 1989. That contract was contained in or evidenced by the offer of loan of 6th April 1989 (together with its attached typed Special Conditions and printed General Conditions) which was accepted by the borrower when the funds were released and held by her solicitor on 20th April 1989. There was no merger, submitted Mr Dutton, because the Mortgage Deed secured future advances while the contract of loan contemplated only that the security would be for the money advanced on 20th April. The obligation to repay the indebtedness was an implied obligation and was subject to a six year limitation period.
- This argument fails for a number of reasons. First, we are satisfied that, if there were an antecedent contract of loan, it did merge with the formal mortgage deed. It would be pointless to have two co-existing contracts. Mr Dutton submitted that the contracts were not co-extensive since the deed secured future advances and cited Barclays Bank v Beck  2 QB 47. There are two answers to that: (1) special condition 8 (said to be part of the antecedent loan agreement) did in fact contemplate that further advances could be made unless the Borrower was in breach of the conditions at the time of the request for the further advances; (2) in any event the earlier contract merged with the mortgage deed at least to the extent of the indebtedness which existed at the date of the loan, see Chitty Contract, 28th edition Vol 1 para 26-001.
- Secondly we do not consider there was an antecedent contract of loan as such. There was, no doubt, a contract for a loan once the borrower accepted the lender’s offer to make a loan; but that is a very different thing. The receipt of the funds by the solicitors acting for both the borrower and the lender was conditional on the execution of a mortgage deed. Once that was done, that deed was the contract.
- Thirdly, even if there were two separate co-existing contracts, there would be no reason why the lender could not choose which such contract to enforce. The lender must be entitled to enforce the mortgage deed, rather than any underlying contract, if he chooses to do so. The lender could only be confined to the underlying contract of loan and any implied obligation contained in that contract, if the mortgage deed was first got rid of. That was recognised by Mr Brock, and Mr Dutton advanced no fresh argument showing how that could happen.
- It follows that Paragon’s appeal will have to be allowed and since the claim relates only to principal, no difficulty arises in relation to interest. Judgment will be entered for the sum claimed.
Halifax v Grant
- Mr Grant appeared in person and in a concise and moderate submission relied on Hopkinson v Tupper. For the reasons given we do not think the expression of support in that case for a six year limitation period is correct. Mr Grant also pointed out that the claim contained a large sum by way of interest accruing between 5th March 1990 and 21st April 1994. If therefore section 20(5) of the 1980 Act applied rather than section 8, most of that claim would be time-barred. Mr Leeming QC for Halifax submitted that Mr Grant’s advocate had abandoned any right to rely on this point at the hearing below. If, however, the correct view is that section 20(5) does apply, and no argument took place about it, that will have to be revisited. But insofar as Mr Grant’s appeal relates to the claim for principal, it will be dismissed.
Section 8 or section 20?
- That then leaves the question (academic as far as the principal amount of the loan is concerned) whether the appropriate time limit for the lenders’ cause of action is to be ascertained by reference to section 20 of the Limitation Act (relating to actions for money secured by a mortgage) or by section 8 (specialties). It is academic because in relation to principal the period is 12 years in either event. The judge in Bristol & West, instigated by both parties for their own separate reasons, held that section 8 was the appropriate section because section 20 refers to “money secured by a mortgage” not “money at one time secured by a mortgage”. We could, with respect, understand (although not agree with) this analysis if, at the time when the cause of action arose, the mortgage had been discharged. But that is not this case. Bristol & West’s cause of action accrued in 1993 and was undoubtedly an action to recover money secured by a mortgage. Nothing that happened thereafter could, in our view, change that. Moreover, Sutton v Sutton is an express authority that the specific limitation provisions relating to mortgages take precedence over the general provisions relating to specialties.
- It is the case that in Hopkinson v Tupper (as also in the Halifax v Grant appeal) the mortgage deed contained an express provision that, in the event of a shortfall between the mortgage debt and the realised sale price, the borrower should pay the amount of the deficiency to the lender. It could thus be argued that a quite separate cause of action arose for that deficiency and that, since the mortgage had been discharged, the action was not an action for money secured on a mortgage. We do not consider that argument to be correct; the true cause of action is still the cause of action for the mortgage debt arising on default under the terms of the deed, see Re McHenry  3 Ch 290. Mr Leeming QC argued that in a case where there was an express obligation to pay any deficiency, such as Condition 3(f) in the Halifax case, the position was different and that a separate cause of action arose on ascertainment of the deficiency. Whether the limitation period were 6 years or 12 years, Halifax would come within it. All counsel for the borrowers relied on the way that the lenders had pleaded their case in this regard. We consider, however, that the relevant cause of action is the cause of action for the debt and, following McHenry, that there is no fresh cause of action arising on the ascertainment of the deficiency.
- Mr Brock and Mr Dutton submitted that section 20(1) of the Limitation Act 1980 could not apply if the mortgagee had exercised its power of sale by the time that action was brought. They supported the conclusion of Judge Havelock-Allan that the section did not refer to money “at one time secured” by a mortgage. They said further that it would be wrong to read such words into section 20(1). Mr Leeming supported these submissions.
- We do not consider that there is any question of reading words into the statute. The question is whether the phrasing of section 20(1) of the statute “any principal sum of money secured by a mortgage” refers only to a principal sum secured by a mortgage at the time when action is brought or whether it is sufficient that the principal sum of money be secured by a mortgage at the start of the 12 year limitation period, whatever may have happened thereafter. Since the sub-section refers to “the date on which the right to receive the money accrued” it is much more natural to read the sub-section as applying to mortgages existing on the date on which such right accrued. It is the borrowers rather than the lenders who seek to read words into the statute when they submit that the principal must continue to be secured by a mortgage at the time when action is brought.
- We, therefore, reject the borrower’s submissions on section 20(1) and decide that the section applies to any action to recover any principal sum of money secured by a mortgage which existed when (as here) the right to recover the money accrued.
- On the basis that section 20(1) continues to apply to claims for principal, although the mortgage has been discharged when a sale is made, it must follow that claims for interest will be governed by section 20(5) and we so hold.
Section 20(5): interest
- No question of interest arises in the Paragon Finance case in which only principal was claimed. It does arise in the other two cases because part of the claim is for interest. The lenders relied on the well-known principle that, in the absence of any appropriation by first the debtor or secondly the creditor, payments will go to discharge interest before they discharge capital. We can well understand the force of that submission but the fact is that in neither Bristol & West v Bartlett nor in Halifax v Grant did the lenders unequivocally (or, indeed, at all) rely on section 20 (as opposed to section 8) of the Limitation Act to defeat the borrowers’ plea that section 5 applied; the result was that no party properly addressed their minds to the calling of any relevant evidence on the question of appropriation after sale or the question whether any prior payments of principal had been made. Somewhat reluctantly, we feel it would be unfair if, now that (contrary to the lenders’ arguments) we have decided that the appropriate periods of limitations are those contained in section 20, the borrowers should have no opportunity of investigating the factual position as to the extent to which the lenders may be seeking to claim interest which has been due for more than six years.
- We would, however, remind the parties that these cases were pursued to this court because it was thought necessary to resolve some issues of general importance. We hope that, now that that objective has been achieved, further costs of litigation in working out the details of these particular cases can be avoided, and that questions relating to interest can be resolved informally and by agreement.
- We therefore conclude that in other than exceptional cases (which we cannot, at present, envisage), claims for a mortgage debt will be governed by section 20 of the Limitation Act even if the mortgagee has exercised his power of sale before he issues proceedings. That means that he has twelve years from the accrual of the cause of action to sue for the principal of the debt but only six years to sue for interest. That will mean that Mr Brock’s otherwise forceful arguments as to anomaly, if section 8 applies, will fall away but that mortgagees will have to be aware of the different provisions of the Act as to interest. This difference has existed since 1833; it must have been what Parliament then intended and also intended at the time of the 1980 re-enactment.
- (1) Bristol & West v Bartlett
We will vary the order of the judge so as to declare that Bristol & West are entitled to judgment for the principal of their loan but so as also to give Mr and Mrs Bartlett permission to advance arguments at trial about any interest element there may be in the claim.
(2) Paragon Finance v Banks
We will set aside the judgment of the judge in favour of the defendants and substitute judgment in the sum claimed against Mrs Banks pursuant to Part 24.
(3) Halifax v Grant
We will vary the order of the judge so as to declare that the Halifax is entitled to judgment for the principal sum claimed but give leave to Mr Grant to advance arguments in relation to the claim for interest.