The Court of Appeal has upheld the vesting of a lease in a mortgagee, where the lease was disclaimed by the crown following dissolution of a limited company borrower
This is a decision that is relevant to lenders who enter into mortgages with more than one borrower where the sole registered proprietor of the mortgaged property is a limited company. In particular, the judgment reaffirms the court’s commitment in cases concerning applications for vesting orders to only exercise its discretion if the legal criteria are strictly met. In particular, these criteria appear unlikely to be met by a joint borrower who applies for an order but is not registered on the legal title to the property simply for reasons of fairness.
The judgment also acts as a warning to shareholders who fail to apply to reinstate a dissolved company to the register within the six-year time period.
In 2007 Frinton Limited, which was beneficially owned by Mr Leon (who was the sole shareholder and also a director until 2005), became the assignee of a long lease of a flat in West London valued at £800,000-£1,000,000 (the Lease).
The Lease was substituted as security in place of another property under a mortgage deed dated 21 October 2002 (the Mortgage). The Mortgage was executed by Frinton as mortgagor, Mr Leon as ‘co-mortgagor’ and Kensington Mortgage Company (previously GE Money) and secured a £472,500 loan made to Frinton and Mr Leon.
The Mortgage and Mortgage Conditions provided that:
In 2009, Frinton was dissolved because of failure to comply with statutory filing requirements. The Lease subsequently vested in the Crown as bona vacantia. Mr Leon, for reasons unclear, made no application to restore Frinton to Companies House in the requisite six year period. The Crown later disclaimed the Lease in 2016.
In 2017, Mr Leon sought a vesting order of the Lease on the basis he believed he could satisfy two tests set out in section 1017(1)-(3) of the Companies Act 2006 (the Act).
The Act provides that a court has discretion to make an order vesting a property in a person “entitled to” disclaimed property if they claim an interest in it. The Act also allows an order to be made if a person remains under a liability following a disclaimer of property by the Crown where the court considers it would be just to do so for the purpose of compensating that person for that liability.
At first instance, the court made a vesting order in Mr Leon’s favour. However, the freeholder (Westminster) appealed and the High Court overturned the decision and vested the Lease in Kensington. Mr Leon, who stood to become the proprietor of a valuable Lease if a vesting order was made in his favour, appealed to the Court of Appeal.
Success would have seen Mr Leon acquire equity in the Lease of between £370,000 and £570,000.
Mr Leon sought to appeal on the basis that:
Accordingly, he submitted that the High Court decision vesting the Lease in Kensington should be reversed.
The court rejected both grounds and upheld the previous High Court decision that a vesting order be made in Kensington’s favour.
The court considered the following factors in considering Mr Leon was not “entitled to” the Property and was essentially merely a co-debtor rather than co-mortgagor:
The court further considered it would also not be just to vest the Property in Mr Leon by way of compensation for his remaining liability under the Lease because:
The key points arising from the judgment are:
Contributors: Rabina Ahmed and Oliver Adams-Liggins
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.