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Fixed charge receivers can bring possession proceedings against an individual mortgagor

Until now the question as to whether fixed charge receivers can bring court proceedings to recover possession of a property from individual mortgagors has been a grey area and has not been considered in reported cases.

However, on 7 October 2019, the High Court provided long awaited clarification on this in its judgment in Menon and Menon v Pask and Goode. In his judgment, Mr Justice Mann provided new authority for three significant receivership points of principle:

  1. Can joint fixed charge receivers issue proceedings against a mortgagor in their own name?
  2. If so, in their capacity as the deemed agent of the mortgagor, can the receiver recover possession of a property against the individual mortgagor?
  3. If so, does s. 36 Administration of Justice Act 1970 (the AJA) assist mortgagors and provide the court with discretion to postpone possession in a possession claim brought by receivers?

Background

Pask and Goode of GVA Grimley were appointed as joint fixed charge receivers over a property in West London pursuant to a Bank of Singapore Ltd legal charge.

The charge contained usual provisions regarding the appointment of receivers, including that the receivers were deemed the agent of the mortgagor. The mortgagors, the Menons, were occupiers of the property as individual mortgagors.

The receivers commenced possession proceedings in the County Court in the names of the Menons, acting by the receivers. The Menons sought to defend possession on the basis that the receivers were deemed to be their agent and, therefore, could not claim against their principal (the mortgagor) for possession of property where they were in possession.

In effect, the Menons argued that the claim operated so that the Menons were suing themselves for possession. Further, the Menons' right to occupy the property superseded the receivers' rights.

At trial, the Judge found that:

            "The receivers are intended to get in the property to enable it to be sold at the proper market price in accordance with the receivers' equitable duties to enable the sums due under the charge to be repaid […] the mortgagor's own rights to deal with the property have been postponed to the rights that they have conferred [by way of the charge] effectively on their deemed agents.Those rights necessarily include the right to possession of the mortgage property."

The judge also considered the application of s. 36 AJA and concluded that the discretion provided by that section only operated when the mortgagee or someone deriving title from them was seeking possession. He therefore concluded that s. 36 did not apply and he did not have discretion to suspend a possession order to allow the Menons time to repay the secured debt. 

At first instance the possession order was granted to the receivers.

Appeal

Upon appeal, the Menons asked that the court permit them further time to make payments to their lender and therefore suspend the possession order pursuant to s. 36 AJA.

Mr Justice Mann first considered whether the receivers could bring the action in their own name (rather than as the mortgagor acting by receivers):

            "It is not possible to have the same people on both sides of the record, and not possible for claimants to claim possession from themselves".

It was held that an action by receivers in their own name was an ancillary power impliedly provided under the charge. Therefore, the receivers were permitted to pursue the proceedings as Pask and Goode.

Mr Justice Mann then turned to the pertinent question as to whether the receivers had a right to possession against an individual mortgagor in possession.

            "In my view the answer is that the power to take possession, on its true construction, is one that can be asserted against the mortgagor by the receivers   notwithstanding the agency. The receivers have power to demand that possession be given up, and if it is not given up then the receivers must have power to take proceedings, and those proceedings would have to be in   their own names. That seems to me to be the only solution which makes business sense. Insofar as it is inconsistent with normal concepts of agency, then that is because the agency of the receivers is not a normal agency […] [the receivers] have a better right of possession than do the mortgagors (if they insist on it). "

Following this finding, could the operation of s. 36 AJA assist the Menons? The section's purpose is to give the court discretion as to granting a possession order in circumstances where it appears that a mortgagor is able, within a reasonable period, to pay sums due to its lender.

The difficulty for Menons is that s. 36 applies to lenders as mortgagee but receivers do not derive title to a property from the lender.

Notwithstanding this, Mr Justice Mann concluded that, whilst it is technically correct that the receivers act as deemed agent of the Menons, it does not in practice reflect the legal and actual reality whereby the receivers are appointed by the lender to enforce the lender's security. Therefore, if it were not for the lender's security, the receivers would not exist.

Following this, Mr Justice Mann found that it ought not be an improper strain on the language of s. 36 to say that the receivers derive title from the lender for the purpose of that section and the Menons in principle could be afforded the discretionary protection of s. 36.

Comments

This unprecedented judgment provides clarity for receivers that they are, in principle, able to bring possession proceedings in their own names against an individual mortgagor in possession. Further, mortgagors have, as a matter of principle, the same opportunities for resisting possession by receivers under s. 36 AJA as they would if a possession claim was brought by the lender as claimant.

Whilst this is likely welcome clarification for lenders and receivers, in practice they may continue to proceed with caution following the judgment. After the 2008 Horsham Properties case (which found that a lender's right to appoint receivers to sell a mortgaged property did not infringe upon the European Convention of Human Rights), the Council of Mortgage Lenders voluntarily agreed to not appoint receivers to sell residential owner-occupier property without (1) the lender first obtaining a possession order or (2) the mortgagor's consent to a sale of the property.

Following the voluntary statement, no formal legislation or formal guidelines were introduced. However, the guidance continued to shape lenders' policies for enforcement and the appointment of receivers.

Mr Justice Mann also refers in his judgment to the fact that, in the majority of cases, the appointment of receivers to get possession of owner-occupied properties risks excessive and unjustifiable costs which would be  borne by the mortgagor under the charge.

Consideration of regulatory issues should therefore be given around any proposed change in approach to possession proceedings in relation to owner occupied properties following the High Court's decision in Menon. 

The conclusion that s.36 AJA applies in possession claims against mortgagors may also create practical difficulties if raised as a defence where the lender is not a party to the proceedings, but may be faced with orders made in relation to the repayment of the  debt owed to them.

This judgment provides much needed and useful clarity where such a course of action is considered and means that receivers can rest assured that the "special agency" of receiverships will not be barrier to it.

Contributor: Sophie Ross 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions

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