Client Alert

Receivers: Possession Against Individual Mortgagors

12 Feb 2020

SUMMARY

A receiver appointed under a mortgage of property owned by individuals (not a company) can claim possession of the property occupied by the mortgagors by suing in his or her own name as receiver. The court also held that it has the usual discretion to postpone possession under section 36 of the Administration of Justice Act 1970 (AJA).

As a practical matter, the decision clarifies that the proceedings should be constituted with the receivers as claimants, not with the mortgagors on both sides of the record.

This alert is relevant to insolvency practitioners, receivers and others in the property sector.

THE FACTS

The defendants, Mr and Mrs Menon (the “Menons” or the “Mortgagor”), charged their dwelling house at 43 Porchester Terrace London W2 (the “Property”) to Bank of Singapore Ltd (the “Bank”) by a legal charge dated 14 March 2014. The legal charge secured the payment on demand of the liabilities of a company, Silky Way Investments Ltd (the “Borrower”), to the Bank. It provided for the appointment of a receiver, and for the receiver to be treated as the agent of the Mortgagor. The receiver had the right to take possession of and generally manage the Property and to bring proceedings. The Borrower defaulted and demand was made of the Menons on 24 October 2017, following which receivers were appointed on 9 November 2017, in exercise of all available powers under the Law of Property Act 1925 and the legal charge.

The receivers then started proceedings to obtain possession of the Property. The proceedings were first brought by "Silky Way Investments Ltd, acting by [the receivers] as joint fixed charge receivers of [the Property]". Since the receivers were not appointed over the assets of the Borrower, that approach was a mistake. The receivers therefore sought to amend the identity of the claimants. The amendment they chose to make was to substitute the names of the Menons, acting by the receivers. The action was thus constituted as the Menons suing the Menons for possession, with the claimant Menons acting by their agents.

The judge granted possession in favour of the receivers of the Property and decided that there was no discretion to postpone possession under section 36 AJA. The Menons appealed and, without opposition, the identity of the claimants was amended to be the receivers.

Two significant questions arose:

1. Can a receiver appointed under a mortgage of property owned by individuals (not a company) claim possession of the property occupied by the mortgagors by suing in his or her own name as receiver?

2. If so, does the court have the usual discretion to postpone possession on terms under section 36 AJA which apply where the mortgagee[1] brings an action in which he or she claims possession?

THE DECISION

As to the first point, it is necessary to inquire whether, despite the shortcomings apparently presented by their status as agents (“for all purposes”), the receivers had some separate right which they could utilise against the Menons, their principal. It would be rather odd if it were the case that the receivers could not claim possession against them. It would make no business sense if a mortgagor in possession of the property would be the one person in the world against whom the receivers would not be able to obtain possession. The court held that the power to take possession, on its true construction, was one that could be asserted against the Menons by the receivers notwithstanding the agency. The court noted that the issue does not arise where there is a corporate mortgagor because, if employees or directors fail to acknowledge the authority of a receiver who seeks possession, the receiver can act in the name of the company and remove them as individuals.

The court held that the receivers had the power to demand that possession be given up, and if not given up, then the receivers had the power to file proceedings in their own names. This is the only solution which makes business sense; receivers need to be able to sell with vacant possession. Insofar as it is inconsistent with normal concepts of agency, the court noted that this is because the agency of the receivers is not a normal agency. The receivers clearly had the right to retain possession as against the Menons were they to go into possession and then be sued by the Menons. This demonstrated that the receivers had a better right of possession and, consistent with that, they were able to claim possession as against the Menons in possession and, if necessary, sue for possession. Since they could not sue in the name of the Menons, they would have to sue in their own name. This was an ancillary power impliedly given to them by the mortgage.

There was an arguable alternative way of reaching the same conclusion as to their right to sue, and that was via an implied term that the Menons would give up possession to the receivers if they were required to do so. If it were necessary to do so, the judge would have implied such a term in order to make the contract work as a matter of business efficacy so far as the acts of a receiver are concerned. The existence of such a right is how the receiver manages security for the benefit of the mortgagee and (given the right to appoint a receiver) is necessary in business terms for that purpose. It is not inconsistent with any express term of the contract – it filled in a gap left by the express terms. One has to reconcile it with the rest of the agency provisions, but that presents no problem. Once the receivers have gained possession, they retain possession as agents of the mortgagor[2] and they can exercise other powers as agents. Since the receivers are not party to the mortgage, they are entitled to the benefit of and to enforce the implied term under the Contracts (Rights of Third Parties) Act 1999.

As to the second point, the court noted that, although it was true that, in a traditional sense, the receivers did not ‘derive title under the mortgagee’ (as required by the literal terms of section 36 AJA), the receivers were appointed by a mortgagee to enforce its security and, in suing for possession, they did so for the benefit of the mortgagee. Bearing in mind the close identity of purpose and who appointed them, it would be right to say that the receivers derived title from the mortgagee for the purposes of sections 36 and 39 AJA. Accordingly, in principle, the Menons could invoke the court’s discretion under section 36 to postpone any possession order. They should have the same opportunities of resisting possession under section 36 as they would have had if the Bank had been a claimant. Whether or not they could make realistic proposals in that respect was an entirely different matter. This was something that would have to be dealt with separately.

COMMENTS

This is an unusual case given the practice identified in the decision as follows:

“It may be that one reason why the matter has not come before the courts is that, since 2008, the members of the Council of Mortgage Lenders have voluntarily agreed not to appoint a receiver to sell residential owner-occupied property without first getting a possession order or the borrower’s consent. This follows the decision in Horsham Properties Group Ltd v Clark[3]. In the vast majority of cases to appoint receivers to get possession of owner-occupier residential mortgages would obviously give rise to unjustifiable and excessive costs.”   


[1] “Mortgagee” is defined by section 39 AJA as including any person deriving title under the mortgagee.

[2] Ratford v Northavon District Council [1987] QB 357 in relation to liability for rates.

[3] [2009] 1 WLR 1255.

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