Michael Leon v Kensington Mortgage Company Ltd
| Jurisdiction | England & Wales |
| Judge | Master Dray |
| Judgment Date | 06 February 2023 |
| Neutral Citation | [2023] EWHC 121 (Ch) |
| Docket Number | Claim No.: PT-2022-000059 |
| Court | Chancery Division |
[2023] EWHC 121 (Ch)
DEPUTY Master Dray
Claim No.: PT-2022-000059
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
PROPERTY, TRUSTS AND PROBATE LIST (ChD)
Rolls Building
7 Rolls Buildings
Fetter Lane
London
EC4A 1NL
Niraj Modha (instructed by Anthony Gold Solicitors LLP) for the Claimant
Clifford Payton (instructed by TLT LLP) for the First Defendant
Gerard van Tonder (instructed by Bi-Borough Shared Legal Services) for the Second Defendant
Hearing date: 12 December 2022
Further written submissions received on 20, 22 & 30 December 2022
Approved Judgment
This judgment was handed down remotely by circulation to the parties or their representatives by email and by release to the National Archives. The date and time for hand-down is deemed to be 10.30am on 6 February 2023.
Introduction
Somewhat simplified, the root issues in this case are:
(1) Where A and B are co-debtors and the creditor C holds security over A's property in respect of the debt, if A is dissolved and the Crown disclaims the property, is B (upon later payment of the debt in full to C) entitled to be subrogated to C's security?
(2) If ‘yes’ to (1), where following such dissolution and disclaimer C has been granted a vesting order in respect of A's property, if B is entitled to be subrogated to the property so vested, i.e. does that property constitute C's security?
For the reasons given below I answer both questions in the affirmative.
The background
Frinton Limited ( Frinton) was a company incorporated on 28.4.1999 and owned or controlled by the Claimant, Mr Leon, or his wife. All its shares were held by him or on his behalf. He was at one time a director of Frinton.
On 21.10.2002 Frinton and Mr Leon jointly entered into a loan agreement with IGroup Mortgages Limited whereby the lender loaned them the sum of £472,500 (the Loan). The term of the Loan was 25 years. The Loan carried interest payable monthly at 0.75% over base rate. The liability of Frinton and Mr Leon for the Loan was joint and several; they were co-debtors.
The Loan was secured by a contemporaneous charge by way of legal mortgage (the Mortgage). The property charged was 86 Flanders Road, London W4 1NG.
In the Mortgage Frinton was identified as the mortgagor and Mr Leon as the co-mortgagor. In addition to the charge effected by Frinton, the Mortgage provided that Mr Leon charged any right or interest which he had in the subject property or its proceeds of sale which was not charged by Frinton.
Condition 11 of the Mortgage provided that conditions 4–10 thereof applied to Mr Leon in the same way that they applied to the mortgagor. Condition 4 was that the mortgagor must keep to the terms of any lease under which the property was held.
In 2007 Frinton took an assignment of a lease (the Lease) of the basement floor flat at 122a Westbourne Terrace, London W2 6QJ (the Property). The Lease was granted by the freeholder, the Second Defendant ( Westminster), and is for a term of 125 years from 10.10.1988. It is registered at HMLR under title no. NGL713746 (the Title).
On 26.3.2007 Frinton, Mr Leon and GE Money Mortgages Limited (as IGroup Mortgages Limited was then known) ( GE Money) entered a deed of substituted security (the Deed). By the Deed the Lease was substituted as security for the Mortgage in place of the property at 86 Flanders Road, on the terms of the Mortgage.
The effect of the Deed was to charge the Lease held by Frinton in favour of GE Money. So far as Mr Leon was concerned, he had no right or interest in the Lease and hence the further charge expressed to be made by him (see paragraph 6 above) had no bite; it would have bitten only if he had any such right or interest (which he did not). However, he remained bound by the Mortgage conditions.
The charge in favour of GE Money (the Charge) was registered against the Title with effect from 27.3.2007.
On 17.2.2009 Frinton was dissolved because of its failure to comply with its statutory filing requirements. No application for its restoration was made within the 6 year period set by s.1024 of the Companies Act 2006 (the 2006 Act).
By s.1012 of the 2006 Act, on the dissolution of Frinton the Lease vested in the Crown bona vacantia.
On 23.5.2016 GE Money transferred the Charge over the Lease to the First Defendant ( KMC). In the same month KMC was registered as the proprietor of the Charge on the Title in place of GE Money.
On 30.8.2016 the Crown, having then recently learned of the dissolution of Frinton, disclaimed the Lease pursuant to s.1013 of the 2006 Act.
By s.1014 of the 2006 Act, the consequence of the disclaimer was that the Lease was deemed not to have vested in the Crown under s.1012. By s.1015 the disclaimer operated to terminate, as from the date of the disclaimer, the rights, interests and liabilities of Frinton in the Lease but did not, except so far as was necessary to release Frinton from such liability, affect the rights or liabilities of any other person.
HMLR made an entry on the Title which recorded the disclaimer.
The open market value of the disclaimed Lease was then put around £800,000 to £1 million. Hence, even after deducting the outstanding Loan, there was roughly £370,000 to £570,000 residual equity in the Lease. I understand that, if the Lease were now sold, there would still be residual equity, i.e. a surplus (the Surplus).
Mr Leon's liability under the Mortgage was unaffected by the disclaimer of the Lease. It is common ground that he remained (and remains) liable to repay the sums secured by the Mortgage.
The previous proceedings
On 5.5.2017 Mr Leon brought proceedings seeking a vesting order in respect of the Lease.
(1) First instance
The claim was heard by Chief Master Marsh. His judgment, delivered on 11.12.2017, bears the neutral citation [2017] EWHC 3148 (Ch).
Mr Leon claimed that the Lease had been held by Frinton on trust for him. The Chief Master rejected that contention and it is unnecessary to say anything more about it.
However, the Chief Master upheld Mr Leon's claim for a vesting order under s.1017 of the 2006 Act.
Thereafter, on 27.7.2018 HMLR registered Mr Leon as the proprietor of the Lease in place of the erstwhile Frinton.
The Charge in favour of KMC remained registered against the Title.
The Lease which, following the disclaimer, had been in what might be described as a state of suspended animation, was thereby revived and vested in Mr Leon.
(2) First appeal
Matters did not end there. Westminster appealed against the decision of the Chief Master. On the appeal Arnold J (as he then was) set aside the vesting order made by the Chief Master. He held that Mr Leon was not entitled to a vesting order under the 2006 Act. His judgment, delivered on 12.11.2018, bears the neutral citation [2018] EWHC 3026 (Ch).
Arnold J held (paragraph [28]) that although Mr Leon would have had the right to redeem the Mortgage by paying off the debt, he did not own the equity of the redemption in the Lease. That had belonged to Frinton until its dissolution and then to the Crown until the disclaimer. Hence Mr Leon did not have an interest which entitled him to the Lease under s.1017(2)(a) of the 2006 Act.
Arnold J further held (paragraphs [34–37]) that, although Mr Leon was under a liability in respect of the Lease by reason of the Mortgage conditions, thereby bringing him within s.1017(2)(b) of the 2006 Act, it was not just to vest the Lease in Mr Leon in order to compensate him in respect of the disclaimer. That was because Mr Leon had not lost the Lease (it never having been his) and, as above, his liability under the Mortgage was unaffected by the disclaimer. Therefore, this gateway to a vesting order was denied by s.1017(3) of the 2006 Act.
It was common ground between the parties that, in those circumstances, a vesting order should be made in favour of KMC on terms that it should account as mortgagee to the person next entitled in accordance with s.105 of the Law of Property Act 1925 (the 1925 Act), whoever that might be. The identity of such person (i.e. the person entitled to the Surplus) was not determined, although Arnold J observed (paragraphs [32] & [38]) – echoing the observations of Chief Master Marsh in paragraph [50] of his judgment – that it was far from clear that Westminster would be entitled to the Surplus if KMC sold the Lease.
Accordingly, by his order sealed on 7.12.2018 (the Vesting Order) Arnold J ordered that:
(1) The property comprised in the Lease be vested in KMC pursuant to s.1017 of the 2006 Act for such term and upon such conditions as the said Lease to the intent that KMC would be in the same position as it would be if it were an assignee of the Lease. (paragraph 3)
(2) The proprietorship register of the Title be amended by the removal of Mr Leon as proprietor and the entry of KMC as proprietor in his place. (paragraph 4)
(3) Upon subsequent sale by KMC of the property thereby vested, KMC be liable to account as mortgagee to the person next entitled in accordance with s.105 of the 1925 Act. (paragraph 5)
(3) Second appeal
Mr Leon appealed unsuccessfully to the Court of Appeal whose judgment, dated 22.11.2019, bears the neutral citation [2019] EWCA Civ 2047.
For Mr Leon it was submitted that he had an entitlement to the equity of redemption in the Lease. In rejecting this argument David Richards LJ (who gave the only substantive judgment, with which Lewison and Simon LJJ agreed) said (at paragraph [29]):
“… [counsel] relied on the right of Mr Leon, as co-debtor with Frinton, to pay the outstanding loan and thereby redeem the Mortgage....
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