Palk v Mortgage Services Funding Plc

JurisdictionEngland & Wales
Judgment Date31 July 1992
Judgment citation (vLex)[1992] EWCA Civ J0731-5
Docket Number92/0767
CourtCourt of Appeal (Civil Division)
Date31 July 1992
(1) Anthony Malcolm Ronald Palk
(2) Margaret Palk
Mortgage Services Funding Plc

[1992] EWCA Civ J0731-5


The Vice-Chancellor

(Sir Donald Nicholls)

Lord Justice Butler-Sloss

Sir Michael Kerr






Royal Courts of Justice

MR ANTHONY RIMMER, instructed by Messrs Meredith, Smith & Pratt (Tonbridge), appeared for the Appellant (Second Applicant).

MR GAVIN LIGHTMAN Q.C. and MR MICHAEL KAY, instructed by Messrs Lewis Silkin, appeared for the Respondent (Respondent).


Anthony Palk is a victim of the recession. In January 1990 he obtained an advance of £300,000 from Mortgage Services Funding Plc. The loan was secured by a mortgage over the house owned by him and his wife Margaret: The Thatch, Warren Lane, Cross in Hand, Heathfield, East Sussex. The formal mortgage deed was dated 6th April 1990. Mr Palk met the instalments due in February, March and April but he was unable to make any more payments. His business started to founder, and his company went into insolvent liquidation.


In July 1990 Mr Palk realised he could not cope with the mounting arrears under the mortgage and his other debts. He resolved to sell the house. As everyone knows, the housing market has been experiencing considerable difficulty for some time. Ultimately in March 1991 Mr Palk negotiated a sale for £283,000. The amount required to redeem the mortgage, including the arrears, was £358,587. He wished to proceed with the sale despite the shortfall because that would at least stop interest accruing on most of the debt. The house was also subject to two further mortgages, and the second and third mortgagees were prepared to agree to the sale at this price. No doubt they realised there was no prospect of obtaining anything from their security. Mortgage Services declined to agree. So on 19th June 1991 Mr and Mrs Palk applied to the Eastbourne County Court for an order that the house should be sold.


Meanwhile Mortgage Services had obtained an order for possession. The order was suspended pending the outcome of Mr and Mrs Palk's application. It has remained suspended pending the outcome of this appeal. Although Mortgage Services is seeking possession its object is not to sell the house at present. The company does not intend to put the house on the market. It believes the best course is to let the property on a short-term lease and to sell when the market improves.


This course of action did not, and does not, commend itself to the Palks. For a postponement of sale to be worthwhile, housing prices would have to rise faster than the rate of interest payable under the mortgage after deducting the amount of the rent obtainable from the proposed letting. The sum due under the mortgage is increasing by about £43,000 a year. Lettings are unlikely to yield more than £13,000 or £14,000 per annum. So the overall debt would continue to grow by a sum approaching £30,000 each year. Moreover, the likely rental would not even match the interest the Palks would save if the house were sold and they were credited with the net proceeds of sale. Even in this respect, which I shall refer to as "the income shortfall", there would be a significant shortfall. The Palks see no prospect of the housing market recovering at a rate fast enough to overtake the income shortfall or, still less, the rate at which their overall debt is increasing steadily month by month.


On 12th November 1991 His Honour Judge Lovegrove Q.C. dismissed their application for an order for sale. He did so "with a good deal of regret". He held that the law is that an order for sale can only be made against a mortgagee's wishes if the property can be sold for an amount which will discharge the mortgagee's debt or if security is provided for that amount. That was not the position here.


Mr Palk is now bankrupt. His wife has appealed against the judge's decision. The amount, including interest, now owing under the mortgage is approximately £409,000.


The statute


The jurisdiction being invoked by Mrs Palk is statutory. Section 91(2) of the Law of Property Act 1925 provides:

"In any action, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money, the court, on the request of the mortgagee, or of any person interested either in the mortgage money or in the right of redemption, and, notwithstanding that—

  • (a) any other person dissents; or

  • (b) the mortgagee or any person so interested does not appear in the action;

and without allowing any time for redemption or for payment of any mortgage money, may direct a sale of the mortgaged property, on such terms as it thinks fit, including the deposit in court of a reasonable sum fixed by the court to meet the expenses of sale and to secure performance of the terms."


The origin of this subsection is section 48 of the Chancery Amendment Act 1852. As originally enacted, the section only empowered the court to make an order for sale in the course of foreclosure proceedings. Its object was to enable the court in its discretion to direct a sale "in order to avoid the great delay and expense occasioned by foreclosure and redemption in a case where there is a great number of successive mortgages": per Sir John Romilly M.R. in Hurst v. Hurst (1852) 16 Beav. 372, 374. Sir John Romilly added:

"The power given to the Court…is at the instance of the first mortgagee, to direct a sale if it should think fit, or at the instance of a second or any puisne incumbrancer, with the consent of the prior incumbrancer; or if they do not consent, then upon ordering such sum of money to be paid into Court as the Court may think necessary to protect them."


In 1881 section 48 was replaced by section 25(2) of the Conveyancing Act of that year. In all material respects, section 25(2) was worded the same as section 91(2). Under the new section the court could direct a sale at any time. In Union Bank of London v. Ingram (1882) 20 Ch.D. 463, 464, Sir George Jessel M.R. observed that the new Act was to be construed liberally:

"The Act is a remedial Act, one effect of it being to allow a mortgagor whose property is worth more than the mortgage-money, but who cannot raise it, to obtain a sale and get the benefit of the surplus. The Act being remedial is to be construed liberally. The Court has power to impose terms so as to take care that no injustice shall be done to anyone, and I think that the Legislature has given it jurisdiction to make the order at any time before foreclosure absolute."


Likewise Brett L.J. (at p.465):

"This is an enabling and remedial statute intended to give the Court a very beneficial power, and I do not see any reason to cut down the words of the enactment…"


The practice


As one would expect, if a mortgagee seeks to foreclose the court will only direct a sale contrary to his wishes if repayment of his debt is fully secured. This can be achieved by fixing a suitable reserve price for a sale, or by requiring the mortgagor to make a payment into court. Thus in Woolley v. Colman (1882) 21 Ch.D. 169, a mortgagor in a redemption action sought an order for sale. Sale was opposed by the first and second mortgagees. Fry J. directed a sale but fixed a reserve price sufficient to protect their interests. In The Merchant Banking Company of London v. The London and Hanseatic Bank (1886) 55 L.J. Ch. 479 the same approach was adopted. A first mortgagee sought a foreclosure order, and the second mortgagee asked the court to order a sale but postpone it for a year or two. Chitty J. refused to direct a sale and made a foreclosure order. To have directed a sale would have been to extend the usual redemption period without cause. The value of the property was speculative and it was not just that the rights of first mortgagees should be postponed to a speculative sale at the instance of second mortgagees. The judge said:

"If a sale were ordered, the reserved price would be fixed at an amount which would cover the first mortgage and costs; and if no bid were made, the market value of the property would be depreciated by the knowledge that there had been an abortive attempt to sell it. Therefore, were the Court to direct a sale, the plaintiffs' rights might be seriously prejudiced. The plaintiffs have satisfied me as to the insufficiency of their security".


The approach exemplified in these two cases hardened into an established practice in the Chancery Division. In its own particular field of foreclosure proceedings the principle underlying this practice is as sound today as ever: in that field it strikes a fair balance between the interests of the parties.


A new problem


So far as I am aware, foreclosure actions are almost unheard of today and have been so for many years. Mortgagees prefer to exercise other remedies. They usually appoint a receiver or exercise their powers of sale. Take the present case: the security is inadequate, but Mortgage Services is not seeking to foreclose, nor is it seeking to sell at once. It is seeking to hold on to the house, preferably without becoming accountable as a mortgagee in possession, with a view to exercising its own power of sale at some future date. It is seeking to do this despite the income shortfall mentioned above. The nineteenth century cases were not concerned with this situation. The principle applied in those cases does not address the problem which has now arisen.


Underlying the present case is not merely a disagreement between a mortgagor and a mortgagee about the likely future trend of house...

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