Archive for the ‘Charge’ Category

Equitable subrogation

December 29, 2014

In Kingsway Finance Ltd v Wang Qingyi ([2014] HKEC 1969, CA) W owned property and had entered into the following transactions:

19/8/2010 – Granted all moneys charge to Oi Wah

30/5/2011 – Granted second all moneys charge to Kingsway (as security for ‘the Kingsway first loan’)

3/8/2011 – Granted third charge to Wing Wei

9/8/2011 – Took out ‘the Kingsway second loan’ to discharge the Oi Wah mortgage

16/11/2011 – Took out ‘the Kingsway third loan’ to discharge the Kingsway first and second loans.

W defaulted, the property was sold and the proceedings concerned the relative priorities of the interests of Kingsway and Wing Wei over the proceeds of sale. Kingsway argued that, so far as the Kingsway third loan was concerned, it was entitled to the same rights as those enjoyed by Oi Wah and those that it had enjoyed by virtue of the charge that it had been granted to it. Kingsway argued that it was entitled to equitable subrogation to those rights because it had supplied the funds to repay the loan provided by Oi Wah and to repay the Kingsway first and second loans. Kingsway was not entitled to tack the second and third loans to the charge granted at the time of the first loan because the conditions in section 45 of the Conveyancing and Property Ordinance were not satisfied. Was Kingsway entitled to equitable subrogation? This would determine the priority question. The Court of Appeal (Cheung CJHC giving the main judgment) held that Kingsway was entitled to equitable subrogation to the Oi Wah and Kingsway charges.

Equitable subrogation

This is ‘based on the doctrine of unjust enrichment, rather than the agreement or common intention of, the party enriched and the party deprived as such’ ([14]). Intention may be relevant to equitable subrogation but it is not central ([16]). In Filby v Mortgage Express (No 2) Ltd ([2004] EWCA Civ 759, [[62]) May LJ said:

‘Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant’s money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result.’

Did Kingsway get what it bargained for?

Wing Wei argued that Kingsway had got what it bargained for when it made the second and third loans, viz. the benefit of the security of the all moneys charge in favour of Kingsway; the fact that the inability to tack the advances to that charge meant that the later loans would not enjoy the priority conferred by the charge to Kingsway was, argued Wing Wei, irrelevant. This argument was dismissed:

‘[the argument adopted] a highly technical and unreal approach to determining Kingsway’s intention in requiring as a condition for the 3rd and 4th loans respectively a first mortgage over the property. When considered in the commercial context of the present case, there can be no doubt that what Kingsway intended to obtain, and what it actually bargained for, was first priority over the property as a secured creditor, just like Oi Wah under the Oi Wah mortgage, once that mortgage was discharged by means of the 3rd loan which Kingsway was advancing to Wang. ‘ ([28])

Even if Wing Wei were right on the question of intention, this would not be decisive. The ultimate question was whether, absent subrogation, Wing Wei would be unjustly enriched ([30]).

Unjust enrichment

On the facts, it was plain that Wing Wei would be unjustly enriched if its arguments succeeded ([34]). Even if the interest rate under the Kingsway third loan were higher than that payable under the Oi Wah and Kingsway charges, which had not been shown, this would be irrelevant. Equitable subrogation would not entitle Kingsway to a higher rate than that payable under the charges to which they were subrogated ([33]).

Subrogation upon subrogation?

The Kingsway third loan had been used partly to repay the Kingsway second loan and the latter had given Kingsway subrogated rights under the Oi Wah mortgage. Wing Wei argued that Kingsway’s third loan could not give rise to be subrogated to the rights enjoyed as a result of the Kingsway second loan. This argument failed, there was no rule that limited subrogation to a one-time application ([35]).

Contrary to public policy?

Allowing Kingsway to make use of equitable subrogation would not bypass the requirements of CPO, s. 45, ‘when there was, in reality, no additional money lent to the borrower, and the prior mortgage was not made to secure any additional indebtedness as such.’ ([43]).

Michael Lower

Barclays Bank plc v O’Brien: the risk of failing to take steps to ensure informed consent

October 1, 2013

In Barclays Bank plc v O’Brien ([1994] 1 AC 180, HL) a married couple granted the bank a second charge over the family home as security for the overdraft facility of a company in which the husband had an interest. The wife signed the document without reading it; she did so because of her husband’s misrepresentation to the effect that the liability to the bank was limited to GBP60,000 and that the exposure under the arrangement would only last for three weeks. In fact, it was an unlimited guarantee. The bank took no steps to have the documents explained to the wife nor did it suggest that the wife should take independent legal advice.

When the company failed to meet its obligations, the bank sought an order for possession of the home. W sought to set the charge aside on the grounds that it was the result of H’s misrepresentation and undue influence.

Only the misrepresentation defence was relied upon in the House of Lords. Nevertheless, Lord Wilberforce (giving the only full judgment) spoke about undue influence and considered the steps that a lender must take to protect itself from a claim that its agreement with a surety might be set aside in the event that it is entered into as a result of misrepresentation or undue influence.

Lord Wilberforce prefaced his analysis with a reminder that there are policy considerations to be borne in mind in shaping the law. The law needs to strike a balance between the need to protect wives from an abuse of the trust and confidence that they place in their husbands, on the one hand, and the need to avoid the creation of a draconian regime that would render family homes unacceptable as security for loans (at p. 188).

Lord Wilberforce considered the proposition that wives enjoy some special equity and are the object of special tenderness on the part of equity. He accepted that there was a greater risk of undue influence ‘than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual’s will’ (at p. 191). At the same time, with an eye no doubt to the future rational and orderly development of the law, he rejected the broad proposition that wives should be accorded special rights in relation to surety transactions. He rejected then the idea of ‘a special equity applicable only to such persons engaged in such transactions.’ (at p. 195).

The judgment seeks to create a legal environment that properly balances the interests of wives and lenders (described below). It is not only applicable to wives. Towards the end of the judgment, Lord Wilberforce emphasises that the same principles apply ‘to all other cases where there is an emotional relationship between cohabitees.’ (at p. 198). Thus, the principles and procedures set out in the judgment are to be followed ‘if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor’. (at p. 198). Marriage is only one instance of a broader category.

The core of the judgment is its consideration of the circumstances in which lenders will take subject to the prior rights of the person whose consent was procured by undue influence or misrepresentation.

In a case like this, it may sometimes be possible for W to argue that H was the bank’s agent. This would provide a basis upon which H’s undue influence or misrepresentation could be attributed to the bank. An agency analysis of this situation, however, would usually be highly artificial (at p. 194).

Rather, the doctrine of notice provides the key: did the lender have actual or constructive notice of the misrepresentation or undue influence (at pp. 194 – 5)? The question is whether the lender is aware of facts or circumstances that put him on enquiry as to the possibility that the surety might have a right to rescind on the grounds of undue influence or misrepresentation. If the lender is put on enquiry and does not take reasonable steps to satisfy himself that W’s agreement to stand surety has been properly obtained then it will have constructive notice of W’s rights (at p. 196).

When is a lender on enquiry (so that it needs to take further steps)?

‘[A] creditor is put on enquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.’ (at p. 196).

When the lender is on enquiry it must ‘take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice.’ (at p. 196).

The steps that a lender is expected to take are set out in this passage:

‘in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.’ (at . 196)

In exceptional circumstances, where the lender knows of circumstances that make the exercise of undue influence probable rather than merely possible, the lender will need to ensure that the wife is separately advised (at p. 197).

This procedure seeks a fair balance between the wife and the lender, even though it does not guarantee that the wife fully understands the transaction (at p. 197).

As the bank had not taken steps to ensure that Mrs O’Brien had been properly informed of the nature of the transaction, it was fixed with constructive notice of Mr O’Brien’s misrepresentation.

Michael Lower

Perpetuities and the exercise of an option

April 30, 2012

In Souglides v Tweedie ([2012] EWHC 561) (now overturned by the Court of Appeal) U1 was the underlessee of a fourth floor flat. U1 created a fifth floor out of the roof space and a roof terrace. The underlease was varied in 1986 to include the fifth floor. Later, in 1987, the freeholder granted U1 an option to extend the underlease for 60 years (the headlease would come to an end three days after the underlease). The option was exerciseable at any time between 25th December 2008 and 25th December 2008. U1 charged the underlease and, in effect, all ‘Related Rights’ to a building society. U1 failed to keep up with the mortgage payments and the building society took possession and the lease was sold to S and his then wife. The option was later registered. S sought to exercise the option in February 2009.

The freeholders claimed that the option was void for perpetuity. They argued that the exception for options contained in leases in section 9 of the Perpetuities and Accumulations Act 1964 did not apply since the option had not been granted by U1’s immediate landlord. This argument failed; there is no such requirement.

The option was said to be exerciseable by U1 and his successors in title. Was S a successor in title since he claimed through the building society and it was argued that, given the nature of a charge, the building society (and its successors) were not successors in title of U1. This failed too. The building society was sufficiently like a successor in title (Law of Property Act sections 1(2)(c) and 87).

The freeholders also argued that the variation of the lease was a surrender and re-grant given that it altered the extent of the demised premises. Did this invalidate the option since it referred to the original lease as varied while S held under the terms of a new lease? This argument was rejected too.