Posts Tagged ‘mortgages’

Mortgage or not: look at the substance of the transaction

April 7, 2016

In Warnborough Ltd v Garmite Ltd ([2003] EWCA Civ 1544, CA (Eng)) W sold property to G but the entire purchase price was left oustanding. G granted W a legal charge to secure the outstanding balance of the purchase price. G also granted W an option to re-purchase the property for the same price as that paid by G less the amount of the purchase price unpaid by G at the relevant time. The option could only be exercised if certain conditions were met. One of these conditions was that a specified amount of the purchase price was still outstanding. The effect of the exercise of the option would be to restore the parties to their original positions. W exercised the option and then sought specific performance of the contract. G argued that the option was a clog on the equity of redemption and so void (Samuel v Jarrah).

Jonathan Parker LJ reviewed the authorities. The court had to look at the substance of the transaction. If the true nature of the transaction was that it was a mortgage then the option was void ([73]). Here, it was more likely that the substance of the transaction was a contract for sale and purchase and not a mortgage ([76]). The option would then be perfectly valid:

‘Although it would clearly not be appropriate to attempt to lay down any absolute rule, it does seem to me that where the option to purchase which is sought to be challenged as a “clog” is granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor for a price which is to be left outstanding on mortgage, there must be a very strong likelihood that, on an examination of all the circumstances, the court will conclude, as it did in Davies v Chamberlain, that the substance of the transaction is one of sale and purchase and not one of mortgage.’ ([76])

Michael Lower


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

Mortgagor in default: does default give rise to adverse possession?

May 21, 2013

In Common Luck Investment Ltd v Cheung Kam Chuen ((1999) 2 HKCFAR 229, CFA) C executed a mortgage assigning a property to X Bank as security for a loan. C defaulted in payment in 1965 but X Bank took no action and C remained in possession. X Bank went into liquidation and the property was assigned by the liquidator to CLI. The question was whether C had been in adverse possession since 1965 so that CLI’s title had been extinguished. C’s argument failed. C had a right to redeem even after default and he had remained in possession under the terms of the mortgage and not as a trespasser (236, Litton P.J.). As to the effect of the sale by the liquidator to CLI, it seemed likely that C had remained in possession as CLI’s licensee. Even if C were to be regarded as a squatter from the time of the sale, not enough time had passed from then to extinguish CLI’s title (238, Litton P.J.).

Michael Lower