Clog on equity of redemption
Liability for contingent costs
Re: Industrial North West LLP (in Administration)
 EWHC 3052 (Ch)
A mortgagee was entitled to retain security, notwithstanding the repayment of a loan, against a contingent liability for legal costs.
Administrators of INW LLP sought directions on whether they should treat the third respondent (Fairfield) as a secured creditor of INW. Fairfield had provided INW with commercial finance pursuant to a facility which was secured by a Security Agreement. INW had repaid the loan in full following demand having been made but the first respondent (M) who owned INW and was himself an unsecured creditor threatened litigation over the termination of the facility. Fairfield wanted to retain the security against a contingent liability for its costs.
The principal issue concerned the interpretation of the costs liability in clause 14.5 of the Security Agreement with M submitting (amongst other things) either that there could be no contingent liability for any costs of future proceedings after the loan had been repaid, or that there could be no contingent liability for legal costs until proceedings have been issued. M also submitted that the retention of security amounted to a clog on the right of redemption.
Following a review of the authorities on what amounts to a contingent liability, including Re Sutherland  AC 235, Glenister v Rowe  Ch 76 and Re Nortel  1 AC 209 there was a real prospect that Fairfield would incur costs in defending litigation instituted by M and that those costs would fall within clause 14.5, being a liability under a contract which equated to a contingent liability per Lord Neuberger in Nortel. The court also rejected the argument that a mortgagee’s legal costs cannot amount to a contingent liability of the mortgagor until proceedings have been issued.
Since INW was not entitled to release of the security upon payment of the capital and interest if there were other outstanding secured liabilities (nor for partial release upon partial repayment) this is not repugnant to the right to redeem. Whilst a mortgagee cannot refuse redemption if the full amount owing is tendered, this must include adequate provision for contingent liabilities (Re Rudd (1986) 2 BCC 98955). It was not offensive against any equitable principle that a contingent liability remains secured for an indefinite period, nor was there anything unfair or unconscionable in the terms of the facility documents.
Accordingly, INW had a contingent liability for Fairfield’s legal costs which were secured by the Security Agreement.
Abuse of process - subsequent redemption claim by option holder
 EWHC 5 (Ch)
Where the court had made an order for possession at a hearing attended by a party claiming an interest in the mortgaged property as an option holder, whose interest did not have priority over the mortgage, it was an abuse of process for that party subsequently to claim to be entitled to redeem the mortgage.
HSBC obtained an order for possession of mortgaged property over which SLF had registered a restriction to protect an option agreement entered into without HSBC’s consent. SLF as option holder subsequently issued a Part 8 redemption claim which HSBC applied to strike out on various grounds including that it was an abuse of process as a collateral attack on the order for possession (per the Aldi Guidelines  1 WLR 748).
SLF had intervened in the possession proceedings and sought a stay of the warrant of possession. At the hearing it argued it could rely on s 36(2) Administration of Justice Act 1970. HSBC argued it was not bound by the option agreement and that SLF had no authority to make any mortgage payments for the purposes of s 36. The District Judge agreed. Permission to appeal was refused.
SLF’s redemption claim was based on a claimed interest in the equity of redemption pursuant to s 91(2) Law of Property Act 1925 and/or s 50 Law of Property Act 1925.
Whether an option holder whose option did not give it priority over a mortgage had a sufficient interest to apply to redeem the mortgage, notwithstanding that the court had already made an order for possession in proceedings involving the option holder.
The possession judgment made clear findings about HSBC’s priority interest and determined that SLF’s interest could not defeat HSBC’s claim or the pursuit of its possession order. Any attempt by SLF to use its redemption claim to thwart HSBC’s right to enforce its possession order was a direct attack on the possession judgment. Furthermore, by failing to ‘come clean’ about the redemption claim during the possession proceedings, the court and the parties were denied the opportunity of having the parties’ rights and obligations determined once and how those claims should be managed in a reasonable and proportionate manner in accordance with the overriding objective. There was a long list of other failings by SLF in the conduct of its claims. Overall, this was part of a concerted attempt to get round the possession judgment. They were an abuse of process and a collateral attack on the possession judgment. The Aldi Guidelines applied to all parties not just claimants and are about case management. A failure to comply with them may result in a second action being an abuse of process, as here.
The issues now raised in the redemption claim should have been raised at the possession hearing. As the Aldi Guidelines make clear and as reinforced by Briggs LJ in Gladman Commercial Properties v Fisher Hargreaves Proctor  EWCA Civ 1466 there is a requirement for parties to refer a contemplated future claim to the judge in the earlier claim as a matter of case management. This is precisely the type of case in which the court would be likely to want to take on a robust case management role.
The redemption claim would accordingly be struck out as an abuse of process.
This is a lengthy judgment (225 paragraphs). It contains quite a bit of analysis about redemption claims although at times it does go a bit astray and confuses redemption claims with foreclosure (para 81). The immediate problem that SLF had was that its option agreement, entered into without the bank’s consent, never gave it priority over the mortgage, nor did it give it a sufficient interest as a mortgagor to seek a stay or suspension under s 36 Administration of Justice Act 1970. Although the bank accepted that if the option had been validly exercised (which was itself in issue) it would give SLF a sufficient interest in the equity of redemption to apply to redeem under s 91, the bank’s case was that holding this claim back amounted to an abuse of process.
The main points are about abuse of process in the context of mortgage proceedings, in failing to bring forward all claims at once or at least to advise the court about the prospect of other claims to enable the court to case manage them properly.Back to top