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Facility agreement

Relationship to legal charge

Rectification of register - power of sale

Cherry Tree Investments Ltd v Landmain Ltd
[2012] EWCA Civ 736

Summary

A facility agreement and legal charge are separate documents. It is not possible, as a matter of interpretation, to insert a clause into a legal charge from the facility agreement in order to extend the statutory power of sale.

Facts

A borrower (B) entered into a facility agreement with a lender (L) for a loan on the security of a legal charge in form CH1 over a property.

A clause of the facility agreement provided that the power of sale would become immediately exercisable on the execution of the facility agreement. This had the effect of varying the statutory power of sale under s 101 Law of Property Act 1925 which provided for the power of sale to become exercisable when the monies secured by the charge become due.

However, the legal charge did not refer to or incorporate the facility agreement, and only the legal charge was registered at HM Land Registry.

Shortly after, and without default on the part of B, L exercised the power of sale and sold the property to P, who applied to be registered as proprietor of the property at HM Land Registry.

B objected. P commenced proceedings against B for an order that it be registered as proprietor, and applied for summary judgment, contending that the statutory power of sale had been varied by the relevant clause of the facility agreement.

First instance

The judge held that the facility agreement and legal charge had been executed as part of a single transaction. Since the parties were mistaken in their belief that the legal charge had been effectively varied by the facility agreement, the charge should be read as if the variation to the statutory power of sale by the facility agreement had been incorporated into the charge. He therefore granted summary judgment in favour of P. B appealed to the Court of Appeal

Issues

The principle issue was whether the principles of interpretation would permit the charge to be interpreted so as to be modified by the facility agreement.

Decision

The Court of Appeal allowed the appeal (Arden LJ dissenting) and refused to interpret the charge as if it had been modified by the facility agreement.

The facility agreement and legal charge are separate documents. Section 101(3) Law of Property Act 1925 provides that a mortgage deed may vary or extend the statutory power of sale. Accordingly any variation of the statutory power of sale must be effected by the mortgage deed and not by some separate agreement.

The court considered Lord Hoffmann’s principles of interpretation in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. Whilst the relevant background of admissible evidence under those principles would have included the facility agreement, the contextual scene involved the registration of the legal charge, which was available for public inspection. The facility agreement was not. As Longmore LJ said:
    “The legal charge in the present case is not just an agreement made by two parties to the transaction who are themselves alone affected. It is a public document on a public register open to inspection and potentially to be relied on by third parties. I do not think that mistakes in such documents can be construed away by a process of construction of the kind envisaged…”
Further reference was made to s120 of the Land Registration Act 2002, which provides:
    (2) As between the parties to a disposition, the document kept by the registrar is to be taken-
      (a) to be correct, and
      (b) to contain all the material parts of the original document.
    (4) No party to the disposition is to be affected by any provision of the original document which is not contained in the document kept by the registrar.
To treat the registred charge as being modified by the facility agreement would fall foul of LRA 2002, s.120(2)(b).

Another issue related to the priority of a charge which had been “modified” under the rules of interpretation, then this charge will rank as from the date of its original registration. This would have the effect of making it binding e.g. on a subsequent chargee. However, another possible remedy where a mistake in a document had been made is to apply for an order to rectify the mistake.

The court pointed out that since the right to rectify is treated for the purposes of the Act as a property right under s 116, it will take effect in accordance with the priority provisions of the Act, rather than being fully retrospective. Lewison LJ:
    “In my judgment in the particular contextual scene of a charge intended to be completed by registration at HM Land Registry, the insertion of the missing clause ought to have been effected (if at all) by way of a properly pleaded and proved claim for rectification.”
Comment

This case raises three important points. First, a legal charge must either expressly include all the relevant terms and conditions (including any extension to the statutory power of sale) or expressly incorporate the terms and conditions. Here it is interesting to note that standard form CH1 was used.

Secondly, in relation to interpretation, there is a limit to corrective interpretation in Investors Compensation Scheme v West Bromwich Building Society. Here, Lewison and Longmore LJJ refused to interpret the legal charge so as to "correct" it so as to incorporate the terms of the facility agreement because to do so would, as a matter of principle, interfere with the scheme of priority under the Land Registration Act 2002.

Finally, the court pointed out that it was open to P to amend their claim by seeking rectification. However, it would appear that even if B remained on the register, subject to the charge, since P had paid L, P would be entitled to be subrogated to L’s rights under the charge.


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