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Court of Appeal highlights dangers to lenders of choosing to enforce only part of a security

Lenders must be careful to ensure that they do not lose the right to enforce their remaining rights under a security agreement when they choose to enforce only part of it, the Court of Appeal has warned.

In a recent judgment the Court upheld the High Court's ruling that Commercial First Business Ltd (CFB) was prevented from taking possession of a mortgaged farmhouse. The case involved two separate mortgages, each of which contained a cross-security provision. However, because CFB had obtained separate possession orders and separate judgments in 2007, in each case without reference to the other property, and had not tried to reassert the cross-security rights until 2012, the High Court held that it was 'estopped' from doing so.

"This case shows the importance for lenders of planning their enforcement strategy in advance, and also the need for lenders that wish to delay enforcing some part of their rights to spell out to the borrowers that any delay in enforcement should not be taken as an abandonment of rights," said banking litigation expert Michael Hawthorne of Pinsent Masons, the law firm behind Out-Law.com.

Jonathan Munday and his mother, Freda, owned a farmhouse and some cottages. In 2006 they took out two loans with CFB. One of these was secured over the farmhouse and the other was secured over the cottages. Each security contained an 'all monies' clause, which usually means that any security covers all amounts that a debtor owes to a creditor under any arrangements, regardless of how they arise.

When the loans fell into arrears CFB began separate proceedings for each of them and obtained separate possession orders, money judgments and warrants for possession on each. These warrants were later suspended to give the Mundays another chance to repay. When they defaulted again CFB obtained possession of the cottages. In 2012 CFB sought a charging order over the farmhouse to secure a money judgment which they had obtained for the cottages loan. They succeeded in the County Court, but this was later set aside by the High Court.

Previous case law states that once a judgment is obtained for the amount due under a loan agreement including interest then that contract merges in the judgment so that the lender can no longer pursue either the principal or any continuing interest. Instead the lender must enforce the previous judgment with statutory interest. In this case CFB argued that that the 'all monies' clause entitled it to pursue the security over the farmhouse. Both the High Court and Court of Appeal disagreed.

"The court in [these] proceedings is limited to considering the amount of the money judgment obtained in respect of the mortgage over that property," said Lord Justice Patten.

"These problems could have been avoided by CFB obtaining an order for possession but not a money judgment for the amount of the outstanding mortgage in the sum which it did. It could then have exercised its power of sale as a mortgagee in possession to recover what was in fact contractually due under the charge. CFB may now have other remedies in respect of its judgment for the cottages loan including possibly an application for a charging order over the farmhouse. But the judge was right in my view to hold that the amount due under the cottages loan judgment ought not to be taken into account on this application," he said.

However, the judge said that interest accruing after the order was granted against the cottages remained secured against both properties. He referred the question of whether CFB could enforce its security against the farmhouse in respect of the interest back to the County Court for consideration.

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