Lender is estopped from using its all monies clause – Commercial First Business v Munday

22nd October 2014

A cautionary tale for lenders to take care that their rights under an “all monies” clause are not lost when enforcement action is taken against individual security in separate actions.

Commercial First Business Ltd v Munday & Anor [2014] EWCA 1296

The Court of Appeal has prevented a lender from executing a warrant of possession to recover monies secured against one property by relying on an ‘all monies’ clause in a charge the same borrowers had executed against another property, because the lender had already obtained separate possession orders and money judgments in respect of the loans against each property.

Facts

In 2006, the borrower borrowed the sum of around £1.3 million (the Farmhouse Loan) on the security of a farmhouse (the Farmhouse) and, by a separate loan agreement, a further £1.07 million (the Barn Loan) secured on some adjoining barns (to be converted into holiday cottages) (the Barns). These loans were intended to re-finance existing borrowings and separate charges were executed in respect of each loan, both including the following ‘all monies’ clause:

“The payment and discharge of (i) all monies now or at any future time due to [the lender] from [the borrower] under each and every loan agreement, now or at any time made between the lender and the borrower, on the [lender’s] general lending terms and conditions.”

A year later there were arrears in respect of both loans and the lender commenced separate proceedings for possession and money judgment in respect of both properties. Separate claim forms and particulars of claim were issued in respect of each loan as secured against the Farmhouse and the Barns individually.

In November 2007 two possession orders in respect of the Farmhouse and the Barns were granted, together with money judgments for £1.4 million and £1.06 million respectively. In April 2008 warrants of possession for the Farmhouse and the Barns were suspended on terms that the global amount of the arrears be paid by the borrower in monthly instalments.

In September 2008, some of the farm land that was secured by the Farmhouse Loan was sold thereby reducing the amount of the loan secured on that property. After a few further instances of arrears and subsequent reductions, by October 2009 the Farmhouse Loan was reduced to about £116,000. However, the borrower also failed to pay the instalments on the Barns Loan and so the lender obtained possession of the Barns in May 2009, following which there was a dispute between the two parties and delay in transforming them into holiday cottages.

In September 2011 the lender sought to obtain a charging order over the Farmhouse to secure the money judgment obtained for the Barns Loan in order to secure the shortfall (the amount outstanding for the Barns was £1.3 million). This application was opposed by the borrower on the basis of their counterclaim for lost rental income due to the delay by the lender in developing the barns and the lender eventually abandoned the application. Instead, the lender claimed that the all monies clause in the Farmhouse loan gave it the benefit of that security for both mortgage debts and therefore issued a warrant for possession of the Farmhouse.

The borrower applied to the County Court to set aside or suspend the warrant of execution. The borrower argued that it had never been advised by the lender or anyone else that the all monies clause in the two charges was intended to provide security for both loans and that this was never the intention. The borrower had deliberately structured the borrowing as two separate loans, each with their own independent security, and would not have agreed to the home standing as security for a start-up business in the form of the barn conversions. The borrower advanced this argument in various guises:

• an estoppel by convention – that there was a shared common understanding between the parties (that the two loans and their respective security were entirely separate), conveyed to the borrower by the lender, which the borrower relied upon to its detriment, sufficient to make it unjust for the lender to assert the true legal position
• a procedural estoppel/ estoppel of causes of action
• a collateral contract between the parties arose which prevented the lender from enforcing the Farmhouse charge as security for the Barns Loan.
• the true construction of the all monies clause in the Farmhouse Loan did not extend to cover the Barns Loan

By the time the matter came before the Court of Appeal, the borrower had been successful in the first argument, estoppel by convention, and the warrant for possession had been set aside without further consideration of the other three arguments.

Court of Appeal decision

In his leading judgment in the Court of Appeal, Lord Justice Patten, disagreed with the lower court and held that the borrower had failed to satisfy the requirements of an estoppel by convention. Case law dictated that it was not sufficient to show that both parties shared the same view about the effect of the relevant contract/loan documentation, but it must also be demonstrated that the lender had some responsibility for conveying that understanding of its effect to the borrower in the expectation that it would be relied upon. That was not the case here.

Having rejected the borrower’s argument of estoppel by convention, Patten LJ proceeded to consider a procedural estoppel.

Once a judgment is obtained for the amount due under a loan agreement, the loan contract merges in the judgment so that the lender no longer has a cause of action in contract for either the principal or any continuing interest. His remedy is to seek execution of the judgment with statutory interest on the judgment until payment. For this reason, mortgages often provide that the covenant to pay continuing interest does not merge in the judgment for the principal due: see Director General of Fair Trading v First National Bank plc [2001] UKHL 52 at [3]-[4].

In this case, Patten LJ considered that the lender had sought and obtained judgment for the outstanding mortgage on the Farmhouse in the amount for the then balance of the Farmhouse Loan. They also sought to obtain judgment for the Barns Loan in another set of proceedings. Their causes of action for the recovery of these two loans and accrued interest were then merged in their respective judgments, preventing the lender from seeking to recover the balance of the Barns Loan in any new proceedings.

The lender could have avoided this by obtaining orders for possession, without obtaining a money judgment, for the amount of the outstanding mortgage. It could than have exercised its power of sale as a mortgagee in possession to recover what was in fact contractually due under the charge. In essence the fact that the lender had decided to prepare distinct possession proceedings linking each of the loans to a separate charge meant that the cause of action had merged into the earlier proceedings. It was now only open to the lender to treat the Farmhouse as security for the Farmhouse and the Barn as security for the Barn loan.

Interest

Patten LJ did say that, although the lender was limited in the amount of the farmhouse judgment in relation to pre-judgment arrears of interest, it was not so limited in respect of continuing interest, which did not merge with the two judgments obtained and therefore the lender was not estopped from using the all monies clause in the farmhouse charge to recover the interest on both loans which had continued to accrue post-judgment.

Patten LJ observed that the all monies clause in the Farmhouse Loan was an “absolutely standard form,” “commonly found in mortgages of this kind” and not the subject of negotiation between the parties. He did not consider it sufficient for the borrower to argue that because it was not advised on its potential effect the clause should not be given anything other than its ordinary and established meaning. Thus he concluded that the all monies clause extended to all the borrower’s liabilities to the lender under both loans, including the interest.  However, Patten LJ conceded that the lower court had not been required to analyse sufficiently the last argument – that a collateral contract arose to the effect that the Farmhouse charge would not stand as security for the Barns Loan. The issues of formation of that contract – the offer, acceptance and consideration – had not been adequately explored and so Patten LJ was obliged to remit the contract issue for determination by the County Court.

In summary, the Court of Appeal held that the lender was prevented by cause of action estoppel from relying on the Farmhouse charge as security for the Barns Loan, but the issue in relation to the post-judgment interest, not estopped by the loan judgments, should be remitted to the County Court for further consideration. The Court suspended the execution of the warrant of possession until further order in the County Court proceedings.

Comment

This case is important to lenders when considering what type of enforcement action to take in cases of multiple loans and security with the same borrower. A cause of action against some of the relevant security may well be merged with a judgment sum, thereby preventing the lender relying on an ‘all monies’ clause which would have given it a right of recovery for both of the loans against the security as a whole.