The Legal Costs Secured by a Mortgage
30th July 2015
It is well-known that Nourse LJ in Parker-Tweedale v Dunbar Bank plc (No. 2)  Ch 26 identified three categories of legal costs that might be incurred by a mortgagee in relation to its security: the costs of proceedings between the mortgagee and the mortgagor or his surety; the costs of proceedings between the mortgagee and a third party who seeks to impugn the mortgagor’s title to the security property (and consequently the mortgagee’s security); and, thirdly, costs incurred by a mortgagee in defending a third party’s attack on its title to the mortgage, or on the enforcement or exercise of some right or power accruing to the mortgagee its mortgage.
Under the general law, a mortgagee is entitled to add its costs of the first two categories of litigation to its security, and to take them from the proceeds of sale. Absent some specific provision in the mortgage deed, however, a mortgagee is not entitled to add the third category of costs to its security. It is common, therefore, for mortgage deeds to include some general form of words providing that a mortgagee can add any and all costs that it may reasonably and properly incur to its security. How such general words should be construed was in issue in the recent case of Credit & Mercantile plc v Kaymuu Ltd  EWCA Civ 655.
Credit & Mercantile (C&M) was the registered legal proprietor of a charge over a property known as Dalhanna. Dalhanna was registered in the name of Kaymuu Ltd (‘Kaymuu’) and, after its purchase, Kaymuu had borrowed money from C&M, executing the charge over Dalhanna as security for the loan. C&M’s charge expressly secured, amongst other costs and expenses, the following:
“all costs moneys charges and expenses properly paid and all liabilities properly incurred by the Lender…(including legal costs charges and expenses ascertained as between solicitor and own client) on or in connection with or incidental to the Property and this Legal Charge and all expenses herein covenanted by the Mortgagor to be paid and in particular in connection with
investigating any matter in relation to the Property and/or considering enforcing or attempting to enforce the rights and powers of the Lender…hereunder or under the general law
doing or considering any other matter or thing whatsoever which the Lender…reasonably considers to be for the benefit of or preservation of or the more advantageous realisation of the Lender’s security“.
The substantive litigation concerned the claim of a third party, Mr Wishart, to be the sole beneficial owner of Dalhanna, and to be entitled to assert that beneficial ownership as an overriding interest in priority to C&M’s charge as a consequence of his actual and obvious occupation of Dalhanna at the time of the charge. The trial Judge found that Mr Wishart did indeed own Dalhanna beneficially, and that he was in actual occupation when C&M received its charge. However, applying the Brocklesby principle, the Judge nevertheless concluded that C&M’s charge took priority over Mr Wishart’s equity. (Click here to find out more about the Brocklesby principle.)
That being the substantive result, C&M then sought to take its legal costs of defending Mr Wishart’s claim from the proceeds of sale of Dalhanna. It argued that those costs were incurred in connection with “enforcing or attempting to enforce the rights and powers of the Lender” under the mortgage deed; and/or were directed to “the benefit of“, and “the…preservation of” and “the more advantageous realisation of” its security under the mortgage deed. The Judge, however, considered that the words of C&M’s charge were intended to do no more than to replicate the general law; he considered that provisions of this nature should be read restrictively, and that “clear words” were required to displace the general law that costs of the third category could not be added by a mortgagee to its security.
C&M’s appeal against that conclusion was successful. The Court of Appeal unanimously held that “Contrary to the view of the judge, there is nothing in Parker-Tweedale v Dunbar Bank Plc (No. 2)  Ch 26 which indicates that these provisions should not simply be read and given effect according to their natural meaning.” C&M’s charge was to be construed in accordance with the natural and straightforward meaning of the words used.
The Court of Appeal concluded that the costs of C&M’s defence of Mr Wishart’s claim were costs were incurred in connection with “enforcing or attempting to enforce the rights and powers of the Lender” under the mortgage deed; and/or were directed to “the benefit of“, and “the…preservation of” and “the more advantageous realisation of” its security under the mortgage deed. C&M was therefore entitled to take its costs of the trial (and of the appeals) from the proceeds of sale.
It had long been understood that a mortgage deed could, by general words, constitute security for the third category of costs identified by Nourse LJ in Parker-Tweedale v Dunbar Bank plc (No. 2)  Ch 26; Scott LJ had suggested as much in Gomba Holdings v Minories Finance  Ch 171, at 186F when making an aside on the likely effect of the general words “howsoever incurred” – but that aside had plainly been obiter. Credit & Mercantile plc v Kaymuu Ltd  EWCA Civ 655 brings welcome and binding clarity to this important and practical point.
Tim Polli successfully represented Credit & Mercantile at trial and, led by Philip Rainey QC, on appeal.
Team: Philip Rainey KC
, Timothy Polli KC
Expertise: Banking & Mortgages
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