Restraining Receivers from Completion: Lexham Securities Limited & Anor v Earlsfort Capital Partners Limited & Ors  EWHC 909 (Ch)
25th April 2023
In an important case determining the extent of fetters to the equitable right to redemption, the Court demonstrated that it did have jurisdiction to award an injunction preventing completion of a contract for sale entered into on behalf of mortgagor by receivers.
In 2017, the Claimants entered into a loan agreement with the Third Defendant for a sum of over £20 million. This loan was secured by registered charges over two of the Claimants’ properties, namely a hotel located at 1 Barkston Gardens, London SW5 (‘the Hostel’), and a hostel located at 19-22 Courtfield Gardens, London SW5 (‘the Lexham Hotel’) (together ‘the Properties’).
The Claimants defaulted on the loan agreement due to global factors, and the Third Defendant appointed the First and Second Defendant to act as fixed charge receivers over the Properties (‘the Receivers’).
The Receivers entered into a contract for sale of the Hostel for c.£22.5M (‘the Contract’). By this time the redemption figure on the loan was in excess of £33 million. The Receivers were coy about sharing the Contract with the Claimants on the basis of purported commercial confidentiality, and as at the date of the Claimant’s application the Claimants were unaware of the proposed completion date (but had guessed it to be the following day).
As a result, the Claimants made an urgent out of hours application for an interim injunction restraining the Receivers from completing the Contract, to enable them to repay the loan and retain ownership of the Hostel.
This case concerns the extent of clogs and fetters on the equitable right to redemption. It is long established that where a mortgagee using their power of sale conveys the subject property, the equity of redemption is extinguished. Historically it has also been held that the equity of redemption is temporarily suspended between the making of a contract for sale by the mortgagee and the completion of that contract (see Property and Bloodstock Ltd v Emerton  Ch. 94).
The position is different where the contract for sale is entered into by a receiver. Although the receiver is appointed by the mortgagee, the receiver acts as agent for the owner/mortgagor, not the mortgagee. That is invariably the result of the terms of the original loan agreement; entered into at a point in time where the mortgagee hopes to meet the terms of the loan. As a result, in National Westminster Bank Plc v Hunter [ EWHC 3170 (Ch) (‘Hunter’), Morgan J determined that the equity of redemption (between the mortgagee and mortgagor) is not extinguished in cases where the receiver had entered into a contract for sale (at ) on the mortgagor’s behalf. Notwithstanding, on the facts Morgan J held that the receivers had entered into a valid contract – through an auction in that case – as the mortgagor’s agent: It would not be appropriate for the Court to intervene and upset the contract made through the auction.
A similar conclusion was reached by David Lock QC, sitting as a deputy High Court Judge, in Buwule v MT Finance Ltd  EWHC 1725 (QB) (‘Buwule’). The receivers in that case had, again, sold the subject property at auction. The claimant alleged that the property had been sold at an undervalue and sought to restrain the sale accordingly. David Lock QC refused to do so, on the basis that if the sale were to be restrained by the court, the claimant would find himself in breach of the terms of a contract which had been entered into lawfully on his behalf by his agents. The Court concluded that there was no proper justification for preventing a sale going ahead where it is “an arm’s length sale [that] has been completed in an entirely lawful manner to an unconnected purchaser” (at ).
In the present case, the Court did not have the Contract. On the facts Sir Anthony Mann determined that there was “a marginal case for saying that [the Claimants] might have an opportunity to redeem [the following day]” (at ). The Court further concluded that “there is just about a case for saying that the contract may not be a bar to that redemption, or may not be as complete a bar as one would think” (at ). Hence the Court granted an injunction restraining the completion of the Contract, albeit it only until noon the following day (at ). The next day the parties agreed to continue the injunction for a further period.
It appears key to Sir Anthony Mann’s judgment that the Court did not have a copy of the Contract in dispute in this matter, and/or any other collateral agreements that might exist between the Defendants. The Court was therefore unable to determine whether the Contract was a bar to redemption, in the sense that it was final and binding between the owner and purchaser; whether there was a term “which would leave it open to the receivers to call it off in the event that a better redemption offer was made” (at ). Indeed, the Court held that the Receivers had been “unjustifiably coy in disclosing” information about the Contract (at ). The Court was also critical of the Defendants failure to provide information as to when the sale was completing (at ).
This case is therefore good authority for the proposition that a contract for sale entered into by receivers is not an automatic clog or fetter to the equity of redemption. This fits neatly with the previous authorities of Hunter and Buwule discussed above; In neither case did the Court determine it had no discretion, merely that it would not exercise its discretion to prevent a lawful arms-length contract for sale.
There are clearly circumstances where it would be appropriate to award a more permanent injunction. For example, if the contract was not an arm’s length contract, or where there was a unilateral entitlement to avoid or discharge the contract in question. Although such examples can only be inferred from Sir Anthony Mann’s judgment and no conclusion was reached at this stage.
The successful applicant was represented by Marc Glover, who was later joined by Hugh Rowan.
A copy of the Judgement can be found here, and a link to the Judgment on Westlaw here.
Team: Marc Glover
, Hugh Rowan
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