Summary

It would be an improper exercise of a mortgagee's power of sale if no part of his motive for exercising that power was to recover the debt secured by the mortgage. However, if a mortgagee had mixed motives for exercising that power and one of the motives was to recover the debt secured by the mortgage, his exercise of the power of sale would not be invalidated.

Facts

The claimants (M and B) brought an action against the defendants (X, F and T) in connection with the purported sale by F to T of a long lease of a partially completed penthouse development on the roof of a block of flats. M and B were subsidiaries of the same parent company. B owned the freehold of the block of flats and M was the leaseholder of one of the flats. B had granted X a long lease of the roof so that X could develop it. X granted F, its parent company, a first charge over the development lease. F was therefore the mortgagee of the development lease and X was the leaseholder. F had purported to sell the lease to T, a private individual who was interested in acquiring one of the penthouses. The parties had fallen into dispute, and the issues for determination centred on (i) the transfer of the development lease to T; (ii) the lease-back option contained in the original agreement between B and X; (iii) whether economic torts had been committed by X, F and T.

Held

(1) Two of the claimants' arguments were barred by issue estoppel. It was an abuse of process for the claimants to raise in the instant action arguments that F had no power of sale. However, it was not an abuse of process for the claimants to argue that the power of sale was in fact exercised for improper purposes. It would be an improper exercise of a mortgagee's power of sale if no part of his motive for exercising that power was to recover the debt secured by the mortgage. However, if a mortgagee had mixed motives for exercising that power and one of the motives was to recover the debt secured by the mortgage, his exercise of the power of sale would not be invalidated, Downsview Nominees Ltd v First City Corp Ltd (1993) 2 WLR 86 considered, and Nash v Eads (1880) 25 Sol J 95 and Belton v Bass Ratcliffe and Gretton Ltd (Unreported, December 1, 1921) applied. F had exercised its power of sale for a proper purpose and was not in breach of any equitable duty owed to M. Even if F had exercised its power of sale for an improper purpose, T would not have been affected by that impropriety as he had had no knowledge of F's motivation, Corbett v Halifax plc (2002) EWCA Civ 1849 , (2003) 1 WLR 964, Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (2001) UKHL 1 , (2003) 1 AC 469 and Strover v Harrington 2 WLR 572 considered. (2) The obligation to grant the sub-lease was linked to a failure to complete the development on time. The purpose behind the leaseback option was to ensure that if X did not develop on time it was not left in possession of the undeveloped roof space for the residue of the term of the lease. The leaseback option was not a security or a penalty. B had assigned the benefit of an agreement, which included the leaseback option to a creditor (N). N had then transferred the charge to F. The Law of Property Act 1925 s.114 did not operate to transfer the benefit of the leaseback option to F because s.114 did not apply to a transfer of a registered charge, Paragon Finance Plc v Pender (2005) EWCA Civ 760 , (2005) 1 WLR 3412 applied. Since there had been no express assignment by N to F of the benefit of the lease-back option, it did not pass to F. (3) F and X lacked the necessary intention to injure B and they believed that the agreements into which they had entered were lawful. T also lacked the necessary intention to injure. F's exercise of the power of sale was not tortious or, if otherwise tortious, any interference with a prior contract was justified.

Judgment for claimants in part.