Where the mortgage lender on a development loan went into administration and was unable to continue funding the works, the borrower could not prevent enforcement of the mortgage on the grounds that the lender’s default had caused losses to the borrower which exceeded the amount of the loan.
In 2008, Mr Spencer Day (“D”) mortgaged a property in Effingham to Standard Chartered (“SC”) to secure a loan of £3m. In 2010, D obtained planning permission to redevelop the property as a six bedroom house. The enhanced value enabled D in 2011 to obtain a development facility of £12m from Tiuta (“T”) of which £6m was made available on completion as an initial drawdown. Of that sum, £3m was applied to redeem SC’s mortgage, and £3m was paid to D. The development work commenced and a further £1.87m was advanced to cover the costs. In July 2012, T went into administration and no further funds were advanced. D was therefore unable to complete the development, which in turn meant that D could not repay T’s loan on the repayment date. T’s administrators appointed receivers to sell the property. D issued proceedings against T, claiming damages for the losses suffered by D by reason of T’s breach of the loan terms, and claimed that those damages could be set-off against the mortgage debt. D also claimed that he had been induced to enter into the loan by T’s fraudulent misrepresentations about its financial condition, and that the mortgage was therefore invalid. T applied to strike out the set-off claim.
T’s application succeeded and D’s set-off claim was struck out. Even if D was eventually to succeed in his damages claim against T for breach of the loan agreement, he only had a claim for unliquidated damages at the present time. It was well-established law that unliquidated damages cannot be set-off against a mortgage debt.
Were D to eventually succeed in setting aside T’s mortgage on the grounds of T’s fraudulent misrepresentation, T would nevertheless be subrogated to SC’s earlier mortgage, to the extent of the part of T’s loan which had been used to redeem SC’s £3m loan. This type of subrogation only applies if the new mortgagee does not obtain the mortgage for which it had bargained. The Court of Appeal held that D’s attack on the validity of T’s mortgage was sufficient to satisfy the test that the mortgage was not what T had bargained for.
D was still able to pursue his damages claim against T, but could not prevent the sale of the property.
"Another case which demonstrates the advantage of taking full mortgage security.
It is not clear whether D intends to pursue his damages claim. The guide price of the (still uncompleted) property is only £2.5m, all of which will belong to T (or, because in this case T had granted a sub-charge to its parent company, to this sub-chargee). If any damages are eventually awarded to D, they will probably rank only as an unsecured claim in T’s administration.
Some may regard D’s inability to set-off his unliquidated damages claim as unjust. It is, however, based on well-established principle."