By section 101 of the Law of Property Act 1925 (“the Act”), a mortgagee has certain powers by implication of law, which do not need to be set out in the mortgage deed itself. One of the powers includes a power of sale. This power is exercisable only once the mortgage monies have become due in accordance with the terms agreed for repayment. It is common, however, for a lender to vary or extend the statutory power of sale to ensure that it is exercisable on execution of the charge rather than merely when the monies are due. In this case although it was agreed in the facility letter that the statutory power should be so amended, by mistake, this provision was omitted from the charge itself.
Landmain Ltd (“Landmain”) obtained a loan of £635,000 from a finance company Dancastle Associates Ltd (“Dancastle”) secured by way a charge on a property. Disputes about repayment arose; Dancastle alleged that there was a default which Landmain denied. The facility agreement provided that Dancastle’s power of sale arose on execution of the charge. Pursuant to that power Dancastle sold the property to Cherry Tree Investments Ltd (“Cherry Tree”) who now wished to be registered as the proprietor. The charge which was in the Land Registry form CH1, however, omitted both the details of the amount to be secured by the charge and a provision that the lender was entitled to exercise a power of sale at a time other than a time “when the mortgage money has become due” despite its inclusion in the facility agreement.
In this case, Longmore LJ pointed out that following the case of Chartbrook Ltd v Persimmon Homes Ltd [2009], it has become fashionable to say that, if it can be seen, from the background of the contract embodied in a document, that the parties have made a mistake in the language in which they have expressed their agreement, that mistake can be corrected as a matter of construction of the document rather than by rectification. This stems from the fifth principle of construction when considering interpretation as set out in the speech of Lord Hoffman in Investors’ Compensation Scheme Ltd v West Bromwich BS [1998]. The fifth rule is that words should be given their natural and ordinary meaning reflecting the common sense proposition that we do not easily accept that people have made linguistic mistakes particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. The court has to find the meaning that the document would convey to a reasonable person having the background known or available to the parties, which meant that the approach was contextual and purely objective.
Cherry Tree, the purchasers, argued that the background to the charge showed that the parties agreed that the power of sale could be exercised at any time after execution of the charge. It must follow that the parties intended to express that agreement in the charge because they must have intended that agreement to be effective and their failure to express that agreement in the charge was a mistake so that at any time after execution of the charge, a power of sale could arise.
By majority, with a dissenting Judge, the Court of Appeal held that Cherry Tree’s line of argument went too far. Longmore LJ stated that this argument relied too heavily on the contextual scene of a charge. The legal charge is not just an agreement made by two parties; it is a public document on a public register open to inspection and potentially to be relied on by third parties. This is not the sort of case where mistakes in such documents can be construed using a process envisaged by Lord Hoffman’s principle.
Lewinson LJ pointed out that this case is unlike Investors Compensation Scheme or Chartbrook where the language under consideration was difficult to interpret or did not make sense. In the particular contextual scene of a charge intended to be completed by registration at HM Land Registry, the insertion of the missing clause ought to have been effected (if at all) by way of a properly pleaded and proved claim for rectification rather than as a claim for mistake which can be corrected as a matter of construction of the document.
Lady Justice Arden meanwhile disagreed. In her judgment the judge was right to treat the facility letter as part of the admissible background against which the charge was to be interpreted, notwithstanding the charge was registered at HM Land Registry and the facility was not so registered.
Notwithstanding her dissenting judgment the result was that Cherry Tree could not be registered as the proprietor of the property. On the face, this decision seems unfair on Cherry Tree, but the implication of the judgment is that Cherry Tree could apply for rectification although any rectification would be from the date of any order or agreement to that effect. In any event Cherry Tree having paid Dancastle would be subrogated to Dancastle’s rights under the charge and so it would have protection in that regard. It is apparent from this case that where a standard form is being used such as the HM Land Registry charge that careful attention should be paid to ensure that all the terms provided in any facility letter are reflected in the charge and that any important rights that a lender wishes to reserve are also included so as to prevent any later difficulties from arising.
Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736