Cherry Tree Investments Ltd v Landmain Ltd  EWCA Civ 736 (31 May 2012)
Solicitor Mr Anis Waiz continues his critical review of recent case law. Here we look at a very important case arising from the sale of a property by a Lender under its power of sale. An everyday occurrence.
However this case raised a novel issue as to whether the charge and a facility agreement (which varied the statutory power of sale) could be interpreted together (“the Interpretation Issue”). This case raises a very interesting point as to the effect of interpretation and rectification.
As is commonplace the facility was not registered at the Land Registry. The issues in this case are set out below. However given the lengthy Judgment this review is limited to the Interpretation Issue.
Landmain was the registered owner of a property in London and borrower under the terms of a charge with a Lender. The lender in exercise of its rights under the charge (and facility agreement) sold the property to Cherry Tree. The charge, excluding the facility agreement, was registered at HM Land Registry.
Landmain alleged that no sum secured by the charge had become due under the terms agreed for repayment before the sale to Cherry Tree. However that was not the dispute before the Court Of Appeal.
The property was transferred to Cherry Tree in 2011. However, when it applied to the Land Registry to register this transfer, it was unable to obtain registration due to objection by Landmain. Cherry Tree brought the proceedings seeking an order of the court for registration of its name as owner at the Land Registry.
The validity of the sale to Cherry Tree depended upon the facility agreement varying or extended the statutory power of sale. Landmain alleged the statutory power of sale applied without any variation because it had not been varied or extended by the charge itself.
The statutory power of sale
A statutory power of sale is one of a lenders rights. Section 101 of the Law of Property Act 1925 ("the 1925 Act") provides that in the case of such a mortgage or charge the mortgagee has certain powers by implication of law. They do not need to be set out in the charge itself. They include a power of sale. However the power of sale is exercisable only once the mortgage monies have become due in accordance with the terms agreed for repayment.
Section 101(3) of the 1925 Act provides that the mortgage deed may vary or extend the statutory power of sale. Section 101(3) states:
"(3) The provisions of this Act relating to the foregoing powers, comprised either in this section, or in any other section regulating the exercise of those powers, may be varied or extended by the mortgage deed, and, as so varied or extended, shall, as far as may be, operate in the like manner and with all the like incidents, effects, and consequences, as if such variations or extensions were contained in this Act."
Thus any variation or extension of the statutory power of sale must be effected by the mortgage deed or charge itself and not by some separate agreement between the parties.
However, clause 12.3 of the facility agreement provided that the Lender’s power of sale arose upon execution and was exercisable after execution. Accordingly
Cherry Tree sought to argue the statutory power of sale was varied by clause 12.3, notwithstanding that clause was not contained in the charge.
Clearly as a further point by virtue of section 104(2) of the 1925 Act, Cherry Tree, as a purchaser from a lender selling under the statutory power of sale, had no obligation to see whether the statutory power of sale had been properly exercised.
There were three issues before the Court of Appeal:
1 First the Interpretation Issue. This was a novel point as to whether the charge and the facility agreement could be interpreted together given the charge alone was registered at the Land Registry pursuant to the Land Registration Act 2002 ("the 2002 Act"). Thus the facility agreement was "extrinsic" evidence given it was not incorporated into the charge.
2 If the answer to the first question was yes, could the court correct by interpretation the mistake made by the parties in not varying the statutory power of sale in the charge itself. For the sake of brevity the reader is referred to the Judgment on this and point 3 below.
3 If the answer to the first and/or second question was no, could the charge and facility agreement constitute a single document and thus the requirement for any variation of the statutory power of sale to be contained in the charge.
The background to the Loan to Landmain and the alleged default by Landmain is set out in the Judgment and the reader is referred to the same. Curiously the charge in the Land Registry standard form CH1 did not contain the amounts secured by the charge and the dates when they became repayable.
Again the reader is referred to the Judgment for the background to the proceedings and the decision of the trial Judge. Cherry Tree obtained summary judgment on its claim. Landmain appealed from the judge’s order.
The Interpretation Issue
By way of general observation the Court of Appeal noted some general points as set out in the speech of Lord Hoffmann in Investors’ Compensation Scheme Ltd v West Bromwich BS  1 WLR 896 ("ICS"). In that case Lord Hoffmann set out five principles.
Germane to the Appeal was that interpretation was not just about finding the ordinary or natural meaning of words in a document. The court had to find the meaning that the document would convey to a reasonable person having the background known or available to the parties. Accordingly the court will in general have to have regard to the background. The matrix of facts.
Here the facility agreement formed part of the background against which the charge would be construed by the court. The Court of Appeal had to consider whether the charge and the facility agreement could be interpreted together given only the charge was registered at the Land Registry pursuant to the 2002 Act
The starting point was section 58 of the 2002 Act which provides that registration is conclusive as to title even if a disposition would not otherwise have been effective, i.e. because it was void. There are exceptions as to the register which is not material here.
Counsel for Landmain argued that under the ICS principles, a document is to be interpreted against the admissible background facts that were known or ought reasonably to have been known by the parties. That included the execution of the contemporaneous facility agreement. However, this was not the usual case since the register is open to inspection by members of the public. In those circumstances extrinsic evidence as to the background was inadmissible as an aid to the interpretation of the charge. Therefore the judge should not have interpreted the charge as incorporating clause 12.3 of the facility agreement.
Counsel for Cherry Tree, argued that it is irrelevant the register is open to inspection by the public as the charge is only capable of being enforced as between the parties. Both Landmain and the Lender knew that the power of sale had been varied by the facility agreement and therefore there was no prejudice to any relevant third party in admitting the terms of facility agreement as an aid to interpretation of the charge.
1 Lady Justice Arden with whom Lord Justice Longmore and Lord Justice Lewison dissented (set out 6 reasons in her judgment) and held that registration at the land registry did not prevent the court from using extrinsic material as an aid to interpretation of the charge provided the court was satisfied that the interpretation would not prejudicially affect the rights of any third party. The reader is referred to Lady Justice Arden’s judgment for further details.
2 Of note is the fourth reason namely that the 2002 Act recognises registered documents may be rectified. Rectification would involve the use of extrinsic material and thus there was no reason why the 2002 Act should allow rectification of a document by order of the court, but not corrective interpretation by a court, if there was no third party who would be prejudicially affected. Accordingly Lady Justice Arden dismissed the appeal on the Interpretation Issue.
3 Lord Justice Lewison agreed with Arden LJ that the registered charge and the facility letter were not one document.
4 As to the Interpretation Issue Lord Justice Lewison held the question is what does the registered charge mean? He noted “Whatever it means, it has always meant what it means. A contract cannot mean one thing when it is made and another thing following court proceedings. Nor, in my judgment, can it mean one thing to some people (e.g. the parties to it) and another thing to others who might be affected by it”
5 Lord Justice Lewison then considered the 2002 Act and noted section 66 of the 2002 Act provides that most documents kept by the registrar relating to an application to the registrar or referred to in the register are open to public inspection and copying. The facility agreement was not one of those documents. Here the parties used a standard form of charge CH1 which was not compulsory. Given that the CH1 was a public document the parties may choose which parts of their bargain they choose to put into the public domain and which parts they wish to keep private. A party may choose to incorporate terms by reference to another document but that was a matter for them. If they do incorporate the terms of another document by reference, that will be apparent on the face of the document that the Registrar has retained and which anyone may inspect.
6 There was a clear difference between the effect of interpretation and rectification. Accordingly, it was necessary to consider the power to rectify the register. The reader is referred to the judgment and Schedule 4 to the 2002 Act. However it was noted that the insertion of the missing clause by way of interpretation rather than by way of rectification would bypass the carefully calibrated rules of priority which are an essential feature of the modern system of land registration.
7 Lord Justice Lewison gave a number of examples. If the missing clause was inserted by means of interpretation, then the "interpreted" charge would rank in priority from the date of its original registration. Thus there was nothing on the register to rectify, and consequently the protective provisions of paragraph 8 of Schedule 4 would not apply.
8 As to the Interpretation Issue Lord Justice Lewison held In my judgment 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. There was no such claim pleaded in the present case, and no attempt to prove one. In my judgment therefore the case should not have been decided summarily as a pure question of interpretation of the charge.
9 In respectful disagreement with Arden LJ, Lord Justice Lewison held to treat the registered charge as including the extended power of sale that was included in the facility letter alone was a step too far. The Appeal should be allowed.
10 Lord Justice Longmore noted that as to any mistake to include the power of sale into the document which charged the property with the obligation to repay whatever sums were due when the power of sale is exercised, that was classic rectification territory. The legal charge in the present case was not just an agreement made by two parties to the transaction who are themselves alone affected. It was a public document on a public register open to inspection and potentially to be relied on by third parties. “I do not think that mistakes in such documents can be construed away by a process of construction of the kind envisaged in Lord Hoffmann’s principle” (ICS).
11 Lord Justice Longmore held that the public nature of the charge which fell to be construed in this case must militate against the construction for which Cherry Tree contends. The appeal should be allowed, the judge’s order be set aside and, in the light of the agreement recorded in paragraph 1 of the judge’s judgment, the claim be dismissed save Cherry Tree seek to amend their particulars of claim by adding a claim for rectification.
It is on first reading a difficult decision to reconcile with section 104(2) of the 1925 Act. However what this decision clearly highlights to any Lender and indeed conveyance and litigator is the need for careful drafting of a legal charge and the subtleness of interpretation as against rectification.
The last words go to Lord Justice Lewison;
Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include. In his well-known article My kingdom for a horse: the meaning of words (2005) LQR 577 Lord Nicholls of Birkenhead wrote:
"The flexible approach, I add, would not render the remedy of rectification redundant. If by oversight parties omit an agreed clause from their contract, interpretation would not provide a remedy. The words included in the contract could not be interpreted to include the meaning intended to be conveyed by the clause which, accidentally, had been omitted."