The Court of Appeal has upheld the vesting of a lease in a mortgagee, where the lease was disclaimed by the crown following dissolution of a limited company borrower

This is a decision that is relevant to lenders who enter into mortgages with more than one borrower where the sole registered proprietor of the mortgaged property is a limited company. In particular, the judgment reaffirms the court’s commitment in cases concerning applications for vesting orders to only exercise its discretion if the legal criteria are strictly met. In particular, these criteria appear unlikely to be met by a joint borrower who applies for an order but is not registered on the legal title to the property simply for reasons of fairness.

The judgment also acts as a warning to shareholders who fail to apply to reinstate a dissolved company to the register within the six-year time period.

Background

In 2007 Frinton Limited, which was beneficially owned by Mr Leon (who was the sole shareholder and also a director until 2005), became the assignee of a long lease of a flat in West London valued at £800,000-£1,000,000 (the Lease).

The Lease was substituted as security in place of another property under a mortgage deed dated 21 October 2002 (the Mortgage). The Mortgage was executed by Frinton as mortgagor, Mr Leon as ‘co-mortgagor’ and Kensington Mortgage Company (previously GE Money) and secured a £472,500 loan made to Frinton and Mr Leon.

The Mortgage and Mortgage Conditions provided that:

  1. Frinton and Mr Leon charged any right or interest that they had in the Lease; and
  2. Frinton and Mr Leon (described as co-mortgagors) were both liable to comply with the terms of the Lease.

In 2009, Frinton was dissolved because of failure to comply with statutory filing requirements. The Lease subsequently vested in the Crown as bona vacantia. Mr Leon, for reasons unclear, made no application to restore Frinton to Companies House in the requisite six year period. The Crown later disclaimed the Lease in 2016.

The proceedings

In 2017, Mr Leon sought a vesting order of the Lease on the basis he believed he could satisfy two tests set out in section 1017(1)-(3) of the Companies Act 2006 (the Act).

The Act provides that a court has discretion to make an order vesting a property in a person “entitled to” disclaimed property if they claim an interest in it. The Act also allows an order to be made if a person remains under a liability following a disclaimer of property by the Crown where the court considers it would be just to do so for the purpose of compensating that person for that liability.

At first instance, the court made a vesting order in Mr Leon’s favour. However, the freeholder (Westminster) appealed and the High Court overturned the decision and vested the Lease in Kensington. Mr Leon, who stood to become the proprietor of a valuable Lease if a vesting order was made in his favour, appealed to the Court of Appeal.

Success would have seen Mr Leon acquire equity in the Lease of between £370,000 and £570,000.

Grounds of Appeal

Mr Leon sought to appeal on the basis that:

  1. He had a sufficient interest for the Lease to be vested in him; namely that he was a co-mortgagor with the right to redeem the Mortgage and therefore ‘entitled to’ the Property for the purposes of the Companies Act test for a vesting order; or
  2. He remained liable under the Lease by virtue of the Mortgage Conditions, which required Mr Leon to keep the terms of the Lease in the same way as Frinton and was unaffected by the Crown disclaiming the property. Therefore, it would be just to compensate him for that liability with a vesting order under the alternative Companies Act test for a vesting order.

Accordingly, he submitted that the High Court decision vesting the Lease in Kensington should be reversed.

The Court of Appeal’s decision

The court rejected both grounds and upheld the previous High Court decision that a vesting order be made in Kensington’s favour.

The court considered the following factors in considering Mr Leon was not “entitled to” the Property and was essentially merely a co-debtor rather than co-mortgagor:

  1. Mr Leon did not charge any interest or right he had in the Lease under the Mortgage and further did not content he had done so;
  2. Mr Leon had the right to redeem the Mortgage, but this would not mean he became the registered proprietor (this being distinct from the “equity of redemption”);
  3. A proprietary interest was not required to be “entitled to” the Lease, but the Court was unconvinced that essentially any financial interest effected by disclaiming of the Lease was sufficient to entitle him to a vesting order; and
  4. Mr Leon’s notional interest as beneficial owner was not relevant owing to Frinton being a separate legal person.

The court further considered it would also not be just to vest the Property in Mr Leon by way of compensation for his remaining liability under the Lease because:

  1. The reasons given by the Chief Master at first instance for vesting the Lease in Mr Leon in the first place did not satisfy the test that required compensation to be for the purpose of compensating a liability. The relationship between Mr Leon’s liability under the Lease and the benefit he would obtain from the Lease vesting in him was insufficient i.e. Mr Leon’s his liability would be far outweighed by the value of the property and would essentially be a windfall.
  2. It was not clear what Mr Leon would be being compensated for (him not being the owner of the Lease prior to the disclaimer) and the reasons given were instead based generally on what was “just”, which were not relevant to the test; and

The key points arising from the judgment are:

  1. Lenders who enter into mortgages with multiple borrowers where the sole registered proprietor of the security property is a limited company which is dissolved may be more certain about their security. If the Crown disclaims the security property, the threat to lender’s security from an application made by a joint borrower (who is not on the legal title to the property) for a vesting order appears reasonably low.
  2. The court did not provide an answer to the question of where surplus sale proceeds in these circumstances should be paid to. However, the court did indirectly accept that Mr Leon would instead be subrogated to Kensington’s rights if he did redeem the mortgage, allowing him to sell the Lease to recoup his monies. Therefore, even if the Lease vested in “co-mortgagor” such as Mr Leon, a mortgagee would remain entitled to have their charge redeemed in the property which was disposed of.
  3. The court will not exercise its discretion to vest disclaimed property in a person on merely the basis of what is “just”. Mortgagees can take comfort that the court will only vest disclaimed property in a person if they are being properly compensated for a liability, or are legally “entitled to” a disclaimed property.
  4. There are serious consequences for shareholders of companies with valuable assets that are dissolved, particularly if they fail to make an application to restore the company to Companies House within the 6 year period allowed for under the Companies Act 2006.