Borrower fails to prove lender's possession proceedings were for improper purposes.
In Co-operative Bank Plc v Phillips [21 August 2014], a borrower sought to recover costs of proceedings from its lender on an indemnity basis, because the lender, allegedly, brought the proceedings for a purpose beyond its powers.
Mr Phillips owned two residential properties, subject to charges in favour of Barclays. Second charges were created for the benefit of Co-operative Bank Plc to secure a loan from Co-op to a company of which Phillips was director (the Company). The charges provided that all costs and expenses incurred and all other money paid by Co-op in connection with the charges were recoverable from Phillips as a debt and were to be charged on the properties. The costs included those incurred in exercising any power under the charges.
Co-op demanded repayment from the Company of over £2 million which it failed to pay. There was negative equity in the properties even before considering Co-op's charges. Co-op brought possession proceedings. Phillips argued that they were an abuse of process, since Co-op would gain no legitimate commercial advantage from enforcing its charges, because of the negative equity. Phillips contended that the possession claims were for a collateral purpose to pressurise him to gain an unfair advantage in a wider dispute between him and Co-op.
The proceedings continued for over a year and costs mounted until in June 2014 Co-op discontinued its claims against Phillips. The Civil Procedure Rules provide that, unless the court orders otherwise, a claimant who discontinues is liable for the defendant's costs.
Co-op did not dispute its liability to pay Phillips' costs on the "standard basis", but Phillips argued the award should be on the wider "indemnity basis". To decide this, the High Court considered whether Co-op had exercised its powers for improper purposes. It held that Co-op did not claim possession for a collateral purpose.
Co-op's purpose was to put Phillips under pressure with a view to receiving payment of the sum secured by the charges. Such a purpose was not collateral, nor outside Co-op's powers as mortgagee. Obtaining repayment and enforcing the security are recognised by law as proper purposes for and being within the equitable constraints on exercising mortgagee's powers. This was the case whether the debt secured was owed by Phillips or the Company.
Proceedings by a mortgagee for possession of a charged property for the purpose of putting pressure on the borrower to pay towards the sums secured are not brought for a collateral purpose and, therefore, not an abuse of process. Co-op's proceedings fell into that category and on that basis costs would not be awarded against Co-op on an indemnity basis, merely standard.
Co-op was unable to recover its own costs of the proceedings and add them to the security. Based on case law, the Court held that Co-op was not entitled to recover any costs incurred which were unreasonable in amount or unreasonably incurred, even though the charges did not limit recovery in that way.
Phillips had to prove that the costs claimed were unreasonable, which he did. Co-op achieved nothing for itself from the proceedings, which it recognised by discontinuing them. The costs were, therefore, not reasonably incurred and were not recoverable. Co-op likewise could not recover its liability to pay Phillips' costs, nor did it have a right to set off its liability against Phillips' liabilities.