Can a mortgagee in possession surrender a lease with the sole purpose of extinguishing a mortgagors' equity of redemption? The High Court answered with a definitive no in the recent case of Wilton Student Developments (Egerton) Limited v Kin Fan IP.
Kin Fan IP, an investor based in Hong Kong and the Respondent in this case (Kin Fan), purchased two student flats within a larger block from a developer off plan prior to completion, each on 999-year leases. The original developer fell into financial difficulties and a new company, Spectrum Buyers Limited (Spectrum) was formed to protect the investors, including Kin Fan who was one of the directors of Spectrum. Spectrum was granted a charge over the freehold of the block, took possession of the freehold as a mortgagee in possession and subsequently sold the freehold to Wilton Student Developments (Egerton) Limited (Wilton), the Appellant in this case, for £1. As a condition of the sale, the leaseholders were required to sell their leases to Wilton for a reduced sum or invest further towards the costs of the development.
Kin Fan entered into a loan agreement and a mortgage which granted charges over the flats in order to provide further funding for the development; however Kin Fan fell behind on repayments. The loan and mortgage were subsequently assigned to Cirrus Property Group Limited (Cirrus), a company closely connected to Wilton, which then proceeded to take possession of the flats as mortgagee in possession.
Rather than sell the flats and then account to Kin Fan for the balance of the sale proceeds once the total amount owing on the loan had been recovered, Cirrus entered into deeds of surrender in respect of each flat with Wilton (and it was not clear what if any consideration had been paid by Wilton to Cirrus in return for these). It then proceeded to grant new long leases over each flat, each of which had also been let out on assured shorthold tenancies.
The District Judge had found that the deeds of surrender were ineffective to extinguish Kin Fan's equity of redemption ie his right on repayment of the debt to recover the assets which were the subject of the mortgage. Wilton appealed.
Agreeing with the District Judge and dismissing the appeal, the High Court held that Cirrus had no power under the mortgage or otherwise to enter into the deeds of surrender and further it had entered into the deeds for an improper purpose which was to extinguish Kin Fan's equity rather than pay off the mortgage debt. It ordered that they be set aside in due course pending a further trial to determine the value of Kin Fan's equity.
This case is a reminder that a mortgagee in possession must act in a way which seeks to recover the debt due to them. Attempts to act for an improper purpose and obtain a windfall will not be tolerated by the courts.
