Knowing When and When Not to Pass Judgment

 

In the recent case of Richard Parr v Tiuta International Limited [2016] EWHC 2 QB, the High Court considered what rate of interest is to be applied to a money judgment obtained at the same time as an order for possession and how that rate varies at different stages of the proceedings. In particular, the court had to decide whether the Respondent continued to be entitled to the (significantly higher) contractual rate of interest after the granting of the order for possession and money judgment, and then after the sale of the property.

Facts

The Appellant took out a loan to enable him to purchase a property, which the loan was then secured against. The Appellant subsequently defaulted on the payments due and the Respondent obtained an order for possession and money judgment, following which it eventually sold the property. If the contractual rate of interest continued to apply after the making of the possession order and money judgment, there remained a sum outstanding even once the proceeds of the sale had been applied, but if the Respondent was only entitled to interest at the statutory rate following judgment, then the entire debt was discharged following the sale. Before this matter was resolved, the Respondent obtained a charging order over another property owned by the Appellant. The charge secured the sum the Respondent claimed was outstanding (on the basis of its being entitled to contractual interest continuing after judgment and after the sale of the property).

Issue

The dispute as to when or if contractual interest ceased to be applicable centred on the operation of the doctrine of merger. On the basis that the making of the court order extinguished the parties’ prior rights and obligations,the Appellant asserted that the obligation to pay interest under the loan agreement and the charge merged with the obligation to pay interest under the judgment. The Appellant stated that the result was that statutory interest only could be charged following the entry of judgment. The Respondent, however, argued that there was no merger of obligations, the terms in the agreement relating to the payment of interest beingbroad enough for the entitlement to contractual interest to continue after judgment. While the terms did not specifically deal with the issue, the Appellant did covenant ‘to discharge all liabilities which now are or may at any time hereafter be due owing […] together with interest […] being at such rate […] set out in the facility letter’ (emphasis added). The Respondent also submitted that even following judgment it continued to rely on its charge over the property and, due to its explicitly ‘sitting on its security’, rather than relying on the judgment, there was no merger.

Outcome

It was held that, due to the wording of the loan agreement, the charge and the fact that the Respondent was holding the charge as security until the sale, there was no merger and that the Respondent was, therefore, entitled to interest at the contractual interest rate until the point of sale. The Respondent was not, however, entitled to the contractual interest rate after the sale, as once the sale was concluded there was no charge on which it could rely and the judgment did not provide for contractual interest to continue.

Varying the Amount Due under a Charging Order

As the Respondent was entitled to the contractual rate of interest only until the point of sale and not beyond, the amount secured by way of the charging order now had to be reduced. When considering its powers under s.3(5) Charging Order Act 1979, the Court held that the mistake as to the amount secured was not a reason to set the charging order aside, but that it was appropriate to vary it. In deciding to vary the amount secured, the Court rejected arguments that, firstly, it should not be varied because the Appellant did not point out the error at the time and, secondly, there was no need to vary it because it could simply be corrected once the property was sold and an account taken.

Unresolved Issues

Although the court reached a seemingly logical conclusion, it did leave several issues unresolved and, as such, the appropriate interest rate at any given stage is not, perhaps, much clearer than it was prior to this judgment.

Firstly, the judgment lists three factors which led the court to conclude that there was no merger, but does not state whether all three are necessary or if any one particular factor would suffice. In particular, the court stated that due to its conclusion, it was ‘not necessary to consider the issue of the construction of the loan agreement on its own’. Whilst it is not clear how such a consideration would be relevant to mortgage proceedings, as presumably the Claimant would always rely on its security until the point of sale, it might be worth bearing in mind that the court has not decided how clear the wording of a clause relating to interest would have to be were it to be relied on in isolation. Similarly, there was no consideration of what wording, if any, would successfully provide for contractual interest to continue even after the sale of the property.

Secondly, the court did not reach a firm conclusion as to whether or not it would be possible to limit the Claimant’s rights to those contained in the judgment at the time of judgment being entered, and thereby limit the Claimant to the statutory rate of interest. Such a possibility seems unlikely, but it is not explicitly excluded.

As a result of this lack of certainty, some claimants may delay or avoid seeking a money judgment, so as to avoid the operation of the doctrine of merger entirely, but of course that approach comes with its own problems. As it stands, it simply is not possible to know for sure when, and when not, to pass judgment.

 

Annie Sampson