[2025] EWHC 2750 (Ch)

The Judge asked Mr Monks directly why Cirrus had surrendered the leases on the Properties rather than exercising its power of sale, Mr Monks answered that question and the Judge quoted his answer at [101]: “had we sold the leasehold and accounted to the Claimant for his equity, we could have ended up in litigation.”

The Judge might have explored this answer further or assisted the Respondent to explore it further in cross-examination. But both before me and before the Judge, Ms Coyle took the point that Cirrus was not a party to the Original Claim or to this Appeal: see [102]. It is also clear that the Judge chose not to address it further for this reason: see [115]. In that paragraph he stated that: “I need to tread carefully here, given that Cirrus has not been joined as a party”.

But in my judgment, both the Respondent and the Judge were entitled to explore Cirrus’s motive with Mr Monks. In each of Monks 1, Monks 2 and Monks 3 the witness stated that he was authorised to give evidence on behalf of Cirrus and he was its sole director. He also volunteered evidence on behalf of Cirrus in Monks 3: see [32] (above). In my judgment, it is simply not open to the Appellant to state that there was no evidence on behalf of Cirrus before the Court.

Furthermore, even if the Judge had asked Mr Monks some more questions about his motives or Cirrus’s purposes, it is quite likely that he would not have got very much further. Mr Monks chose to rely on the legal advice which Cirrus had received and there had been no waiver of privilege. The Judge was not entitled to ask him any further questions about his instructions to Knights or the advice which they gave and he was not entitled to draw any adverse inferences from Mr Monks’ failure to waive privilege either on behalf of the Appellant or on behalf of Cirrus. It is quite possible, therefore, that the Judge would have been left with Mr Monks’ original answer even without Ms Coyle’s intervention and had he explored it further.

The Judge directed himself correctly as a matter of law. He cited Çukurova at [73] (above) and directed himself that “enforcement must be to secure satisfaction of the debt and no other purpose”: see [114]. This statement was derived directly from that paragraph and accurately reflected the second sentence of the statement of principle which it contained.

I accept that the Judge did not direct himself in terms that this test did not require the Appellant to prove “purity of purpose” or that repayment of the Loan was Mr Monks’ sole and exclusive purpose. But in my judgment, it was unnecessary for him to do so. Ms Coyle did not submit that Mr Monks had mixed motives one of which was repayment of the loan. The issue which the Judge had to decide was whether it was improper to enter into the Deeds of Surrender on terms which provided for no payment to Cirrus.

In my judgment, the Judge was fully entitled to find that recovery of the debt which the Respondent owed to Cirrus and which was secured by the Properties formed no part of Cirrus’s purpose and to make that finding on the basis of the Deeds of Surrender alone. As the Judge observed, there was no commercial rationale for Cirrus to surrender a 999 year lease of a residential apartment with a substantial capital value for no consideration. In common sense terms this was “madness”: see [116].

Although Ms Coyle tried to meet this point by telling the Judge that there was some consideration for the Deeds of Surrender, there was no admissible evidence before the Court to that effect and when I probed this issue I was not satisfied that the Appellant had paid any money to Cirrus for the surrender of the leases of the Properties far less that it paid Cirrus their market value.

There was no evidence before the Court either to justify the conclusion that Cirrus had credited the Respondent with any sums which the Appellant paid or lent to Cirrus. No statement of account was put before the Judge or before me to demonstrate that Cirrus treated the Deeds of Surrender as discharging the Loan (and any accrued interest or costs) either in full or in part. Nor was there any evidence to demonstrate that either the Appellant or Cirrus treated the Deeds of Surrender as discharging any arrears of ground rent and service charge. Mr Monks could easily have given evidence to this effect if this had been the case. But he did not.

I also tested this issue in argument. When I put it to Ms Coyle that the Respondent still owed the Loan together with interest and costs to Cirrus, she accepted that this must be right and that no part of the Loan had been paid off. It follows, therefore, that the Respondent is still legally liable to Cirrus for the full amount of the Loan notwithstanding that the Appellant has received two premiums totalling £120,000 for the grant of new leases. Ms Coyle’s realistic acceptance of this point was also reflected in her submission to the Judge (which he recorded at [107]) that in substance the Appellant’s case was: “Tough. It is a windfall for us, but you signed up for it and you lose.”

In any event, I am also satisfied that the Judge was entitled to find that repayment of the Loan formed no part of Cirrus’s purpose in entering into the Deeds of Surrender on the basis of Mr Monks’ oral evidence. His answer to the Judge’s question revealed that his motive for entering into the Deeds of Surrender was to avoid litigation and, as Ms Coyle confirmed in her submissions, the litigation which he had in mind was a claim by the Appellant against the Respondent to recover the unpaid service charge and ground rent. But the way in which he intended to avoid litigation was to direct Cirrus to surrender the leases rather than exercise the power of sale, repay the Loan and then argue or litigate with the Respondent over the net proceeds of sale and his equity in the Properties.

In my judgment, therefore, the Judge was entitled to find that Mr Monks effectively conceded that it was no part of Cirrus’s purpose to exercise the power of sale and repay the Loan but rather to extinguish the Respondent’s equity of redemption in each of the Properties: see [115]. Moreover, he was the trial judge and heard Mr Monks give evidence. I was not taken to a transcript of his evidence and Ms Coyle did not suggest that the Judge took his answer out of context or that this was not a proper interpretation of his answer.

The Judge’s conclusion was also consistent with the terms of the Deeds of Surrender themselves. None of the four Deeds of Surrender referred to the exercise of the power of sale and none of them was expressed to be made by Cirrus on behalf of the Respondent in exercise of the power of attorney in clause 14 of the Mortgage. If Cirrus’s purpose (or one of its purposes) had been to exercise the power of sale in order to repay the Loan, a professionally drafted deed could have been expected to record this fact.

Finally, it is clear from Surrenders 1 and 3 (which Knights originally submitted for registration) that Knights considered that they had been instructed to draft surrenders of the leases of the two Properties by the Appellant to itself. In my judgment, the Judge was entitled to take the view on the evidence that Mr Monks and his solicitors treated Cirrus and the Appellant as interchangeable and that the Deeds of Surrender amounted in substance to a collusive attempt between Cirrus and the Appellant to defeat the Respondent’s rights: see [115] and [118].

Clause 7.3 only confers an express power to accept surrenders of leases and not to surrender them. It would have been necessary, therefore, for the Appellant to persuade the Judge that a term should be implied that the Security Trustees could surrender as well as accept surrenders of leasehold property.

Ms Coyle did not argue that such a term should be implied and I am satisfied that none of the standard tests for an implied term are met. I am prepared to accept that it was within the power of sale for the Security Trustees to enter into a contract to sell leasehold property to its landlord and to complete such a sale by entering into a deed of surrender. But I am not prepared to accept that a surrender of leasehold property which is not expressed to be made for any consideration could be treated as a sale. If it had been the intention to confer such a power, the Mortgage would have said so.

Ms Coyle correctly pointed out that clause 8.2(2)(e) confers a power upon a receiver appointed by a mortgagee to surrender leasehold property. But in my judgment, that is a reason to interpret clause 7.3 narrowly. The drafters of clause 7.3 fully understood the difference between the word “surrender” (a verb) and the phrase “accept surrenders” (a noun) and if they had wished to confer a similar power on the Security Trustees, there is no reason to doubt that they would have done so expressly.

But in any event, it is easy to see why such a power was conferred on a receiver. If the Security Trustees had appointed a receiver to manage leasehold property and the outgoings had exceeded the rents which the receiver achieved, it was important to enable the receiver to surrender onerous leasehold property. But it was unnecessary to confer such a power on the Security Trustees themselves who could appoint a receiver both before and after entering into possession of the property.

Ms Coyle submitted that the words which I have underlined in clause 7.1 (above) conferred the same powers on the Security Trustees as they did on a receiver. I do not accept that submission because, in my judgment, it involves a distortion of the syntax of that part of the clause. For ease of reference, I repeat the relevant words again and in doing so I break them down into three sections A, B and C:

“…[A] the Security Trustees may exercise without further notice on and without the restrictions contained in section 103 of the Act all the powers conferred mortgagees by the Act as varied by this deed and [B] all the powers and discretions conferred by this Charge [C] either by themselves or by a Receiver appointed by them…”

Sections A and B set out the powers which the Security Trustees may exercise dividing them up into two categories, namely, the statutory powers and the express powers conferred by the Mortgage. Section C sets out how the Security Trustees may exercise those powers, namely, by doing so themselves or by appointing a receiver to do so. Ms Coyle’s construction involves running sections B and C together. But this requires section C to be read as “either on themselves or on a Receiver appointed by them”. But this is not what the clause says and this is not a case in which the literal meaning of the clause does not make any sense.

Mr Monks was aware of the terms of all four of the Deeds of Surrender and that no consideration was to be paid by the Appellant to Cirrus for the surrender of both leases. It is also clear from his answer to the Judge’s question that Mr Monks knew that the Respondent had equity in both Properties and that he intended Cirrus to surrender the leases rather than exercise the power of sale, repay the Loan and account to the Respondent for his equity.

Mr Monks was aware, therefore, that Cirrus’s purpose was not to exercise the power of sale and use the proceeds to repay the Loan or protect its security but to extinguish the Respondent’s equity of redemption in each of the Properties. This was his purpose in acting both as a director of Cirrus and a director of the Appellant.

I accept that the Judge did not find that Mr Monks was acting in bad faith. But, as I have held, it was unnecessary for him to do so. I also accept that the Judge did not find in terms that Mr Monks knew that it was improper to enter into the Deeds of Surrender. But he received legal advice about the transactions from Knights before entering into them and he knew their purpose and what they were intended to achieve. In my judgment, there was sufficient evidence upon which the Judge was entitled to find that he had actual knowledge of the impropriety.

I also accept that the Judge did not take into account Mr Monks’ evidence in Monks 4 that each Property was sold at an increased price because it had a sub-lease in place and an assured yield guaranteed to the purchase and that the proceeds of sale of both Properties were reinvested in full into the development project. However, there was no appeal against his refusal to do so and no application to admit Monks 4 as fresh evidence under CPR Part 52.21(2).

But in any event, that evidence only serves to confirm that the Judge was correct and that Mr Monks had actual knowledge of Cirrus’s impropriety. Cirrus and the Appellant could have achieved the same outcome if Cirrus had properly exercised the power of sale. If it had sold the Properties to the Appellant for their market value after taking proper valuation advice, the Appellant could then have surrendered the leases, granted new sub-leases and sold them as investment properties at a higher price of £60,000 each. If Mr Monks’s evidence about their value was correct and they were only worth approximately £29,000 each, then the proceeds of sale would have been just about sufficient to discharge the Loan and repay the arrears of service charge and ground rent.

But it was no answer for Mr Monks to say that he believed that the Respondent had no equity in the Properties after taking into account their market values, the ground rent and service charge, sale costs and legal costs and that the Appellant only achieved a much higher price for each one because of the special circumstances of the sales. This is because no part of the premium which the Appellant achieved on the grant of the new leases was applied to discharging the Loan. If Cirrus had exercised its power of sale, it would have used the proceeds of sale for that purpose.

When the Judge asked Mr Monks why he had not taken this course, he had no real answer. Moreover, it must have been obvious to Mr Monks when he was asked this question that by entering into the Deeds of Surrender rather than exercising the power of sale, the Respondent had not been credited with the value of the Properties and the Loan remained outstanding in full. Indeed, he acknowledged in Monks 4, paragraph 17 that the Appellant (and not the Respondent) took the benefit of any equity in the Properties by reinvesting it in the development.

The Judge made no finding that Mr Monks was aware that Cirrus had no power to enter into the Deeds of Surrender and in one sense issue (1) (above) was a red herring. But the absence of any such power and, equally importantly, any reference to such a power in the Deeds of Surrender confirmed that Mr Monks could not have been acting under the mistaken belief that Cirrus was exercising its power of sale when he executed Surrenders 2 and 4 on its behalf.