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Subrogation enthusiasts will be interested in the CA's recent (4th Dec 1997) decision in Halifax Mortgage Services Ltd v Muirhead. This was yet another of the husband/wife mortgage renegotiation cases of the kind I discuss in my book (The Law of Subrogation, Clarendon Press 1994, stocks still available) at pp 123-5: P building soc discharged valid mortgage over H and W co-owners' property at H's but not W's request, took new security executed by H but not W which therefore turned out to be void against W, and then sought to be subrogated to the original mortgage. In previous proceedings, P won an order for possession against H - these proceedings were concerned with its rights against W. At first instance, His Honour Judge Wakefield in the Clerkenwell County Court granted an order for possession against W on the basis that the original mortgagees would have been entitled to such an order and so P standing in their shoes should be similarly entitled. On appeal, W conceded that P was entitled to subrogation, but argued that the judge should not have made the order for possession without first establishing whether any and if so what sums were due under the original mortgage (the judge recognised that the figures had not been gone into, and directed an inquiry into them which was stayed (by a further order of the CA made when leave to appeal was granted) pending the appeal). P argued that he was entitled to make the order which he did, and further, by way of cross-appeal, that the order for sale was justified on another basis, namely, under s 30 of the Law of Property Act 1925, superseded on 1 January 1997 (ie. after judgment was given) by ss 14 and 15 of the Trusts of Land etc. Act 1996. The portion of Evans LJ's judgment which was concerned with the subrogation point follows:

'(1) Subrogation

The basis of the plaintiffs' claim to exercise rights under the Halifax [ie the original - CM] mortgage is the statement of principle by Lord Jenkins in Ghana Commercial Bank v Chandiram [1960] AC 732, [1960] 2 All ER 865 at 745 of the former report:-

"It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit : see Butler v. Rice [1910] 2 Ch. 277".

The Ghana Commercial Bank claimed as legal mortgagees but their mortgage was held to have been null and void. It was taken, in part, as security for a payment made to discharge an equitable mortgage which had been created in favour of another bank by the deposit of title deeds. The presumption to which Lord Jenkins referred was supported by a term of the abortive legal mortgage to the effect that that mortgage was not to prejudice or affect any other security held by the bank, including an express reference to the title deeds (see pp. 736-7 and 745 of the former report).

The principle extends to cases where the proceeds of a re-mortgage are used to discharge an existing mortgage, so that the maker of the new loan can obtain a first mortgage as his security. The relationship between the process of tracing the payment to the original mortgagee and the remedy of subrogation to that mortgagee's rights which then becomes available to the new mortgagee was analysed and explained by Millett LJ in Boscawen v Bajwa [1995] 4 All ER 769, [1996] 1 WLR 328 (see pp. 334-341 of the latter report). Miss Taylor accepts for the purposes of this appeal that the principle applies. I should add, however, that the presumed intention to keep the original mortgage alive which is attributed to the re-mortgagee - the "third party" who pays the sums due under it - cannot have been his intention in fact. He is concerned to ensure that the original mortgage is discharged rather than kept alive, so that he can obtain a first mortgage to secure his own advance. If he does have any actual intention to keep the original mortgage alive, this can only be conditional upon some failure of his own security, which he is unlikely to foresee or to recognise when the payment is made (as the present case demonstrates). It may be that the equitable jurisdiction to enforce a charge by way of subrogation rights derives partly from the third party's mistaken belief that his own new security is valid, coupled with the unjust enrichment of the borrower which might otherwise result : see Millett LJ's judgment at 335C of the latter report and for a general discussion. Mitchell (The Law of Subrogation Clarendon Press 1994).

So it becomes necessary to consider what the plaintiffs' rights are, by reason of their discharge of the Halifax mortgage in 1987. The starting point in my judgment must be the actual rights which the Halifax released by reason of the discharge. The sum paid was slightly in excess of £30,000 and the mortgage period was 25 years from 1984. It is not entirely clear what the repayment terms were but we understand that by the time of discharge it had become a repayment, rather than an "interest only" mortgage. In general terms, the Halifax was entitled to receive monthly payments, the amounts varying with changes in interest rates, for the balance of the 25 year period and to be repaid in full at the end of the period or earlier in the event of default. It is clear also that a failure to pay the instalments over a two month period would amount to such a default.

Clearly, the rights which are transferred, or are capable of transfer, to the third party who discharges the mortgage must be those which existed immediately before the discharge took place. But the extent to which they may be exercised by the third party thereafter by virtue of subrogation depends also upon the terms on which the money, which is used to discharge the original mortgage, is advanced to the borrower by the new lender. If he makes an unsecured loan, he cannot claim the benefit of a security which was available to the original mortgagee (Paul v Speirway Ltd [1976] Ch. 220, [1976] 2 All ER 587 at 232 of the latter report per Oliver J. ; see also Boscawen v Bajwa [1995] 4 All ER 769, [1996] 1 WLR 328 at 338G of the latter report per Millett LJ). Similarly, he cannot recover a greater rate of interest than he agreed to accept under the new mortgage (Chetwynd v Allen [1899] 1 Ch. 353 : see also Western Trust & Savings Ltd v Rock CA 26 February 1993, unreported, per Peter Gibson LJ at 9G).

In my judgment, the extent to which the rights may be exercised by the subrogatee may also be affected by subsequent events. They are not simply fossilised and then revived in exactly the same form. Some account must be taken of later dealings which in fact take place between the borrower and the re-mortgagee, but which also affect or would have affected the rights of the original mortgagee under the notional mortgage, which has been "kept alive" for the purposes of subsequent enforcement by the subrogatee.

First, it becomes necessary to determine to what extent any payments that have been made to the new mortgagee should be attributed to the original mortgage, if thereafter he claims relief by reference to the rights of the original mortgagee. Here £53,857 was paid up to July 1990, which was probably more than enough to discharge the whole amount due under the Halifax mortgage. One possibility is that these payments should be allocated to the original mortgage, in which case it would have been already discharged when the subrogation rights were claimed. This could be justified on the basis that, if the plaintiffs elect to rely upon the original mortgage, then they should give credit against that mortgage for all payments received. Moreover, the sum payable to discharge the original mortgage was in effect a first charge on the fresh advance, because the new mortgagee required that it should be paid off so that he could succeed to the rights of the original mortgagee. Alternatively, the payments in fact made under the new mortgage could be apportioned as between it and the original mortgage, in the proportion here of 30 : 130 approx. Further complications will arise from the fact that the Halifax mortgage called for capital repayments (as we understand the position) whereas the plaintiffs' mortgage called for interest payments only.

A second aspect of the same problem is whether and if so the extent to which any subsequent events which affected or were believed to affect legal relations between the borrower and the new mortgagee should be assumed to affect, or to have affected, the notional rights of the original mortgagee. There could be an agreement to extend the time for repayment, or to vary the amount of monthly payments, or, as there was here, a two months' default under the new mortgage. Should this necessarily be attributed to the original mortgage, bearing in mind that if the borrower had had only the reduced obligation, then the default would or might not have occurred?

These issues were not developed before the judge, and although he regarded the actual default under the plaintiffs' mortgage in October/November 1990 as an equivalent default under the Halifax mortgage, he expressly left open the question whether any and if so what sums were due in respect of that mortgage, whether in 1991 when proceedings were begun or in April 1996 when the appellant became a party to them or in December 1996 when judgment was given.

Miss Taylor submits that the judge had no power to make an order for possession and sale unless first he established what sums were due under the security pursuant to which the order was made, and that the order is defective unless it states the amount. But it is not necessary in my judgment to say whether or not that submission is correct. This is because the judge made the order without first deciding the issues of allocation (possibly apportionment) and attribution which I have described above. This is more than a matter of form, because probably the amounts in fact paid between 1987 and October 1990 were more than sufficient to discharge the Halifax mortgage in full. On the other hand if some form of appropriation is necessary, and the payments were of interest only, then the Halifax mortgage has not been repaid. Nevertheless, there may have been no default, unless the actual 1990 default is attributed to it. It could also be relevant that the appellant upon becoming a party to the proceedings offered to pay more than the monthly amount due under that mortgage.

It seems to me that the judge was wrong to order possession and sale by reference to the plaintiffs' subrogated rights under the Halifax mortgage without first determining what those rights are. These must be determined before any such order is made. It may also be necessary for the judge to consider whether or not he should exercise the Court's power under s 36(2)(a) of the Administration of Justice Act 1970 to adjourn the claim for possession rather than to make an order, execution of which he can then suspend.

I therefore would allow the second defendant's appeal against the order for possession and sale insofar as it was based upon the plaintiffs' subrogation rights. Whether it nevertheless was justified under s 30, or can now be justified under ss 14 and 15 of the 1996 Act, is the second main issue raised by the appeal and cross-appeal. Before proceeding to consider this, I should add in relation to subrogation that the problems of allocation and attribution which the judge will have to resolve seem to me to be easier to grapple with if the notion of "keeping alive" the original ie. the Halifax mortgage is regarded for what it is, namely, a fiction or a presumed intention rather than the actual intention of the third party re-mortgagee ie the plaintiffs when the mortgage was discharged. The question for the Court is the extent of the re-mortgagee's rights in circumstances where he cannot enforce the new mortgage and relies instead on the fact that his money was used to repay the original mortgage advance on the borrower's behalf. The circumstances must be such as to "make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff" (per Millett LJ in Boscawen v Bajwa at 335D of the latter report). It seems to me that the task is made easier if emphasis is placed on the existing equitable rights of the plaintiff re-mortgagee, rather than regarding them simply as rights which he has inherited from the original mortgagee.'

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Dr Charles Mitchell
School of Law
King's College London
Strand
LONDON WC2R 2LS

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