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A mortgagee’s statutory power of sale can be expressly varied, but what happens when the clause varying this power is not expressly incorporated in the registered charge but contained within an unregistered document?

In the Court of Appeal case of Cherry Tree Investments Ltd v Landmain Ltd, a borrower and lender used a Land Registry standard form charge, supplemented by a facility agreement which set out commercial terms agreed between the parties. This agreement varied the statutory power of sale so the lender could sell, not only on the borrowers default, but as soon as the charge was executed.

The charge was registered at the Land Registry however the facility agreement was not and the charge itself made no reference to it.

A dispute arose between the borrower and the lender as to whether the borrower was in default. The lender sold the property under the extended power of sale. The purchaser sought to register its title and the borrower objected. The purchaser sought a Court Order that it be registered as the owner, which the Judge at first instance granted. The borrower appealed.

The Court of Appeal overturned the first instance decision ruling that the charge could not be interpreted to include the terms within the unregistered document. The Court stated that a charge was a public document, open to public inspection and to be relied upon by third parties. Because of this, the Court felt the weight attached to the facility agreement was not enough to apply the usual rules of construction to incorporate the terms into the charge.

Interpreting the charge using the unregistered terms would mean the insertion would be treated as having been made when the charge was originally registered and would take priority over subsequent registered interests – thereby undermining the priority rules of the registered system. Interestingly, the Court found that had rectification been pleaded in the alternative, the purchaser would likely have succeeded in its argument, as the amendment would not have been fully retrospective.

This would not of course have helped the purchaser to register its sale retrospectively.

Finally, it is worth remembering that, in order to be incorporated into the charge, a term need not be set out in full therein. It is sufficient if the agreement, in this case the facility agreement, is clearly identified and expressly stated to be incorporated.

Emma Giles - Solicitor, Banking, Finance and Professional Negligence, Manchester