Mortgagee in Possession Entitled to Rent Payments Due Prior to Accepting Tenancy

Mortgagee in Possession Entitled to Rent Payments Due Prior to Accepting Tenancy

MJM have acted for HSBC Bank Bermuda Ltd (the “Bank”) in an interpleader application which has clarified the entitlement of a mortgagee in possession to rental arrears for a period prior to their obtaining an order for possession or adopting a lease: John Rowe v (1) Cameron Hill and (2) HSBC Bank Bermuda Limited [2022] SC (Bda) 74 Civ (6 October 2022).

The Application was made by a tenant, Mr Rowe, (the “Applicant”) asking the Court to determine who was entitled to disputed rental payments claimed by both the Bank as mortgagee in possession and the guarantor, Mr Hill, (the “Guarantor”) who had purported to grant the tenancy.

In July 2010, the borrower, a trustee entered into a mortgage with the bank (the “Mortgage”), with a beneficiary as the Guarantor. The trustee had granted a lease of the mortgaged property to the Guarantor. The Mortgage fell into arrears and a demand was made by the Bank.

On 9 October 2018, the Guarantor purported to grant a tenancy to the Applicant for three years with the rent payable to the Guarantor.  One day earlier, the trustee had given the Guarantor, who had a lease over the same mortgaged property, notice to quit. The trustee then also gave the Applicant notice to quit in January 2019 on the basis the lease had been granted without lawful authority and the Applicant was a trespasser.

As a consequence of the notice to quit, the Applicant sought advice from their attorney regarding the rent and was advised to pay it into their attorney’s trust account until such time as it was determined who was ultimately entitled to it. The Applicant paid rent into the trust account from January 2019 until December 2019 when the Supreme Court granted the Bank an order for possession and sale of the Mortgaged Property. The Bank then elected to adopt the tenancy and the Applicant then paid the rent directly to the Bank.

The Guarantor continued to demand payment of the rent held on trust. Facing demands from both the Guarantor and the Bank for the rent, the Applicant issued the interpleader.

The Court held that the Guarantor had no legal authority to grant the lease, because he had already received a notice to quit expiring before the expiry of the lease he purported to grant and because the Mortgage prohibited the grant of a lease without the Bank’s prior consent.

In seeking payment of the rental arrears held on trust, the Bank relied on the right of a mortgagee in possession to adopt a tenancy per Stroud Building Society v Delamont [1960] 1 All ER 749, meaning it was also entitled to any rent arrears in relation to the tenancy, including those due for a period prior to the order for possession.

The Guarantor disputed the bank’s entitlement to rental payments made prior to the order for possession. He relied on decision of Harman J in Lever Finance Ltd v Trustee of property of Needleman [1956] 2 ALL ER 378 arguing that the Bank could only receive rents once the order was made and the tenancy was accepted because that created a new relationship of landlord and tenant, implying that earlier rental payments remained his.

The Court recognised that the authorities relied on by both the Bank and the Guarantor dealt with the issue of whether a mortgagee has lost his right to treat the tenant as a trespasser rather than the rental arrears issue.

The Court rejected the Guarantor’s argument, finding that if a lease has been affirmed by the mortgagee there is no reason in principle why the mortgagee should not be able to claim the entirety of the unpaid rent, including rent which relates to a period prior to the affirmation. The Court held that there is no legal or public policy justification for allowing a person who had no relevant legal authority to grant a lease to retain rental payments for any period in preference to the mortgagee. The only other party with any entitlement to rents might have been the trustee but likely given the significant sums remaining due under the Mortgage, they advanced no claim to the rental arrears. The Court further criticised the Guarantor’s conduct of the litigation and noted futility of the Guarantor arguing the issue given the rental payment could simply have been put toward the far larger sum he will ultimately owe under the Guarantee. He was ordered to pay the Bank’s costs on an indemnity basis and the Applicant’s on the standard basis.