UBS AG v Rose Capital Ventures Ltd & Ors

Factual and Procedural Background

The proceedings concern a property located at 18 and 19 Cornwall Terrace, London NW1, part of a Grade 1 listed terrace, previously used as offices and purchased by the first Defendant (Company A) in October 2005 for residential conversion. A charge was registered in favour of a bank (Company B) in February 2006. Initially, Company A had no connection with the second Defendant or his family, but in 2007 shares in Company A were acquired by an entity owned by a family trust associated with the Defendants.

In March 2012, Company A borrowed £20.4 million from the Claimant (Company B), with the second Defendant acting as agent for Company A. The loan was secured by a legal mortgage on the property. The loan was interest-only, with a specified term of five years but subject to early repayment on three months' notice at the Claimant's absolute discretion.

In 2016, the Claimant served notice demanding repayment of the loan, appointed fixed charge receivers, and commenced possession proceedings (the Receivers Claim). The Defendants raised issues including the validity of the notice, the reasonableness of early termination, and occupation rights of the individual Defendants. The Receivers Claim was stayed to allow fresh proceedings based on the expiry of the loan term. The current claim was issued in September 2017, seeking possession and payment due on expiry of the five-year term.

The Defendants served an amended defence resurrecting earlier issues and introducing new claims, including that the loan term was at least ten years and that the Claimant delayed and frustrated refinancing efforts. The Claimant applied to strike out parts of the amended defence. The hearing of this application was listed for October 2018, and the Defendants sought an adjournment which was dismissed by the court.

Legal Issues Presented

1. Whether the Claimant's absolute discretion to call in the loan early is subject to a duty of good faith or a Braganza-type limitation.
2. Whether the Claimant breached any duty of good faith or the alleged fetters in exercising its discretion to call in the loan early.
3. Whether the appointment of receivers was wrongful.
4. Whether the Claimant is relying on its own wrong in seeking possession.
5. Whether there is an implied term that the Claimant would comply with Principle 2.1.1 of the Financial Conduct Authority Handbook.
6. Whether the Claimant delayed and frustrated the Defendants' attempts to refinance the loan.
7. Whether the Claimant made an election precluding it from pursuing possession on expiry of the loan term after calling in the loan early.
8. Whether bringing the current claim separately from the stayed Receivers Claim amounts to an abuse of process.
9. Whether the Claimant is estopped from alleging the loan expired after five years in relation to individual Defendants.
10. Whether the individual Defendants have occupation rights that take priority over the Claimant's mortgage.
11. Whether the Claimant is entitled to be subrogated to the prior charge held by another bank.

Arguments of the Parties

Appellant's Arguments (Claimant)

• The absolute discretion to call in the loan early is not subject to a Braganza-type limitation but is qualified only by a narrow duty of good faith, allowing the mortgagee to act in its own interests.
• The duty of good faith does not require the Claimant to provide reasons for calling in the loan, nor does it prevent the exercise of the right for proper commercial purposes.
• The implied term that the Claimant would comply with the Financial Conduct Authority Handbook is misplaced as the loan was not regulated and such a term would not benefit individual Defendants.
• The Defendants' allegations of wrongful appointment of receivers and reliance on the Claimant's own wrong are legally unsustainable and lack pleaded consequences.
• The Defendants' case on occupation rights is weak and undermined by the failure to obtain necessary Occupier's Waivers and by the uninhabitable state of the property at the relevant time.
• The Claimant is entitled to pursue possession based on expiry of the five-year term, and the Defendants' inconsistent pleadings regarding loan term are problematic.
• The separate claim by the Claimant is not an abuse of process, especially given the Defendants consented to stay the Receivers Claim.
• The subrogation claim is valid, and the Defendants' equitable defences fail as they have not established any breach affecting subrogation.

Respondent's Arguments (Defendants)

• The absolute discretion to call in the loan early is subject to a duty of good faith and a Braganza-type implied term limiting arbitrary or capricious exercise of that discretion.
• The Claimant acted in bad faith and irrationally in calling in the loan early and failed to provide reasons, shifting the burden to the Claimant to justify its decision.
• The Claimant is obliged to comply with the Financial Conduct Authority Handbook principles, including fair treatment of clients, which extends to the individual Defendants.
• The appointment of receivers was wrongful and interfered with the Defendants' rights, and the Claimant should not rely on its own wrong in seeking possession.
• The Claimant delayed and frustrated refinancing efforts, causing prejudice to the Defendants.
• The Defendants claim occupation rights that take priority over the Claimant's mortgage, based on actual occupation through building contractors and proprietary estoppel or contractual licences.
• The Defendants assert estoppel based on representations that the loan term would be extended to at least ten years.
• The Defendants contend that the Claimant's pursuit of possession in separate proceedings while the Receivers Claim is stayed is an abuse of process.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch)	Clarification of the test under CPR 3.4(2)(a) for strike out applications.	Distinguished from CPR 24.2 test; court applied the stricter test requiring the claim or defence to be bound to fail.
Re Potters Oils Ltd [1986] 1 WLR 201	Mortgagee's duty of care is qualified and subordinated to protection of own interests.	Supported the narrow scope of mortgagee's duty of good faith.
Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949	Mortgagee can give preference to own interests where they conflict with mortgagor's.	Reinforced mortgagee's entitlement to act in own interests.
Quennell v Maltby [1979] 1 WLR 318	Mortgagee restrained from possession only if not bona fide or unreasonable.	Not inconsistent with narrow duty of good faith; distinguished from fact-finding discretion.
Yam Seng Pte Ltd v International Trade Corp Ltd [2013] 1 All ER Comm 1321	Implied duty of good faith and cooperation in relational contracts.	Not applicable as mortgage duty of good faith arises differently.
Socimer International Bank Ltd (In liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116	Mortgage good faith duty distinct from other contractual good faith.	Supported the limited scope of mortgagee's duty of good faith.
Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2016] AC 923	Enforcement of security for proper purpose not vitiated by collateral motives.	Confirmed mortgagee's discretion is valid if exercised for proper purpose.
Braganza v BP Shipping [2015] 1 WLR 1661	Implied term limiting discretion where decision affects both parties and involves conflict of interest.	Held not applicable to mortgagee's absolute discretion to call in loan early in this context.
Paragon Finance Ltd v Nash [2001] EWCA Civ 1466	Power to vary terms subject to implied limitation against dishonest or arbitrary exercise.	Discussed as background to Braganza; not applied here.
Mid Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200	Scope of implied term limiting discretion.	Confirmed limited scope and difficulty of excluding implied term.
Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529	Bank's powers to act subject to duty to act for proper purpose and not arbitrarily.	Applied to limit bank's power but scope limited; supports Claimant's position.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50	Principles of contract construction respecting parties' language.	Applied to reject implication of Braganza term inconsistent with clear contractual language.
Arnold v Britton [2015] UKSC 36	Commercial common sense and contract construction.	Reinforced importance of clear language over implied terms.
Wood v Capita Insurance Services [2017] UKSC 24	Contract construction principles.	Supported approach to contractual interpretation.
Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72	Test for implication of terms: business necessity and commercial coherence.	Applied to deny implication of Braganza term into mortgage contract.
Hills v Niksun Inc [2016] EWCA Civ 115	Burden shifting in reasonableness of employer's decision.	Distinguished and held burden shifts only after prima facie case of irrationality.
Commerzbank AG v Keen [2006] EWCA Civ 1536	Requirement for employee to prove irrationality before employer must justify decision.	Applied by analogy to mortgagee's duty.
Alliance & Leicester v Slayford [2001] 1 All ER Comm 1	Mortgagee entitled to exercise remedies successively or simultaneously.	Rejected abuse of process argument.
Brocklesby v Temperance Permanent Building Society [1895] AC 173	Principle that owner bears risk of agent's authority to deal with property.	Applied to support Claimant's position on occupation rights and priority.
Wishart v Credit & Mercantile plc [2015] EWCA Civ 655	Clarification of Brocklesby principle.	Reinforced application in mortgage context.
Thompson v Foy [2010] 1 P&CR 16	Principles on actual occupation for overriding interests.	Guided analysis of actual occupation issue in this case.
Williams & Glyns Bank v Boland [1981] AC 487	Physical presence required for actual occupation.	Supported requirement of physical presence or representation.
Abbey National BS v Cann [1991] 1 AC 56	Occupation by representative counts as actual occupation.	Considered in context of builders occupying on behalf of Defendants.
Strand Securities Ltd v Caswell [1965] Ch 958	Presence of licensee or furniture insufficient for actual occupation.	Applied to assess occupation claim.
Hoggett v Hoggett (1980) 39 P&CR 121	Occupation must be manifested and accompanied by intention.	Referenced in occupation analysis.
Thomas v Clydesdale Bank [2010] EWHC 2755 (QB)	Builders' presence and claimant's involvement can establish actual occupation.	Distinguished facts but recognized factual nature of occupation issue.
Alghussein Establishment v Eton College [1988] 1 WLR 587	Principle that one cannot rely on own breach to avoid contract or benefit.	Considered and found inapplicable on pleaded facts here.
BDW Trading Ltd v JW Rowe (Investments) Ltd [2011] EWCA Civ 548	Principle of construing contract to prevent party relying on own wrong.	Applied to reject Defendants' reliance on Claimant's own wrong.
Day v Tiuta [2014] EWCA Civ 1246	Clean hands maxim in equitable claims.	Referenced in relation to subrogation defence.

Court's Reasoning and Analysis

The court began by contextualising the application to strike out parts of the amended defence, emphasizing the importance of the contractual terms governing the loan and the mortgage conditions. The court noted the unequivocal language granting the Claimant an absolute discretion to demand repayment on three months' notice, overriding the specified five-year term.

On the duty of good faith, the court accepted its existence in mortgage contracts but stressed its narrow scope, allowing the mortgagee to prioritize its own interests. The court rejected the Defendants' submission that the Claimant was required to provide reasons for calling in the loan or that a Braganza-type implied term fettering the discretion existed. The court found the loan's contractual language incompatible with such an implication, applying established principles of contract construction and implication.

The court addressed the Defendants' claims of wrongful conduct, holding that such allegations raised factual issues but did not provide grounds for strike out. However, the legal basis for some claims, such as reliance on the Claimant's own wrong, was found unsustainable due to lack of pleaded consequences.

Regarding the Financial Conduct Authority Handbook, the court found no implied contractual term requiring compliance, as the loan was expressly unregulated and such a term would not benefit the individual Defendants.

The court examined the occupation rights claim, recognizing the factual complexity and the necessity of trial to resolve issues of actual occupation and overriding interests. Nonetheless, the court concluded that the Defendants' pleaded case on exceptions to overriding interests was bound to fail due to failure to prove actual knowledge and obviousness of occupation to the Claimant.

On subrogation, the court found that equitable defences based on alleged breaches of duty were either unsupported or irrelevant to the Claimant's claim based on expiry of the loan term.

The court expressed concern about the Defendants' inconsistent positions on the loan term but declined to strike out the inconsistent claim absent a formal application. The court also declined to grant the Defendants an opportunity to amend their defence further, except for a minor amendment to address an acknowledged defect.

Overall, the court applied the high threshold for strike out under CPR 3.4(2)(a), concluding that the Defendants' case on most issues was bound to fail as a matter of law, leaving only factual disputes for trial.

Holding and Implications

The court granted the Claimant's application to strike out parts of the amended defence, holding that the Defendants' case on issues 1 to 8, 10, and 11 was bound to fail. Permission was granted for the Defendants to amend one paragraph of the defence to cure a minor defect.

The direct effect is that the Defendants' attempts to challenge the Claimant's absolute discretion to call in the loan early, reliance on the Financial Conduct Authority Handbook, and certain equitable defences were dismissed at this stage. The claims relating to occupation rights and factual allegations of delay and frustration remain for trial.

No new legal precedent was established; rather, the court applied established principles of contract construction, mortgage law, and procedural rules to manage the scope of the issues proceeding to trial.