Accounts

Accounts

This part looks at a number of issues about taking accounts
in mortgage cases
Information Sheet

What does this involve?

As with other aspects of mortgage law, the process of taking accounts has become complicated largely by historic practices which have little application today. Accounting is simply the process by which either or both of the parties to a mortgage are entitled to determine, by way of an account, particular sums which may be due or owing. The account can be general, or it may be specific, and may be dealt with out of court, or by application in court. 


The process of providing account information and statements will usually be provided for in the contract of mortgage, and in certain respects in relation to regulated mortgage contracts, is supplemented by specific obligations on mortgage lenders and others in MCOB (FCA Handbook: Mortgages and Home Finance: Conduct of Business Sourcebook).



Types of account

A general account will typically comprise principal and interest, at the contract rate, either from inception, or if a particular dispute has arisen, from a particular date. In practice, with automated accounting systems, and having regard to proportionality the scope to require a general account may be quite limited, unless, for example, there is an issue about the range of liabilities sought be charged under an ‘all-monies’ charge, or there is a challenge to the rates or methods of charging interest (for e.g. in respect of high rates, default rates or the effect of compounding interest, as common law penalties, or unfair terms under the Consumer Rights Act 2015 or as giving rise to an unfair relationship under the Consumer Credit Act 1924, s 140A).


For a case in which the court declined, on proportionality grounds, to order a general account, but went on to address specific charges, see Nautch Ltd v Mortgage Express [2012] EWHC 4136 (Ch).


Specific accounts can include any element which may be charged to the mortgage account, and may include:


(1)   An account of costs, charges and expenses;


(2)   An account of receivership income or expenses;


(3)   An account of rents and profits against the mortgagee while in possession (which may be on a wilful default basis);


(4)   An account of the proceeds of sale of the mortgaged property, and if necessary an account to reflect the best price reasonably obtainable upon a sale of the mortgaged property. 



Particular points

(1) Receipt clauses: A receipt clause in a mortgage whereby the mortgagor acknowledges receipt of a loan of a specified amount (and/or a covenant to repay a specified amount), is not conclusive and does not in an appropriate case where the mortgagor has adduced sufficient circumstantial evidence prevent the mortgagor from seeking an account or inquiry as to the amount advanced (Mainland v Upjohn (1889) 41 Ch D 126; Close Asset Finance Ltd v Taylor [2006] EWCA Civ 788).

(2) Conclusive evidence clauses: A clause which is frequently found in personal guarantees, but occasionally appears in loan and security documents is that a certificate in writing signed by [an officer of the lender] stating the amount at any time due and payable by [the borrower] shall, save for manifest error, be conclusive and binding on the [borrower]. Such clauses are effective and may operate to preclude a [borrower] from contesting the particular charges and requiring an account to be taken (Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyd’s Rep 437; IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542). ’Manifest error’ usually means one that is obvious or easily demonstrable without extensive investigation (IIG Capital LLC v Van Der Merwe [2007] EWHC 2631 (Ch) per Lewison J at [52] (not challenged on appeal)), although there is no reason why the error has to be manifest at the time when the certificate is given (North Shore Ventures v Anstead Holdings Inc [2012] Ch 31).

(3) Mortgage indemnity guarantees: A mortgagor is not entitled to the benefit of the proceeds of a mortgage indemnity guarantee policy taken out by the mortgagee (at the expense of the mortgagor) to insure against the risk of default by the mortgagor and is not entitled to require the mortgagee to account for the amount of any recovery in any claim it has against the mortgagor (Woolwich Building Society v Brown [1996] CLC 625; Bristol & West Building Society v May, May and Merrimans (No. 2) [1998] 1 WLR 336; Banfield v Leeds Building Society [2007] EWCA Civ 1369).

(4) Default interest: It has traditionally been stated that where a mortgagee wishes to charge a higher rate of interest in the event of default in punctual payment by the mortgagor, he must reserve the higher rate as the standard rate, and stipulate for the lower rate to be paid in the event of punctual payment; he cannot do it the other way around, by charging a standard rate and stipulating for a higher rate in the event of default because this will amount to a penalty in equity (See Fisher & Lightwood’s Law of Mortgage, 15th Edition, para 54.57, although in Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 it was held that a 1% increase would not be struck down as a penalty provided it could be commercially justified). However, this must now be regarded as a doubtful proposition. Many mortgage lenders now habitually charge dual rates of interest, with a higher rate being charged in the event of default. The issue is one of substance, not form, and will not prevent the court from considering whether the stipulation is in fact penal in effect (in accordance with the principles in Makdessi v Cavendish Square Holdings BV [2016] AC 1172. In particular, the court will consider whether the impugned provision was a secondary obligation which imposed a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation: Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm) (default rate of interest of one-month LIBOR plus 12% held valid and enforceable). Depending on the interpretation of the contract of mortgage, stipulations as to interest will usually be regarded as primary obligations.

Accounts in court

Where the court directs the taking of an account it will usually give case management directions as to the manner in which the account is to be taken (CPR PD 40A, para 1.1; Chancery Guide, para 23.2). The mechanics for the taking of the account will depend on the nature and extent of the points in issue, but may typically involve (1) directing the accounting party (usually the mortgagee) to file/serve the particular account verified by a witness statement, and where appropriate exhibiting any relevant documents relied on in support; (2) directing the paying party to file/serve any objections to the account also verified by a witness statement with any relevant documents; and then (3) listing the disputed account for hearing, usually before a Master or District Judge (CPR PD 40A, para 9).

Practice and procedure

There are no particular jurisdiction limits. Separate proceedings for an account may be issued in the High Court or county court (CPR PD 7A, para 2.5). For mortgage-related accounts, a claim in the High Court should be issued in the Business & Property Courts (ChD) and listed in the Property, Probate and Trusts List. A claim in the county court should be marked Business & Property work: CPR PD 57AA – Business and Property Courts. The allocation of business between the High Court and county court will probably depend on the usual criteria (CPR PD 7A, para 2.4). The claim may be commenced using either the Part 7 or Part 8 procedure, the choice between the two probably depending on whether the issues involved in the account are likely to involve a substantial dispute of fact (CPR 8.1(2)(a)).

Similarly, in pending proceedings, all parts of the High Court and county court have jurisdiction to direct an account to be taken. In proceedings in the county court, one judge may refer to another for inquiry and report proceedings involving an account (County Courts Act 1984, s 65(1)(b)). An interim application for an account may be made by application notice (under either CPR PD 24, para 6 or CPR 25.1(1)(o)). 

Limitation

In terms of time limits, an action for an account shall not be brought after the expiration of any time limit under the Limitation Act 1980 which is applicable to the claim which is the basis of the duty to account (Limitation Act 1980, s 23).

Unless the claim is framed in contract (in which case the relevant limitation periods may be six years in respect of simple contracts: Limitation Act 1980, s 5, or 12 years in respect of deeds: Limitation Act 1980, s 8) since the obligation to account is in equity, there may be no statutory time limits under the Limitation Act 1980.


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