Receivers’ charges revisited

As I write this post, the rain is sleeting down outside, almost continuously as it has done for the last week.

Like tears from heaven, as the angels weep for the World’s Pain, it seems to have no end in sight.

Accordingly, in this somber mood, it is appropriate to consider the vexed question of how to challenge receivers charges, where a receiver is appointed by a mortgagee to take possession of a property and sell it, but where the mortgagor will end up paying the charges through them being added to her mortgage debt.

Like the related question of solicitors charges incurred by the mortgagee but charged back to the mortgagor, in this situation, an assessment under section 71 of the Solicitors Act 1974 will prove useless and the route to challenging the incurrence or quantum of those charges lies outside the familiar strictures of the Civil Procedure Rules 1998 or the Solicitors Act 1974 and in the realm of equity.

I start with consideration of the authorities.

Gomba Holdings (U.K.) Ltd. and Others v Minories Finance Ltd. and Others (No. 2) [1993] Ch 171 is a very interesting case which notes in the judgment of Scott LJ that a mortgage deed cannot require payment of unreasonable costs:

We would only add this. It is difficult to contemplate that a mortgage deed would ever be construed as entitling a mortgagee to charge against the mortgaged property, or to require the mortgagor to pay, all costs charges and expenses even if improperly or unreasonably incurred or improper or unreasonable in amount unless the mortgage deed had expressly in terms so provided. But if a mortgage deed did expressly so  provide, the enforceability of such a provision would, in our opinion, be open to serious question on public policy grounds. However, we do not think any of the security documents in the present case should be so construed.

On quantification the Court of Appeal noted this:

Whatever the extent of the contractual right of recovery to which a mortgagee is entitled under the mortgage deed some means of quantification must be adopted. It is clear that the court has jurisdiction to quantify the amount recoverable both under its inherent jurisdiction as well as pursuant to such statutory provisions and rules as may apply to a particular case. This familiar process of quantification must take place not only in respect of litigation costs but also in respect of non-litigation costs as well as in respect of damages claims and a variety of other claims. The Rules of Court provide machinery for the quantification. They provide, in particular, for accounts to be taken and inquiries to be made. and they provide, also, for costs to be taxed by the taxing masters.

Summarising the position Scott LJ ultimately formulated these principles:

(1) The defendants have a contractual right to retain out of the mortgage funds in hand their costs, charges and expenses, including the receivers’ remuneration, on an indemnity basis.

(2) On the taking of the account the plaintiffs are entitled to object to items therein contained on the ground that they have been unreasonably incurred or are of an unreasonable amount.

(3) To make good any particular objection, the plaintiffs must satisfy the Chancery master, or the taxing master, as the case may be, of the unreasonableness contended for with any doubts being resolved in favour of the defendants.

(4) The Chancery master taking the account has power under Ord. 62, r. 24 to request a taxing master to tax any of the items of costs, including fees, charges, disbursements, expenses and remuneration, contained in the account. The taxation must be on the contractual basis, that is to say, the indemnity basis.

(5) In respect of any orders for payment of standard basis costs by the plaintiffs to the defendants that have already been made it is, as we understand it, common ground that the court was not thereby purporting to deprive the defendants of any costs which they were contractually entitled to add to their security. Accordingly, in our judgment, the defendants remain entitled on the taking of the account to their costs on *195 an indemnity basis. An indemnity basis taxation of costs that have already been taxed on the standard basis would seem to us to lead to the conclusion that the costs of the standard basis taxation were unnecessarily and unreasonably incurred and should be disallowed on the taking of the account. But that is not before us for decision.

(6) We should add that we do not agree with Vinelott J. that a complaint about the fixing of the receiver’s remuneration at an unreasonably high level could only be pursued in a separate action. In our judgment the plaintiffs are entitled, if so advised, to object to the remuneration on the ground that it is, to use the judge’s words, “plainly excessive” or, as we think is the same criterion, unreasonably high. The issue can be dealt with by the Chancery master. He can, in relation to this or any other issue on the account, direct points of claim and points of defence; or he can refer the issue to the taxing master. A separate action is not, in our opinion, necessary.

It follows that  a receiver’s remuneration/charges/expenses which are added to the mortgage account and then passed onto the mortgagor, to be paid out of his equity, can be challenged but not by way of detailed assessment in the first instance, but rather by way of an account being taken by the court under its equitable jurisdiction. These are not, in any event, solicitors legal costs, which would be capable of assessment under section 71 of the Solicitors Act 1974.

This conclusion is reinforced by the  Court of Appeal in the case of Tim Martin Interiors v Akin Gump LLP [2012] 1WLR 2946 where the Court noted:

100 Instead of seeking an assessment under section 71, therefore, in almost all cases a mortgagor or other party seeking to challenge the costs claimed and received by a mortgagee should bring a claim for an account of the sums due under the mortgage. I doubt that such proceedings for an account nowadays would be much more complex than assessment proceedings. In practice the mortgagor would issue a claim form, perhaps under Part 8, in the Chancery Division or, where appropriate, in the county court, and on the rst hearing before the master or district judge he would apply for an order that the costs in dispute be referred for assessment, normally to the SCCO. From then on, the procedure would be as for an assessment under section 70, but with the right parties contesting it, namely the mortgagor and the mortgagee. The costs judge will have the necessary expertise, and will be able to decide the dispute, on ordinary principles and processes of assessment, in an economical and e–cient manner. Once the assessment is complete, the result would be reported to the master or district judge, and the account would proceed on that basis. Somewhat more by way of steps in the proceedings would be necessary than for an ordinary assessment, but not a great deal. If there are other issues in dispute as well they can be dealt with in whatever is the appropriate way, by the master or district judge or, if necessary, by a judge.

 101 A claim for an account may be the right approach for several situations which can throw up this sort of problem, for example in the case of a trust or the administration of an estate. In other cases that may not be the right approach, and it may be necessary to claim a declaration as to the amount properly due, especially if the amount claimed has had to be paid by the third party, no doubt under protest.

 102 In the light of this judgment it may be anticipated that third party assessments will become rare, whereas claims for an account, and like proceedings in other types of case, where the real issue is as to the reasonableness of legal costs, best resolved by those experienced in the assessment of costs, may become much more frequent. With that in mind, it seems to me that it might be sensible for a dispute which is only, or mainly, about legal costs to be able to be commenced as an application for an account directly in the SCCO, rather than having to go via the Chancery Division. So far as the jurisdiction of the county court is concerned, as regards an assessment under section 70 or 71 it is limited to a case where the bill relates wholly or partly to contentious business in the county court and where the bill does not exceed £5,000: see article 2(7) of the High Court and County Courts Jurisdiction Order 1991 (SI 1991/724). So far as I am aware, none of the nancial limits on the jurisdiction of the county court in that article applies to a claim for an account under a mortgage. It seems to me that the appropriate procedure for a dispute of this kind is a subject worthy of the attention of the Civil Procedure Rules Committee.

What is the going rate for receivers charges? Receivership is not cheap. Under section 109(6) of the Law Of Property Act 1925, the receivers would be entitled to a commission of 5% of the value of the properties on sale:

(6)The receiver shall be entitled to retain out of any money received by him, for his remuneration, and in satisfaction of all costs, charges, and expenses incurred by him as receiver, a commission at such rate, not exceeding five per centum on the gross amount of all money received, as is specified in his appointment, and if no rate is so specified, then at the rate of five per centum on that gross amount, or at such other rate as the court thinks fit to allow, on application made by him for that purpose.

But most receivers will not be appointed under the statutory power to do so: instead their authority (and their charges) will be governed by the mortgage deed which provides for their appointment. Accordingly there is scope for a more forensic assault on the quantum of their charges looking at whether items are properly incurred and whether they are reasonable in amount.

The narrowness of the scope of section 71 continues to cause problems: those problems are not limited to the mortgagee/mortgagor field, but can arise in any circumstances, where a solicitor’s charges are incurred by a client with little interest in controlling them as the ultimate liability will rest with a third party.

Perhaps another reason to add to the growing number of reasons why the Solicitors Act 1974 can be justifiably condemned as useless, dangerous and contrary to the public weal.

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