In the recent judgment of Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd (and others)[1], the High Court provided further clarity on how sale proceeds should be accounted for as between the first-ranking mortgagee and a second-ranking secured creditor.

Background

In the original court proceedings, Brooke Homes (Bicester) Ltd (“Brooke”) obtained judgment against three companies (the “Borrowers”) (who were not parties to the current application) for damages totalling £13.4 million, plus interest and costs.

Before the Borrowers entered administration and in order to secure its judgment debt, Brooke was granted charging orders over three of the titles which formed part of development land owned by the Borrowers (“Charging Orders Land”). The last of the titles was held in the name of Desiman 2 Limited (“Desiman 2“) by way of security and the Borrowers retained an interest in the equity of redemption.  

Desiman’s debt (meaning Desiman Limited and Desiman 2 (together, “Desiman”), which was secured by way of fixed and floating charges, ranked ahead of Brooke’s charging order security over the Charging Orders Land.

Following the appointment of administrators over the Borrowers, contracts were exchanged for the sale of part of the Charging Orders Land for £40 million (“Sale”). The Sale was effected by Desiman as mortgagee and Desiman accepted that it owed duties to Brooke.

Key points of principle arose in relation to the Sale proceeds concerning the equity of redemption and the doctrine of marshalling. The judgment concerned an application brought by Brooke against Desiman.  

Equity of redemption

Desiman accepted that it was liable to account to Brooke as a party interested in the equity of redemption. However, Brooke disputed the scope of the equitable account.

Specifically, two surcharge issues in relation to the Sale were disputed: firstly, whether Brooke should account for a £2 million price chip on the Sale price (“Price Chip”); and secondly, whether the cost or value associated with an extension of the development for the sum of £3 million would flow to Desiman (“Development”).

Doctrine of marshalling

Desiman further accepted that the doctrine of marshalling may have some application in the proceedings, albeit Desiman emphasised that the doctrine could not operate to its detriment but only offer Brooke certain advantages.

The doctrine of marshalling is an equitable remedy that can permit a second ranked secured creditor to gain the benefit of wider security held by the first ranked secured creditor. When both creditors have security over the same property and it is realised, it can be unfair to the creditor with fewer secured assets when their security is reduced for the benefit of the first creditor, who still has access to other additional secured assets. The doctrine of marshalling therefore permits the court to order that proceeds from the sale of the property be made available to the second-ranked creditor.

Decision

As held in Union Bank of London v Ingram [1880] 16 ChD 53, the underlying principle when considering a surcharge issue is that “whatever the mortgagee has received from the mortgaged property is charged against him” on the account. That is, the mortgagee cannot make a personal profit or advantage beyond what is due to him under the mortgage.  Furthermore, whilst the mortgagee must account for the purchase money and any non-monetary consideration, it is not obliged to account for “purely collateral advantages”.

It was common ground that Desiman had properly accounted for the whole of the purchase money from the Sale. The dispute centred on whether part of the consideration from the Sale (being the Development) consisted of non-monetary consideration derived by Desiman, which should be accounted for, or whether it was a purely collateral advantage for which Desiman should not be obliged to account.

Price Chip

It was also noted that the court may surcharge the account if it was satisfied there was “wilful default” on the part of the mortgagee for what they might have received but for that default. It was argued that the Price Chip constituted a wilful default or in any event, the absence of a satisfactory explanation for the Price Chip was indicative of some undisclosed personal advantage to Desiman.

On the evidence before it, the court was unable to find that the Price Chip had occurred. The court therefore found that Desiman had not committed wilful default in accepting the consideration of £40 million and the surcharge issue was not made out.

Development

Unlike the surcharge in respect of the Price Chip, the court did apply a surcharge for the Development. It found that the Development work constituted a benefit “by and out of” the mortgaged property.

The court concluded that on the equitable account, and absent further evidence to the contrary, a surcharge made in favour of Brooke of at least £2.4 million was made out (representing the lowest cost figure). 

The court said that it would hear further submissions on the value of the surcharge ordered. It may be argued that if there is to be disclosure or further direction on the Development surcharge then there should also be in relation to the Price Chip, given the potential for overlap.

Costs and expenses to be deducted out of receipts

The judgment also addressed the costs and expenses incurred by Desiman in respect of the Sale.

The court adopted a three-stage approach when considering costs namely (i) whether the item was or was potentially within contractual scope; (ii) whether it was reasonably incurred; and (iii) whether it was reasonable in amount.

Implications

The case provides clarity on the application of equitable principles, particularly the doctrine of marshalling and the equity of redemption.

The decision reminds higher-ranking lenders, in circumstances where there are multiple charge holders with security over the same assets, that they may need to account to the other secured creditors. 

[1] [2025] EWHC 1305 (Ch)