Jersey Property Security and Costs – Good News for Lenders
Something of a chill wind blew through the local lending community earlier this year when the Royal Court handed down its judgment in the case of Dégrèvement of the Immovable Property of Mrs Powell. The ability of lenders to recover their costs when enforcing security against Jersey property was called into doubt. To the relief of lenders, however, the Court of Appeal has now reversed the Royal Court’s decision.
The case concerned a dégrèvement. This an insolvency procedure which involves creditors being called in turn to declare whether they wish to take ownership of the debtor’s property, on condition of being required to pay off all prior ranking secured claims, or alternatively to renounce their security. First to be called are the unsecured creditors, en bloc, followed by each secured party in reverse date order of the date of their respective charges. The party who takes ownership (known as the tenant après dégrèvement (the “Tenant”)) only has to pay off prior ranking secured claims; there is no obligation to account for any surplus value in the property to the debtor or anyone else.
In the Powell case, one of the unsecured creditors took ownership and therefore became liable to pay off the secured claims of the parties with security over that property. The issue at stake was whether the legal costs of the secured parties properly formed part of their secured claims. Their legal costs were significant as the case was complex and protracted.
After a consideration of the relevant legislation (the Loi (1880) sur la propriété foncière (the “1880 Law”)), the Royal Court concluded that the secured parties’ legal costs did not form part of their secured claims and so the Tenant was not liable to pay them. The legal analysis was highly detailed, but central to the Court’s decision was what it saw as the clear legislative intention behind the 1880 Law, that the amount secured against a particular property should be readily apparent from the Public Registry.
According to the Court, there were only limited circumstances in which a secured party whose claim was paid off in a dégrèvement would be entitled to its costs. One possibility would be where the legal costs, when added to the capital amount outstanding, fell below the originally specified capital amount of its security. Alternatively, a secured party might be able to obtain a separate judgment in respect of costs and register it as a charge against the debtor’s property.
One of the disappointed secured creditors, Jersey Home Loans Limited, appealed the Royal Court’s decision and was successful. In coming to its decision, the Court of Appeal held among other things that the 1880 Law did not repeal the customary law principle of costs (as well as interest) being secured as accessory to the principal amount secured by a hypothec (charge). This, said the Court of Appeal, is the starting point in any particular case, though this presumption may be rebutted if an examination of the contractual documentation between the creditor and the debtor shows that costs were not to be secured.
Both the Royal Court’s judgment and that of the Court of Appeal contain carefully argued legal analysis. A non-lawyer might be surprised that they could come to different conclusions and indeed that the issue was not already decided. However, the legal issues were highly technical and, in a small jurisdiction such as Jersey, court decisions in many areas of law are few and far between. Nevertheless, the outcome will no doubt be greeted with relief by lenders – a warm glow after the chill wind.
