Mortgagees and Costs: A warning

Legal charges often carry with them an ability for the mortgagee to add legal costs that it incurs to the secured debt.  While charges may refer to “all legal costs” or other similar wording, this does not mean all the costs howsoever incurred and irrespective of what they were incurred in relation to are recoverable in this way.  The case of Co-operative Bank Plc v Phillips (2014) is an illustration of this.
The case concerned, amongst other things, the costs incurred by the bank in bringing possession proceedings under its powers as a mortgagee.  The proceedings were ultimately discontinued and there was no dispute that the bank should meet the mortgagor’s costs of the discontinued proceedings (that is what usually happens when a party bringing proceedings discontinues them).  So far as the bank’s own costs were concerned it contended that the costs provisions in the charge entitled it to add those to the security, notwithstanding the discontinuance.

The court disagreed.  While it is right that the effect of such provisions in the charge entitles the bank to add legal costs to the security, the mortgagee is only able to do this to the extent that the costs were not unreasonably incurred or unreasonable in amount.  The court decided that while it was not unreasonable for the bank to have commenced the possession proceedings the fact that they had been discontinued, with the effect that the bank got nothing out of the litigation in which the costs were incurred, meant that the costs were unreasonably incurred and so should be disallowed in this case. 

This case is perhaps a stark illustration of the principle in practice, because the possession proceedings were discontinued (without any explanation) rather than formally determined.  If the case had been formally determined in favour of the mortgagor it might be said that to disentitle the unsuccessful lender its costs under the terms of the charge based solely on the outcome of the case would be taking matters too far.  To stretch the principle this far would result in costs that were in any objective sense reasonably incurred at the time, being assessed at the conclusion of a case as unreasonable and irrecoverable under the charge if the judgment goes in favour of the mortgagor.  Whether that is seen as a fair conclusion perhaps depends on whether you are a mortgagee or a mortgagor.

The full case report can be accessed here:

by Nitej Davda, Partner