The price of discontinuing possession proceedings

Most lending agreements provide a contractual right for lenders to recover the costs of taking proceedings against borrowers, irrespective of the outcome of proceedings. But what happens if the lenders themselves decide to discontinue proceedings?

This was the dilemma facing the court in Co-operative Bank plc v Phillips [2014] EWHC 2862 (ChD). When Mr Phillips raised a defence to possession proceedings brought by the bank, the bank decided to discontinue the proceedings, which, according to the Civil Procedure Rules, would make the lenders liable for the costs. However, it still raised the question as to whether the lenders could nevertheless add the costs of the proceedings to the security under the standard clause in the loan agreement.

The leading authority on this situation, a case called Gomba Holdings, says that a lender is not entitled to recover any costs which are of an unreasonable amount or which have been unreasonably incurred. However, the burden of showing that the costs are unreasonable in either respect is on the borrower and that any doubts on those matters are to be resolved in favour of the lender.

The problem in the Phillips case was that, although the lenders had grounds to bring the proceedings, they gave no explanation as to why they decided to discontinue them. Under the circumstances, the borrower was able to establish that the lender's costs had not been reasonably incurred and that, therefore, they could not recover them.

The lessons for lenders to be learned from this are clear. Do not issue proceedings unless you have good grounds for doing so. If you do issue, you must be prepared to give a cogent and reasonable explanation for discontinuing proceedings or risk losing the costs.