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Mortgage arrears and sale
[published in the Association of District Judges Law Bulletin, Autumn 2003, many years before the Pre-Action Protocol relating to mortgage arrears.
Tuesday, 10 o'clock. Warrant suspensions squeezed in before the applications list. First case. Mainstream building society, which has converted from fully mutual status. Suspended possession order last year. Borrower kept to the payments for a while, but then had a period of sick leave. Warrant suspended four months ago on the basis that she was going back to work the following week and could resume regular payments. That order was breached and a new warrant issued. Current arrears £3,500. Outstanding balance £70,000. Property worth £220,000. Borrower, in person, says that she was made redundant two months ago, partly, she thinks, because she could not keep up with the pace at work following her illness. She is not confident about finding new work and made the decision a month ago that she could not keep up with mortgage payments. As a result she put the property on the market. She has received an offer for £215,000 but she has not yet received the written confirmation that the estate agents promised.
Traditionally the local solicitor agents instructed by the lender would have taken a realistic view. "Sir, I have no instructions to consent to the suspension, but the lender's security is not at risk. I should point out the breach of the earlier order, but I have to recognise that if the sale goes through, the arrears will be cleared within a reasonable period." Application adjourned for three months, with the warrant suspended in the interim, to enable the sale to complete, or warrant simply suspended for three months.
In fact the solicitor for the lender indicated that the application was "strenuously opposed". There is "no evidence of any sale." Two orders have already been breached and "I have no confidence whatsoever in this borrower. My client requires possession immediately. I must refer you to the Court of Appeal decisions of Mortgage Services Funding v Steele and Abbey National Building Society v Mewton which show that you should not suspend." This is now a common scenario.
Although at common law mortgagees were entitled to possession the moment the ink on the mortgage deed was dry, the starting point now, whether it is a mortgage possession claim or an application to suspend a warrant, is Administration of Justice Act 1970 s36. That section gives the power to adjourn, stay or suspend if the arrears are likely to be paid during a “reasonable period”. On the face of it, this means the remaining term of the mortgage (Cheltenham and Gloucester Building Society v Norgan  1 WLR 343;  1 All ER 449, CA), although caution has to be exercised if the lender's security is at risk. However, the court cannot suspend an order for possession under s36, however hard the circumstances, if there is no prospect of the borrower reducing the arrears (Abbey National Mortgages v Bernard (1996) 71 P&CR 257, CA).
So we should adopt a two-stage approach. First, to decide whether or not it is likely that the arrears will be paid within a reasonable period. The test is one of likelihood, or probability, not, as is sometimes argued, one of certainty that the arrears will be cleared. Secondly, if it is, to decide whether or not to exercise the s36 discretion to adjourn or suspend.
What evidence is required to show that it is likely that the arrears will be cleared in a reasonable period by sale? Increasingly solicitors are making submissions to the effect that, as there is no formal evidence, and contracts have not been exchanged, the court cannot be satisfied that it is likely that the arrears will be paid. As a matter of law, that is wrong. In Cheltenham and Gloucester Building Society v Grant (1994) 26 HLR 703, CA, the Court of Appeal declined to lay down rigid rules on how busy district judges should satisfy themselves about the requirements in s36. Nourse LJ stated that:
It must be possible for [judges] to act without evidence, especially where, as here, the mortgagor was present in court and available to be questioned and no objection to the reception of informal material is made by the mortgagee. Clearly, it will sometimes be prudent for the mortgagor to put in an affidavit before the hearing ((1994) 26 HLR at 707).
It is wise to ask borrowers if they have anything in writing to confirm that the property is on the market or that a sale has been agreed. It is wise for us as judges to refer to any such documentation when giving judgment, but it is not essential. If the facts are seriously disputed, it may be wise to adjourn for formal evidence. However if we believe a borrower who says that the property is on the market at a price which is comfortably greater than the outstanding mortgage balance, that in most cases should be sufficient to bring into play the s36 discretion. As a matter of common sense, isn't any property which is on the market at a reasonable price likely to be sold within six to twelve months? The position may though be different if what the borrower has said at previous hearings was not borne out.
The s36 discretion
The purpose of a normal residential repayment mortgage is to lend money for a fixed term to enable the borrower to live in the property. The lender's position is protected both by the security and the terms of the mortgage deed, which inevitably provide for payment of interest on arrears and for the costs of possession proceedings to be added to the security. There is often also provision for administration charges where there are arrears. If the total amount outstanding under the mortgage is less than the value of the property, there is no prejudice to the lender in claims being adjourned or suspended orders being made. All sums lent plus interest and costs will be repaid by the end of the term of the mortgage as originally envisaged. That is the rationale behind the decision in Norgan. (See too First Middlesbrough Trading and Mortgage Co Ltd v Cunningham (1974) 28 P&CR 69, CA.) It is also the reason why, along with their social responsibilities, most mainstream lenders can afford to deal sympathetically with arrears. The Council of Mortgage Lenders Statement of Practice Handling of Arrears and Possessions* states in para 2
(a) When a borrower falls into arrears, the problem should be handled sympathetically and positively by the lender.
(d) Possession of the property will be sought only as a last resort when attempts to reach alternative arrangements with borrowers have been unsuccessful.
In exercising the s36 discretion, the key question is whether or not the lender's security is at risk. If it is not at risk, provided that it is likely that the arrears can be paid within a reasonable period, there is little or no prejudice to the lender in adjourning or suspending. In cases where the borrower wishes to sell, it is generally recognised that a borrower living in the property will achieve a better sale price than a mortgagee who has recovered possession. In Target Home Loans v Clothier  1 All ER 439, CA, the arrears were over £64,000. There was a letter from estate agents indicating that an offer of £450,000 for the house had been received. Nolan LJ, after asking whether there was a prospect of an early sale, stated:
If so, is it better in the interests of all concerned for that to be effected by [the borrower] and his wife or by the mortgage company? If the view is that the prospects of an early sale for the mortgagees as well as for [the borrower] are best served by deferring an order for possession, then it seems to me that that is a solid reason for making such an order but the deferment should be short. ( 1 All ER at 447)
A similar approach was adopted by the Court of Appeal in Cheltenham and Gloucester plc v Booker (1997) 29 HLR 634, CA where the Court of Appeal held that even if the power to suspend execution under s36 cannot be exercised because it is unlikely that the borrower can repay arrears within a reasonable period, the county court still has a residual inherent jurisdiction to defer the date of giving up possession in order to enable the lender to sell the property. The court may give conduct of the sale of premises to the lender while postponing execution of a warrant for possession until completion of the sale, thus allowing the borrower to remain in occupation. Millett LJ said that there is no reason in principle for the court to accede to a lender’s insistence on immediate possession if:
1) possession will only be required on completion;
2) the presence of the borrowers pending completion will enhance, or at least not depress, the sale price;
3) the borrowers will co-operate in the sale; and
4) they will give possession to the purchasers on completion.
The principal argument against such an approach is to be found in Mortgage Service Funding plc v Steele (1996) 72 P&CR D40, CA. This was a case where a borrower who was in receipt of state benefits had arrears of over £29,000 by the time the case reached the Court of Appeal. In the county court, the claim was adjourned to allow the borrower to pay instalments. Those terms were breached. At the adjourned hearing a district judge concluded that it was unlikely that the sums due could be paid within a reasonable period. A possession order was made. A circuit judge dismissed an appeal. The possibility of sale was only raised in the Court of Appeal. Leave to appeal was dismissed. Nourse LJ said that:
If the property has to be sold, it can just as well be sold by the mortgagee, whose duty is always to obtain the best price … at the date of sale. If there is a potential purchaser at hand, then all the mortgagor has to do is put the mortgagee in touch with him and the matter can proceed from there. Unless there is firm evidence that a particular sale is about to be completed, it is not the practice of the court to prevent the mortgagee from enforcing his remedy of obtaining possession and exercising his own power of sale over the property.
In this appeal the borrower appeared before the Court of Appeal in person. Target Home Loans v Clothier was not cited. Nourse LJ's comments were obiter and made in relation to a proposal which was not before the county court. Notwithstanding those comments, provided that the court is satisfied that the property will be sold for more than the outstanding balance, it has always been the practice of experienced district judges to delay possession or execution of a warrant for a reasonable period to enable the borrower to sell.
The other case routinely referred to in opposition to applications to suspend warrants is Abbey National Building Society v Mewton  CLY 3598, CA, a case where the defendant in mortgage possession proceedings successfully applied to set aside judgment, then for possession to be suspended, and then on two occasions for the possession warrant to be suspended. On each occasion, he failed to make payments which he had promised. On a further application to suspend the warrant, the district judge dismissed his application and ordered that he make no further application to suspend in any circumstances. The Court of Appeal dismissed his appeal, stating that:
It seems to be clear that [the defendant], having failed to comply with the conditions on which the suspension of possession is granted, is not in a position to complain about the orders and warrants for possession made. His record of payment is deplorable ... The district judge was fully entitled to order as he did.
The ratio of this case is simply that, after a borrower had breached four previous orders, a district judge was entitled to reach the conclusion that it was unlikely that the arrears would be paid within a reasonable period. It is not authority, as is sometimes argued, for the proposition that outright orders should be made or that warrants should not be suspended.
A reasonable period
How long should the borrower have to sell? In Norgan the Court of Appeal indicated that "a reasonable period" could be the remainder of the term of the mortgage. That is clearly not necessary if all that is to be done is for the property to be sold. What is "a reasonable period" is a question for the court in each individual case. In National and Provincial Building Society v Lloyd  1 All ER 630, CA, Neill LJ said that if completion of the sale of a property ‘could take place in six or nine months or even a year’, there was no reason why the court should not come to the conclusion that it was likely that the arrears would be repaid within a reasonable period. Further consideration was given to this question in Bristol and West Building Society v Ellis (1997) 29 HLR 282, CA where the Court of Appeal confirmed that what is a reasonable period for sale depends on the individual circumstances of each case, particularly the extent to which the mortgage and arrears are secured by the value of the property. The comments by Neill LJ in National and Provincial BS v Lloyd did not establish a year as the maximum period ‘as a rule of law or as a matter of general guidance’.
Permission to Appeal
Back to Tuesday morning. I gave a short judgment stating that there was no suggestion that the claimant's security was at risk. I was satisfied, in view of what the borrower had told me that, notwithstanding the absence of any written confirmation, it was likely that the arrears would be cleared in a reasonable period by sale. In the light of the defendant's personal circumstances, the history of the matter and the fact that the claimant's position was adequately protected it was appropriate to exercise the s36 discretion in her favour. Even before I could state the terms of the order I proposed to make, the lender's solicitor said, "I have instructions to seek leave to appeal." I asked who had given her instructions to seek permission to appeal. "Samantha.**" No she did not know her surname. She works in the national firm of solicitors who had instructed the agent. No, she could not say whether anyone in the solicitors had discussed the question of appeal with anyone employed by the lender. Yes, she accepted, she did always ask for permission to appeal if an application to suspend a warrant was allowed, irrespective of the circumstances. Permission to appeal refused. Another N460 to be completed, although it is very unlikely to go any further. It seems to have become routine, as part of "strenuous opposition" to warrant applications, to ask for permission to appeal, although very few appeals are pursued if the security is not at risk.
*available at cml.org.uk
** not her real name
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