3. M O R T G A G E S
Although some mortgages are regulated by the Consumer Credit Act 1974, most mortgage possession proceedings are governed by the provisions of the Administration of Justice Acts 1970 and 1973.
Power to suspend or to delay date for possession
At common law, "the court has no jurisdiction to decline to make a possession order or to adjourn the hearing, whether on terms of keeping up payments or paying arrears, if the mortgagee cannot be persuaded to agree to this course" (Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883, ChD.) In Caunt Russell J stated that the sole exception to this rule is that possession proceedings
"may be adjourned for a short time to afford the mortgagor a chance of paying off the mortgagee in full or otherwise satisfying him; but this should not be done if there is no reasonable prospect of this occurring. When I say the sole exception, I do not, of course, intend to exclude adjournments which in the ordinary course of procedure may be desirable in circumstances such as temporary inability of a party to attend, and so forth". (p912)
However Administration of Justice Act 1970 s36(1) provides:
Where the mortgagee under a mortgage of land which consists of or includes a dwelling‑house brings an action in which he claims possession . . . (not being an action for foreclosure in which a claim for possession . . . is also made) the court may exercise any of [its] powers . . . if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.
Section 36(2) provides that the court:
(a) may adjourn the proceedings, or
(b) on giving judgment, or making an order, for delivery of possession . . . or at any time before execution of such judgment or order may:
(i) stay or suspend execution of the judgment or order, or
(ii) postpone the date for delivery of possession
for such period or periods as the court thinks reasonable.
The court's powers under s36 apply equally to repayment mortgages and endowment mortgages (Bank of Scotland v Grimes [1985] 2 All ER 254, CA).
In Royal Bank of Scotland v Miller [2001] EWCA Civ 344, [2002] QB 255, CA it was held that (1) the relevant time for determining whether land consists of or includes a dwelling-house within the meaning of s36 is the time when the mortgagee claims possession, not the date when the legal charge is entered into; and (2) breach of a term of the mortgage (e.g. occupation by a third party without consent) does not prevent s36 from applying.
The court's power under s36 to adjourn mortgage possession proceedings, stay or suspend execution or postpone the date for delivery of possession ceases after a warrant has been executed. (Cheltenham and Gloucester Building Society v Obi (1996) 28 HLR 22, CA.)
A bankrupt has locus standi to make an application to the court for relief under Administration of Justice Acts 1970 and 1973 (Nationwide BS v Purvis [1998] BPIR 625, CA).
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Criteria and Evidence
The borrower must, on the balance of probabilities satisfy the court that it is likely that the arrears will be cleared within a reasonable period. 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 (1995) 71 P&CR 257, CA)
The defendant need not always produce evidence in the normal formal sense (e.g. witness statement, affidavit or on oath). In Cheltenham and Gloucester Building Society v Grant (1994) 26 HLR 703, CA where the building society unsuccessfully challenged the common practice of district judges exercising their discretion under AJA 1970 without hearing sworn evidence from borrowers, 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." (p707)
The Court of Appeal declined to lay down rigid rules as to how "busy district judges" should satisfy themselves as to the requirements in s36 and upheld the original order made by the district judge that a possession order should not be enforced without leave of the court while regular payments were made.
Reasonable period
One crucial question which has to be answered in every case is "What is a reasonable period?" The phrase is not defined by the Administration of Justice Act.
In Centrax Trustees v Ross [1979] 2 All ER 952, ChD, Goulding J stated that in assessing how long a reasonable period might be, the court must "bear in mind the rights and obligations of both parties, including [the lender's] right to recover their money by selling the property, if necessary, and the full past history of the security."
In First Middlesbrough Trading and Mortgage Co Ltd v Cunningham (1974) 28 P&CR 69, CA, Scarman LJ, when considering what is a "reasonable period" within s36, stated:
"since the object of the installment mortgage was, with the consent of the mortgagee, to give the mortgagor the period of the mortgage to repay the capital sum and interest, one begins with a powerful presumption of fact in favour of the period of the mortgage being the 'reasonable period'". (p75)
In Western Bank v Schindler [1977] Ch 1; [1976] 2 All ER 393, CA Buckley LJ stated:
"What must be reasonable must depend on the circumstances of the case. . . . In a suitable case the specified period might even be the whole remaining prospective life of the mortgage". ([1976] 2 All ER at p400)
These passages were obiter but were followed by the Court of Appeal in Cheltenham and Gloucester Building Society v Norgan [1996] 1 All ER 449, CA. Waite LJ stated that in determining "a reasonable period"
"the court should take as its starting point the full term of the mortgage and pose at the outset the question: would it be possible for the mortgagor to maintain payment-off of the arrears by installments over that period?" (p458)
In Norgan there had been a history of arrears. In May 1990, when arrears stood at £7,216, the building society obtained a possession order suspended for 28 days. In December 1990 the terms of the suspension were varied, but not complied with, and the building society obtained a warrant. The warrant was twice suspended on terms, but when the borrower failed to comply, the building society applied to reissue the warrant and the borrower crossapplied for a further suspension. The district judge gave leave to reissue the warrant and refused any further suspension. By the time the appeal came on before the circuit judge the arrears were in the region of £20,000. He dismissed the borrower's appeal and she appealed to the Court of Appeal. The Court of Appeal allowed her appeal.
Evans LJ set out a number of considerations which are likely to be relevant when establishing what is a reasonable period. They include:
"(a) How much can the borrower reasonably afford to pay, both now and in the future? (b) If the borrower has a temporary difficulty in meeting his obligations, how long is the difficulty likely to last? (c) What was the reason for the arrears which have accumulated? (d) How much remains of the original term? (e) What are the relevant contractual terms, and what type of mortgage is it, ie when is the principal due to be repaid?"
Other matters which may be relevant include family circumstances and the income of other members of the family. If arrears have accrued as a result of matrimonial breakdown, are any proceedings for ancillary relief likely to result in an order which will enable arrears to be paid off? Is the Benefits Agency (or should it be) paying anything towards the interest due on the mortgage?
Security at risk
Norgan was a case where the lender's security was not at risk. Courts are likely to be far more cautious about exercising s36 powers where there is already negative equity or where there is a risk of negative equity. In Norgan Waite LJ recognised that there would be cases where evidence might "be required to see if and when the lender's security will become liable to be put at risk as a result of imposing postponement of payments in arrear". (p459) Evans LJ indicated that courts should ask "Are there any reasons affecting the security which should influence the period for payment?" (p463) Similarly in First Middlesbrough Trading and Mortgage Co Ltd v Cunningham the Court of Appeal stated that when exercising its AJA discretion, one of the "relevant surrounding circumstances" which the court is entitled to take into account is the fact that the debt might be inadequately secured. Sometimes borrowers produce letters from estate agents in order to satisfy the court about the value of the property in comparison with the amount of the loan outstanding, but in Bristol and West BS v Ellis (1997) 29 HLR 282, CA the Court of Appeal stated that judges should approach such estimates with "reserve". If a borrower's valuation is disputed, it may be necessary for there to be an adjournment for an independent valuation so that the court can determine whether the lender's security is at risk.
Sale of the property
In most cases borrowers try to satisfy the court that it is likely that the arrears will cleared within a reasonable period by giving evidence about their income and expenditure. However, where borrowers' income is not sufficient to repay arrears, they may seek time in which to sell the property so that the outstanding balance (including arrears) can be paid from the proceeds of sale.
In National and Provincial Building Society v Lloyd [1996] 1 All ER 630, CA, the Court of Appeal considered an appeal against a decision to suspend a possession order to give the borrower time to sell premises and so clear mortgage arrears. The building society argued that any such suspension should only be for a short period. Neill LJ rejected this submission. If there is clear evidence that 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 could not come to the conclusion that it was likely that the arrears would be repaid within a reasonable period. What is "a reasonable period" is a question for the court in each individual case. However, in Lloyd there was insufficient evidence before the judge to show that the arrears would be paid within a reasonable period. Much of it was "a mere expression of hope" and accordingly the building society's appeal against the suspension was allowed.
In Bristol and West BS v Ellis (1997) 29 HLR 282, CA, 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. In Ellis the Court of Appeal allowed a lender's appeal against an order which would have allowed the borrower three to five years (when her children would have finished university education) to sell because there was insufficient evidence that Mrs Ellis could or would sell the property within that period or that the proceeds of sale would be sufficient to discharge the mortgage debt and arrears. The Court stated that the comments by Neill LJ in National and Provincial BS v Lloyd [1996] 1 All ER 630 that sale "could take place in six or nine months or even a year" did not establish a year as the maximum period "as a rule of law or as a matter of general guidance". (See too Cheltenham and Gloucester BS v Johnson (1996) 28 HLR 885, CA where Lloyd was followed.)
In most cases where the security is not at risk, the court will adjourn or make a suspended order to allow the borrowers to arrange a sale. It is generally accepted that borrowers occupying premises achieve a better price on sale than lenders through "forced sales". For example in Target Home Loans v Clothier [1994] 1 All ER 439, CA borrowers paid no mortgage installments for over 15 months and when possession proceedings came to court there were arrears of £46,000. The lenders sought an immediate possession order, but the district judge adjourned for 56 days under s36. When the Court of Appeal heard the appeal, 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 . . . ([1994] 1 All ER at p447)
The Court of Appeal made a possession order to take effect in three months.
Even if the power to suspend execution under Administration of Justice Act 1970 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 giving up of possession in order to enable the lender to sell the property (Cheltenham and Gloucester plc v Booker (1997) 29 HLR 634, CA.) In such circumstances 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. There is no reason in principle for the court to accede to a lender's insistence upon immediate possession if
(a) possession will only be required on completion;
(b) the presence of the borrowers pending completion will enhance, or at least not depress, the sale price;
(c) the borrowers will cooperate in the sale; and
(d) they will give possession to the purchasers on completion.
However in Booker Millett LJ stated these conditions are seldom likely to be satisfied and the circumstances in which such a course would be appropriate are hard to imagine. Such an order would "certainly be a rarity".
If a lender does not agree to a borrower selling premises, the borrower may apply for an order for sale under Law of Property Act 1925 s91(2). Such an application may be made in a county court if "the amount owing in respect of the mortgage or charge at the commencement of the proceedings does not exceed £30,000" (The High Court and County Courts Jurisdiction Order 1991, para 2(4)). If the amount owing is more than £30,000 a section 91 application has to be made in the High Court. In Cheltenham and Gloucester BS v Krausz [1997] 1 All ER 21, CA, the Court of Appeal held that a district judge in the county court has no jurisdiction to suspend a warrant in these circumstances. Phillips LJ did not consider "that the County Court, as part of its inherent jurisdiction, can properly suspend an order or warrant for possession in order to enable a mortgagor to apply to the High Court for an order under section 91. It [is] incumbent on the mortgagor to seek from the High Court any relief which the court is empowered to give before the warrant takes effect." He noted that s36 makes it clear that parliament did not intend that the court should have power to curtail mortgagees' rights to possession unless the proceeds of sale were likely to discharge the mortgage debt.
Mortgage Pre-Action Protocol
A new pre-action protocol for possession claims based on residential mortgage arrears came into force on 19 November 2008. See White Book 2009, C*-**** and the annotations thereto. The Protocol does not alter the parties contractual or statutory rights and obligations, but does describe the behaviour the court will normally expect of the parties prior to the start of possession claims. It aims to ensure that lenders and borrowers act fairly and reasonably with each other in resolving any matter concerning mortgages and encourages more pre-action contact between lenders and borrowers in an effort to seek agreement, and where this cannot be reached, to enable efficient use of the courts time and resources. For example, it provides that
- lenders should consider reasonable requests from borrowers to change the date of regular payment or the method of payment;
- lenders should respond promptly to any proposal for payment made by borrowers. If lenders do not agree to such a proposal they should give reasons in writing;
- if lenders submit proposals for payment, borrowers should be given a reasonable period of time in which to consider such proposals; and
- if borrowers can demonstrate that reasonable steps have been or will be taken to market the property at an appropriate price in accordance with reasonable professional advice, lenders should consider postponing starting possession claims.
The Protocol does not contain any specific sanctions, but concludes Parties should be able, if requested by the court, to explain the actions that they have taken to comply with this protocol. However, if non-compliance has led to the commencement of proceedings which might otherwise not have needed to be commenced, or has led to costs being incurred in the proceedings that might otherwise not have been incurred, the court has the power to make the orders in relation to costs and interest set out in para 2.3 of the Practice Direction on Protocols (see White Book, C1-002), although when doing so, the court should bear in mind the contractual rights and obligations of the parties under the mortgage deed.
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