Cheltenham and Gloucester Building Society v. Norgan

Assess whether the decision in Cheltenham and Gloucester Building Society v. Norgan [1996] 1 All ER 449 favours borrowers or lenders.

In the past many considered Mortgagees (Lenders) to be ‘hard hearted…turning out the innocent and grinding the faces of the poor’^[1] but that cannot be said to be true of present mortgagees. All one has to do is walk down the high street to realise that mortgagees of the modern times are competing with one another to reach out to the ‘aggressive consumerists avidly working their way up the ladder of property ownership’^[2] through special mortgage offers. Despite all this there are many instances where the law has to step in to determine what the rights of both the mortgagee and the mortgagor ( borrower) when disputes arise. The case of Cheltenham and Gloucester Building Society v. Norgan^[3] had to analyse the rights of both the mortgagee and the mortgagor to decide if the mortgagor should be allowed to remain in the property and the mortgagee denied possession.

Right to Possession

The right of a mortgagee of possession is exactly that – it is a right. It would be easy for many to mistakenly believe that this right is actually a remedy for the mortgagee to use when the mortgagor defaults on the mortgage, but in truth this is not the case. Harman J very astutely set this out in one of his judgements in the following way:

‘The right of a mortgagee to possession in the absence of some contract has nothing to do with default on the part of the mortgagor. The mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the mortgage, express or by implication, whereby he has contracted out of that right’^[4]

This being the case it would appear that the position of the mortgagor is severely unfavourable compared to that of the mortgagee.

Possession and the Mortgagee Pre Norgan

The rights of the mortgagor were made a lot clearer by the introduction of s36 of the Administration of Justice Act (AJA) 1970 and s8 of the AJA 1973 which gave the courts a statutory discretion to deny the mortgagee from gaining possession of a dwelling house. This power would only arise if an action for possession is brought by the mortgagee^[5] and it must appear ‘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 or by virtue of the mortgage’^[6] One big problem remained and this was that neither statute specified what ‘reasonable time’ meant when referring to the period that the court could deny the mortgagee from gaining possession of the mortgaged property. Prior to Norgan this relief was very limited in that the courts adopted the view that a reasonable period of time should be between two and four years.^[7] The Judicial Studies Board actually recommended that the ‘reasonable time’ period should be two years.^[8] This problem was resolved in the Norgan^[9] case.

The Norgan Case

In 1996 Mrs Norgan mortgaged her property to Cheltenham and Gloucester for 22 years to provide £90,000 for her husbands business. By 1990 Mrs Norgan had fallen into arrears and owed £7, 000. Cheltenham and Gloucester applied for a possession order worth £225, 000. The court suspended the possession order on the condition that Mrs Norgan would pay interest and the arrears within 4 years. Mrs Norgan was unable to keep up with the repayments and in 1993 Cheltenham and Gloucester applied for immediate possession. The District Judge ordered possession as he decided Mrs Norgan would be unable to repay the interest and arrears within a reasonable period, which he deemed to be four years. The order was upheld in the County Court and Mrs Norgan appealed to the Court of Appeal.

It could be argued that at first instance and the first appeal the courts decision was in the favour of the Mortgagee. The courts decision meant that a precedent would be set to allow mortgagors who fell into arrears only 4 years to pay off the arrears, the interest and to also keep up with the mortgage repayments. Waite LJ was ‘strongly in favour of adopting the full term of the mortgage as the starting point for calculating a ‘reasonable time’ for payment of arrears’.^[10] He used the dictum of Scarman LJ from Middlesbrough Trading and Mortgage Co Ltd v. Cunningham^[11] who stated ‘Since the object of the installmentmortgage was, with the consent of the mortgagee, to give the mortgagor the period of themortgage to repay the capital sum and interest, one begins with a powerful presumption of fact in favour of the period of themortgage being the “reasonable period”’^[12] This case was prior to the enactment of s8 of the Administration of Justice Act 1973 and Waite LJ was aware of this but believed that the view of allowing the remainder of the mortgage term for repayment of arrears was the correct approach. Waite LJ also used the dictum of Buckley LJ in Western Bank v. Schindler^[13] who said ‘in a suitable case the specified period might even be the whole remaining prospective life of themortgage’^[14]. This Schindler case, however, applied to a situation where there had been no default, meaning that there were no arrears to repay. Waite LJ also sought to support his judgment by stating that allowing the remainder of the mortgage term to be the starting point for the ‘reasonable time’ period would ensure that the parties to such proceedings would not frequent the courts over many years, therefore cutting down on court time and costs.^[15]

Evans LJ agreed with Waite LJ’s judgment entirely but he looked both at the interests of the mortgagor and the mortgagee as the word ‘reasonable’ must mean reasonable for both parties. The only interest of the mortgagee is financial. The interests of banks and their shareholders are dependant upon the mortgagor paying off the mortgage. However, for a mortgagor the interests are more than just financial. The property is the home of the mortgagors and their families. The differing interests of mortgagees and mortgagors were not examined at length in the case but are a good reason for allowing a mortgagor the whole term of the mortgage to repay.

Who Does the Norgan Decision Favour?

In possession cases the court must determine whether the mortgagor is likely to be able to repay the arrears and the mortgage repayments within a reasonable period. If they find the mortgagor is likely to be able to keep up with payments then the court may delay the granting of possession to the mortgagee. The difference that the case of Norgan makes is that a reasonable period may now be 20 years rather than just between two and four years. The courts will now consider the whole of the remaining mortgage term as their starting point for what a reasonable period is. This seems to favour the mortgagee in that the longer the period the more ‘reasonable’ it will be for him.^[16] However it is likely that the court will only allow an amount of time before which the financial interest of the mortgagee will be at risk.^[17] When the arrears and the capital together reach the expected sale price of the property the mortgagee’s financial interest is at risk as the power of sale might not recover the total amount outstanding. In the case of Norgan the price of the property, if the right of sale took place, would have exceeded the amount owed. If a case came along where the mortgagor was in the unfavourable position of negative equity then the mortgagee’s financial position would be at risk and it is very unlikely that the court would allow a long period of time for repayments. Bearing all of this in mind the case of Norgan could be said to favour both the mortgagee and the mortgagor. The mortgagee does not care if the mortgagor is allowed to remain in the property as long as the mortgagee receives the financial reward of having provided the mortgage. The mortgagor is now in a more favourable position where he can show that he has the financial means to pay off what he owes over the remaining term of the mortgage. However, it would also appear that not all types of mortgagor will be placed in a more favourable position, as the legislation will not come into play for those mortgagors where possession is not sought through the courts. Also mortgagors who find themselves in negative equity are not likely to be provided with the opportunity to have possession delayed for the remaining term of the mortgage. The mortgagee has always had the opportunity to ensure their financial interest is not put at risk and that is still the case. Mortgagees are unlikely to lose out but the mortgagors are now in a much more welcome position.

Bibliography

Books

• • Gray, K and Gray, SF Land Law (3^rd edn), Butterworths publishing, London, 2003
  • Thompson citing Waite LJ in Thomson, MP Modern Land Law (2^nd edn) Oxford publishing, Oxford 2003

Statutes

• • Administration of Justice Act 1970
  • Administration of Justice Act 1973

Cases

• • Cheltenham and Gloucester Building Society v. Norgan [1996] 1 All ER 449
  • First Middlesbrough Trading and Mortgage Co Ltd v. Cunningham (1974) 28 P & CR 69
  • Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317
  • Hanlon v Law Society [1981] AC 124, HL
  • Ropaigealach v Barclays Bank plc [2000] QB 263, CA
  • Western Bank v. Schindler [1977] Ch 1, CA

Word Count: 1, 758

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Footnotes

^[1] Hanlon v Law Society [1981] AC 124, HL per Lord Denning MR

^[2] Gray, K and Gray, SF Land Law (3^rd edn), Butterworths publishing, London, 2003 at p.545

^[3] [1996] 1 All ER 449

^[4] Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317

^[5] Ropaigealach v Barclays Bank plc [2000] QB 263, CA

^[6] S.36(1) Administration of Justice Act 1970

^[7] Thompson citing Waite LJ in Thomson, MP Modern Land Law (2^nd edn) Oxford publishing, Oxford 2003 at p. 422

^[8] Waite LJ referring to the judgement of judge O’Malley [1996] 1 All ER 449 at 456

^[9] [1996] 1 All ER 449

^[10] Ibid at p 459

^[11] (1974) 28 P & CR 69

^[12] Ibid, at p 75

^[13] [1977] Ch 1, CA

^[14] Ibid at p 14

^{[15] [1996] 1 All ER 449 at 459}

[16] ^{[1996] 1 All ER 449 at 46}1

[17] Waite LJ [1996] 1 WLR 343, at p 354