The Most Expensive Purchase, a Mortgage

By the nature of the mortgage, terms of repayment of the debts are incorporated in the document. It may also contain certain rights, but invariably includes rights of the mortgagee in the event of the mortgagor’s inability to keep up repayment or to pay the capital.

In these circumstances, a mortgage has several remedies available for enforcing payment. Three of these are primarily directed to recovering the capital due and putting an end to the security whilst the other two are taking possession and appointing a receiver (Oakley 2002, p.501) When the mortgagor falls into arrears, it has been argued that the lending institutions do all it can to avoid repossession, but if it has to enforce their security, difficult social questions arise since the mortgagor has given his home as security, and not as investment (Burn and Cartwright 2006, p.719) This issue is of particular relevance in the current economic climate, especially because it is predicted that “there will be 40,000 home repossessed in 2011 – up from about 36,000 this year”. (Metro: 21 December) Further, the main issue arising in these cases is whether or not the mortgagor has sufficient protection if the mortgagee brings action to repossess the property.

It was considered that the Administration of Justice Acts 1970 and 1973 was enacted “with the objective of allowing a mortgagor who had got into difficulty in making mortgage repayments some breathing space before the mortgagee took possession of the property, in order to get his financial affairs in order” (Thompson, M. 1996, pp118-125). However, this objective of protecting the mortgagors has not been consistently employed when the courts exercise their discretions under relevant provisions (in particular section 36 of the 1970 Act as amended by section 8 of the 1973 Act) and resolve the competing interests of mortgagor and mortgagee. (Thompson, M. 1998, pp125-133)

The mortgagee has a right to take possession of the property as a secured creditor. (Thompson, 2006: p.449) As Harman J pointed out “the right of the 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.”(Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317 at 320). However, in practice, possession is only sought if there was a default (Thompson, 2006: p.449).

Where the mortgagor seeks relief from the mortgagee’s action to repossess the property, the court may adjourn the proceedings, stay or suspend execution of the judgement or order, or postpone the date for delivery of possession under section 36 of the Administration Act 1970. The court has a wide discretion to deal with the proceedings under this Act. However, a court shall not exercise its jurisdiction unless it appears to the court that the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage, or to remedy any other default under it (Oakley, 2002: p.509).

In addition to the right afforded to the mortgagees set out by Harman J above, mortgagees have further protection where a “default clause” is inserted into the mortgage, giving them entitlement to bring action against the mortgagor even if the mortgagor has only fallen behind, say, two mortgage instalments. These clauses have deprived a mortgagor of the protection which the Act was intended to give, which was to provide him a reasonable time to clear the mortgage arrears (Thompson, 2006: p.450). Such clause was dealt with in Halifax Building Society v Clark [1973] 2 All E.R. 33, where the court had to decide as to whether the sums due under the mortgage was the actual arrears, (in this case two instalments of £72.97) or the whole amount which had been borrowed. The court held that it was the latter. As a result of this decision, section 8 of the Administration of Justice Act 1973 was passed. Section 8 provides that:

“Where….the mortgagor is entitled or is to be permitted to pay the principal sum secured by instalments or otherwise to defer payment of it in whole or in part, but provision is also made for earlier payment in the event of any default by the mortgagor or of a demand by the mortgagee or otherwise, then, for the purposes of section 36 of the Administration Act 1970…a court may treat as due under the mortgage on account of the principal sum secured and of interest on it only such amounts as the mortgagor would have expected to be required to pay if there had been no such provision for earlier payment.”

In considering what amounts to “reasonable time” under the above provisions the court will take into account the interests of the parties. (Bridge, et al., 2008: p.1118) It has been argued that how the court will exercise its discretion will depend upon the facts of individual cases which may be influenced by the different practices of lending institutions who display quite varied reactions to instances of mortgage default by mortgagors (Thompson, 2006:p.453). However, the court will usually start with the full term of the mortgage and consider the mortgagor’s ability to pay off all of the arrears over that time (Bridge, et al., 2008:p.1118).

The case law has developed in determining as to how the above discretion was to be exercised. In the case of Cheltenham and Gloucester Building Society v Grant [1993] 25 H.L.R., the Court of Appeal “declined to interfere with the exercise of a county court judge’s discretion unless it was regarded as being demonstrably wrong.” (Thompson, M. 1998: pp.126) This very lax approach evidently did not assist the mortgagor but the decision in the very important case of Cheltenham and Gloucester Building Society v Norgan [1996] 1 All E.R.630 was welcomed. This case provided clear and intelligible guidelines as to how judges are supposed to exercise their discretion when a mortgagor seeks to defend possession action (Thompson, M. 1996:pp 125-133) It has been held in this case that considerations which are likely to be relevant in determining what constitutes reasonable period include: the amount the borrower could reasonably afford to pay both now and in the future; if he has temporary difficulty in meeting his obligations, the reason for the arrears which had accumulated; the amount remained of the original term; the relevant contractual terms and type of mortgage (Oakley:2002:484) In this case, it was considered that “reasonable time” might extend to the full term of the mortgage.

Although the above decision has since been reaffirmed in a later case in Household Mortgage Corporation v Pringle (1998) 30 HLR 250, CA, the court has not been so generously inclined towards the mortgagor in cases would yield insufficient amount to discharge the mortgage liabilities or where the prospect of sale is a mere “expression of hope”. (Clements, 1999 Web Journal)

For instance, in Bristol and West Building Society v Ellis (1996) 73 P. &C.R. 158, the Court of Appeal has made it clear that the main consideration is the safety of the mortgagee’s security. (Clements: 1999: Web Journal) In this case, the arrears were some £16,000 on the original loan of £60,000. Mrs Ellis was in a position to pay the mortgagee a lump sum of £5,000 and meet the normal repayments as well as pay £10 towards clearing off the arrears. Based on the facts, it would take her 98 years to pay off the arrears, a period which nobody argued could be seen as a reasonable period within the meaning of the Act (Thompson,2006:p.456). She proposed that the sale of the property should be postponed for a period of five years to allow her son to finish his education and that when the house would be sold in five years’ time there will be sufficient amount to discharge her debt to the mortgagee. Her argument was rejected by the Court of Appeal and Auld L.J. stressed that:

“the critical matters are the adequacy of the security for the debt and the length of the period necessary to achieve a sale. There should be evidence, or at least some informal material…before the court of the likelihood of a sale the proceeds of which will discharge the debt and of the period in which such a sale is likely to be achieved.”

One of the consequences for the mortgagors as a result of the decision in Norgan was that they are expected to present firm evidence of a realistic budget showing how they will be able to pay off the mortgage whilst maintaining normal mortgage repayment (Clements, 1999:Web Journal). The difficulty with this requirement is that, invariably, the reason as to the mortgagor falling into arrears in the first place is the loss of a job (Thompson, 1998:126). In the current economic climate, the chances of the mortgagor presenting the required evidence to convince the court to postpone or suspend possession because alternative employment might be found will be very slight. The alternative for the mortgagors in these circumstances is to seek to sell the property themselves in order to discharge the arrears (Thompson, 1998: p.126). However, recent cases indicate that this alternative is not without problems, as even though the mortgagors had put the property in the hands of an estate agent this does satisfy the requirement (Thompson, 1998:p.126). Effectively, the introduction of the legislation had not materially changed the substance of the law when a mortgagor sought a postponement of a possession order in order to sell the property himself, in order to redeem the mortgage (Thompson, 1998:p.126).

In addition to the above, where the mortgagee takes possession of the property without the court order, the court has no jurisdiction under the 1970 and 1973 Acts as the taking possession is a right by the mortgagee and not a remedy as decided in the case of Ropaigelach v Barclays Bank Plc [1999] 4 All E.R. 235 (Thompson, 2006, p.450). This decision highlighted the weakness in the law protecting residential mortgagors (Clements, 1999: Web Journal of Current Legal Issues). As highlighted in the above cases, the limitations of the statutory discretion afforded by the courts with the intention of protecting the mortgagors have become apparent (Clements, 1999: Web Journal of Current Legal Issues).

Clements (1999) suggests that the legislation must address two major issues which are: the need for the mortgagee to obtain a court order for possession in all cases and whether the court should be given power to re-write contracts.

The Law Commission recognised the lack of protection afforded to mortgagors in repossession proceedings. In their 1991 Report, Transfer of Land – Mortgages, they propose various changes but so far have fallen into deaf ears by the Parliament. Unless such proposals are implemented, mortgagors will have to rely on the court’s exercising their discretion under the Administration of Justice Acts 1970 and 1973 to their favour.