As mortgage repossession claims rise, Georgia Bedworth and Simon Hill consider the courts’ approach ten years after Norgan and Ellis
Worry about the rise in personal debt and the near doubling of mortgage repossessions between 2004 and 2005 has again thrown into sharp focus the rights of mortgagors and mortgagees when homeowner mortgagors fall behind with their mortgage repayments. As in the days of creeping negative equity and rising interest rates, practitioners will need to consider how long mortgagors can postpone the moment when the mortgagee will succeed in recovering possession.
Mortgagee’s right to possession
Many practitioners will recall from their university days the often quoted line that a legal mortgagee has a right to go into possession of the mortgaged property 'before the ink is dry on the mortgage' (Harman J in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317, 320), unless the mortgagee has contracted out of the right. Before Parliament stepped in with the introduction of section 36 of the Administration of Justice Act 1970 and section 8 of the Administration of Justice Act 1973, the mortgagee’s proprietary right was curtailed only in one respect – a court could limit the mortgagee’s entitlement to an immediate order for possession by finding that the mortgagor had a reasonable prospect of paying off the mortgage in full, or otherwise satisfying the mortgagee, within a ‘short time’; the court would then provide a ‘short’ adjournment for this purpose – see Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883.
This harsh rule was mitigated by the introduction of the 1970 and 1973 Administration of Justice Acts. By those Acts, the court became entitled, in certain circumstances, to adjourn, postpone, stay, or suspend the claim for possession, order or warrant, for such period or periods as the court thinks fit; thereby enabling the court to provide a 'measure of relief to those people who find themselves in temporary financial difficulties, unable to meet their commitments under their mortgage and in danger of losing their homes' – Bank of Scotland v Grimes [1985] 2 All ER 254.
Section 36 of the 1970 Act provides that where the court is faced with a mortgagor in default, the court ‘may’ exercise these powers 'if it appears to the court that in the event of it exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage'. Section 8 makes provision so that section 36 applies notwithstanding the existence of an early repayment clause.
Likelihood
Whether the mortgagor is ‘likely’ to pay the sums due is a question of fact, to be decided by the judge on the evidence (Royal Trust Co of Canada v Markham [1975] 3 All ER 433).
What is a ‘reasonable period’?
The concept of a 'reasonable period' is central to the court’s jurisdiction under the Administration of Justice Acts. The Acts do not define what a 'reasonable period' is, and the phrase has been discussed in a number of Court of Appeal decisions. It is important to note that the court’s approach to the concept of ‘reasonable period’ differs according to whether the mortgagor proposes to:
(1) pay (i) the current instalments as and when they fall due; and (ii) repay the arrears by periodic payments; and/or
(2) redeem the mortgage, by selling or re-mortgaging the property.
Periodic payments
Where the mortgagor proposes to discharge all the arrears by periodic payments, the court will have to be satisfied that the mortgagor is able to pay the ongoing mortgage instalments in addition to a periodic sum in respect of the arrears. The court must be satisfied that this will result in the arrears being repaid within a 'reasonable period'. By virtue of section 8 Administration of Justice Act 1973, the court will almost always ignore any accelerated payment clause.
It is well established as a result of Cheltenham & Gloucester v Norgan [1996] 1 All ER 449 that the starting point for a 'reasonable period' for such payment is the remainder of the term of the mortgage. It is, however, only a starting point and not an assumption. The rationale behind taking the mortgage term as the starting point is that it gives the mortgagor a long period to repair the damage and avoids repeated court hearings by granting a generous arrangement to start with. It must be remembered that by virtue of the contract between the parties, the mortgagee is not entitled to full repayment until the end of the term. Mortgagees benefit because, should the mortgagor default on the new arrangement, the mortgagee can legitimately say that the mortgagor has had his chance.
From this starting point, the following non-exhaustive list of factors is likely to be relevant when establishing the reasonable period:
(1) How much can the mortgagor reasonably afford to pay, both now and in the future?
(2) If the mortgagor has a temporary difficulty in meeting his obligations, how long is the difficulty likely to last?
(3) What is the reason for the accumulation of the arrears?
(4) How much remains of the original term?
(5) What are relevant contractual terms, and what type of mortgage is it, ie, when is the principal due to be repaid?
(6) Is it a case where the court should exercise its power to disregard accelerated payment provisions (section 8 of the 1973 Act);
(7) Is it reasonable to expect the mortgagee, in circumstances of the particular case, to recoup the arrears of interest: (i) over the whole of the original term; (ii) within a shorter period; or even (iii) within a longer period, ie, by extending the repayment period?
(8) Are there any reasons affecting the security that should influence the length of the period for payment. In relation to this last factor, the court will take into account whether the mortgagor is allowing the property to deteriorate or whether the mortgage is of a wasting asset, such as a lease.
When defining a claim to possession on the basis of periodic payments, each of these factors should be considered and dealt with, including by ensuring that the court has up-to-date information regarding the mortgagor’s current and likely future income and the value of the security.
Remortgage or sale of the property
Where a mortgagor cannot discharge the arrears by periodic payments, whether or not he can meet the normal instalments, his only real prospect of avoiding repossession will be to repay the entire mortgage loan with accrued (and accruing) interest by:
(i) selling the property, or
(ii) remortgaging with another lender (sometimes called 'to rebank').
In such cases, the reasonable period is clearly not the term of the mortgage and the Norgan line of authority does not apply. So, how long is the reasonable period that the court should give? In Target Homes Loans Ltd v Clothier [1994] 1 All ER 439, a reasonable period was said to be three months. National and Provincial Building Society v Lloyd [1996] 1 All ER 630, decided in December 1995, set down that ‘reasonable’ in the statute should not necessarily be equated with ‘short’. Neill LJ said that:
'If there were…clear evidence that the completion of the sale of the property, perhaps by piecemeal disposal, could take place in six or nine months or even a year, I see no reason why a court could not come to the conclusion [that this was a reasonable period].'
On the facts of Lloyd, the evidence was insufficiently clear to establish the required likelihood.
Bristol & West Building Society v Ellis
Bristol & West Building Society v Ellis [1996] 29 HLR 282 sets down the critical factors to be considered in this type of case:
(1) the adequacy of the property as security for the debt;
(2) the effect of time on the security; and
(3) how long is needed to achieve the sale.
These are the most important, but the court will consider the other circumstances of the case in deciding what is a reasonable period. Ellis held that the reference to a year in Lloyd did not set down a rule of law that one year is the maximum allowed; in theory, more than one year could be allowed, but the court in Lloyd emphasised that in many cases one year was likely to be the maximum. This would be especially so where arrears are increasing because current instalments are not being met. It is likely that suspension of a possession order for a period in excess of one year will only be granted in exceptional circumstances.
The next step is to consider whether the case falls into any of the following categories:
(1) Where the property is already on the market and there is some indication of delay on the part of the mortgagor it may be that a short period of suspension of only a few months would be reasonable (eg Clothier – three months);
(2) Where there is likely to be considerable delay in selling the property and/or its value is close to the total of the mortgage debt and arrears so that there is a risk the sum raised by the sale will be insufficient to repay the loan (in other words, the security will be inadequate), immediate possession or only a short period of suspension may be reasonable;
(3) Where there has already been considerable delay in realising a sale of the property and/or the likely sale proceeds are unlikely to cover the mortgage debt and arrears, or there is simply insufficient evidence as to sale value, the normal order would be for immediate possession.
Conflict between Steele and Ellis
There is a tension however between this guidance in Ellis, and Mortgage Service Funding Plc v Steele [1996] 72 P&CR D40 (a favourite authority with representatives of mortgagees). In Steele, the mortgagor sought leave to appeal against an order for possession, seeking a deferment of the possession order in order to sell the property. The court held that in such circumstances, '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'. The rationale expressed in Steele for taking such a strict line is that:
(1) if there is a potential purchaser at hand, then the mortgagor can put the mortgagee in touch with him and the sale can go from there i.e. the purchaser isn’t lost, he simply purchases from the bank instead; and
(2) the mortgagor’s position is protected because the mortgagee is under a duty to obtain the best price reasonably obtainable.
The tension between Steele on the one hand, and Ellis and Lloyd on the other arises because Steele raises the bar for section 36 protection, requiring that there must be a particular sale, and that it must be about to be completed. Mortgagee representatives cite Steele as authority for the proposition that ‘about to be completed’ means contracts must already have been exchanged, with completion due to take place within a few weeks. However, this is not what Steele requires. Steele requires that there is a sale with a particular purchaser on foot and suggests that where there is no particular sale on the horizon, the court should not undertake the balancing exercise set out in Ellis.
It is our view that Ellis is to be preferred over Steele. This is because:
(1) Ellis (24 April 1996) was decided after Steele (10 April 1996);
(2) Ellis is a full appeal decision, whereas Steele is an application for leave (i.e. permission) to appeal. Leave for appeal decisions are only of persuasive authority and reference to them is not encouraged – see Clark v University of Lincolnshire and Humberside [2000] 3 All ER 752;
(3) Express consideration is given in Ellis to the previous authorities in relation to the sale of property, including Clothier and Lloyd; whereas the Court of Appeal in Steele only referred to Norgan, which in our view is not strictly relevant to the question that the court had to decide as it is a periodic payment case, not a redemption case; and
(4) The approach in Ellis accords more with the wording of the statute. A court should be able to consider the full range of sale situations, from the ‘very imminent’, to the ‘distant hope’, and consider on a case-by-case basis what is a reasonable period.
A gloss is given in Cheltenham & Gloucester BS v Krausz [1997] 1 All ER 21, CA, where it was held that, where the mortgagor is in negative equity, a mortgagee’s rights take priority and the court has no power to suspend an order for possession unless the mortgagor can show he is able to make up the shortfall from elsewhere.
Evidence
A mortgagor’s evidence can be either formal evidence taken on oath, or simply information provided to the court informally (Cheltenham & Gloucester BS v Grant, The Times, 9 May 1994). Should periodic payments be proposed, it would be wise for the mortgagor to have a detailed financial budget demonstrating how and where the money will be found.
Where a sale of the property is proposed, a mortgagor may find he needs more than a few optimistic letters from estate agents to convince a judge that a sale is likely soon. Such letters are treated with reserve as estate agents 'could win by a distance any competition between members of different professions for optimism' (Clothier). Evidence of at least some marketing of the property with some type of valuation should be presented. Usually, it is quality not quantity that is persuasive.
It is important to distinguish the two different lines of defence and prepare evidence (and submissions) appropriately.
Conclusion
It is now ten years since Norgan, Steele and Ellis. The stronger economic climate resulting in fewer mortgage repossessions has allowed the tension between Ellis and Steele to persist. Any persuasive force Steele currently has, should bow to the more authoritative Ellis, where practical considerations, mortgagee’s income stream, mortgagor’s optimism and real evidence are more properly reasoned and balanced. With the present increase in mortgage possession claims, these factors are likely to come to the fore once again.
SIMON HILL AND GEORGIA BEDWORTH © 2006
BARRISTERS
33 BEDFORD ROW AND 10 OLD SQUARE
Simon Hill and Georgia Bedworth are barristers practising from 33 Bedford Row and 10 Old Square respectively
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.