Essay Question On Mortgages

QUESTION "It is quite incredible in the 21st century that the law allows a lender to choose whether or not to take possession proceedings and that the borrower then becomes a trespasser in his or her own home." - John Gallagher, principal solicitor at Shelter (quoted in The Times on 10th November 2008) Find the High Court case which prompted this statement and explain and analyse, with reference to this and earlier case law, the ability of a mortgagee to seek possession without first obtaining a court order. Evaluate some of the initiatives and reforms recently proposed or introduced with the aim of protecting mortgagors of residential property in this context.

ANSWER In English law mortgagees have an unqualified right to possession when the mortgage begins. Case law and statute have restricted this right. However English law has seemingly overlooked the fact that a mortgagee can obtain de facto vacant possession of a property by exercising contractual and/or statutory powers of sale or self help that are not subject to similar restrictions. When such powers are lawfully exercised the subsequent purchaser takes free of the mortgagor's rights. The mortgagee gets its money, the second purchaser a new property and the mortgagor loses their home without the matter coming before a court as no court order is required to exercise these powers. 21st century case law has confirmed this position and that the passing of the Human Rights Act 1998 (HRA) has not altered this. This apparent neutering of the restrictions placed on the mortgagee's right to possession gave rise to a series of reforms and proposals in the face of public concern at the potential risk presented to mortgagors who could lose their home in the event of a minor default with no opportunity to argue their case in court. Some reforms have had the practical effect of improving mortgagors' protection while others have not. Radical law change aimed at addressing this anomaly is likely to have negative economic impacts that will outweigh the value of the extra protection afforded to mortgagors.

A mortgagee has an unqualified right to possession of a mortgaged property subject to any express or implied contractual limitations 'before the ink is dry on the mortgage' [Four-Maids Ltd v.Dudley Marshall[1957] F No26(HC) ; Birmingham Citizens Permanent Building Society v.Caunt [1962]Ch 883(HC)]. The courts placed modest limits on this right, stating mortgagees must give mortgagors 28 days to discharge the entire debt as long as there was a reasonable prospect such payment could be made [Caunt]. Statute then placed greater limits on this right through s36(1) and (2) of the Administration of Justice Act 1970 (as amended by s8 of the Administration of Justice Act 1973) (AJA). These sections empower the court to suspend, postpone or dismiss the execution of a possession order for such period as the court thinks reasonable, if it is likely the mortgagor can repay within a reasonable period, thereby giving mortgagors a certain degree of protection. However English law contains a curious anomaly that mortgagors are given more protection when mortgagees bring court proceedings to realise their security than where mortgagees by-pass the system completely (Wood, 2009 p31). When a mortgagee exercises a contractual or an implied statutory right to sell under s101(1) Law of Property Act 1925 (LPA), that mortgagee is is under no obligation to obtain a court order when exercising that right [Ropaigealach v.Barclays[2000]QB 23 (CA)] and the subsequent purchaser will overreach the interests of the mortgagor[s2(1)(iii) LPA]. In strict legal terms the statutory intervention under s36 AJA aimed at protecting mortgagors is thus rendered impotent.

There was some hope that the passing of the HRA would correct this anomaly but the case of Horsham Properties v.Clark [2008]EWHC 2327(HC) dashed any such hopes. The defendants had defaulted on their mortgage repayments and under the terms of the mortgage the mortgagee had a contractual right to sell the mortgagor's property to realise their security in addition to the mortgagee's implied statutory power of sale under s101(1)LPA [Ropaigealach]. The mortgagors claimed that the mortgagee's sale of their property to a third party and the subsequent claim for possession breached various Convention Rights under the HRA. The main basis of their argument was that their right to peaceful enjoyment of possessions under Article 1 First Protocol (A1FP) had been breached. This would require them to show that their equity of redemption was a possession under A1FP, that state intervention had deprived them of this right and that this deprivation was not in the public interest. However the court rejected this argument on every count. While the court accepted that the mortgagor's equity of redemption was a possession within A1FP, it rejected the idea that this Article had been engaged on the facts as the mortgagors had lost their equity of redemption by operation of contract, rather than statute. Briggs J then addressed the wider issue of whether s101 engaged A1FP. Legislation can constitute the requisite 'state intervention' but only if it represents a deprivation of an applicant's Convention rights rather than a mere delimitation of them [Wilson v.First County Trust Ltd(No 2) [2003] UKHL 40(HL); Pennycook v. Shaws Ltd[2004] EWCA Civ 100(CA)]. It was concluded that s101 did not deprive an applicant of their rights under A1FP, as it had the effect of helping to implement the private bargain of the parties rather than overriding the bargain entirely and consequently the bar to the claimed right was neither rigid, arbitrary or discriminatory [Wilson; Horsham]. Briggs J went on to state that even if the mortgagee's sale out of court was construed as a deprivation of possessions it would still not amount to a breach of A1FP. It could be justified in the public interest [A1FP] as it reflected the previous 200 years of mortgage dealings and that any adjustment to this balance of power may result in a restriction of the availability of mortgages to the wider public at affordable rates of interest. Also the Convention was intended to deal with arbitrary intrusion by the state into citizen's lives [Harrow London Borough Council v Qazi [2003] UKHL 43(HL)]. It was certainly not intended to tilt the balance of power struck by law in states between lenders and borrowers, in favour of borrowers [Wood v UK (32540/96)(1997)24 EHRR CD69; Qazi].

Various proposals and reforms emerged in response. Some increased mortgagors' protection, others did not.

The Pre-Action Mortgage Protocol and House Possession Court Duty Scheme are considered to have improved mortgagors' protection. The Protocol was introduced in November 2008 and it encourages lenders and borrowers to discuss the borrower's financial situation and obliges them to explore ways in which the borrower's financial position can be aided before possession is sought. At first glance, the protocol seems rather toothless, supporting the view that it is a 'complete waste of time and paper' (McAuslan, 2009, p3). But evidence has emerged that it is having a positive impact. The Protocol has been largely embraced by all of those involved in domestic mortgage repossessions (Wood, 2009, p34). The Ministry of Justice suggested it was 'highly likely' that the Protocol led to a marked reduction in possession claims (Greer,2009, p522). In the first three quarters of 2008 the number of claims were consistent at around 38,500 but after the Protocol was introduced in the final quarter, this number fell to 26,008 (Greer,2009, p522). The Council of Mortgage Lenders (CML) forecast in February 2009 that there would be 75,000 repossessions in that year but this figure was revised downward in June 2009 and again in November 2009 to an estimated 48,000 (Wood, 2000 p34). Wood also believes that the Court Scheme, which provides free legal advice for mortgagors, was another 'significant step forward' in providing protection (Wood, 2000 p34).

Two reforms introduced by the Government promised much but ultimately failed to deliver. Firstly the Mortgage Rescue Scheme (MRS) was introduced in January 2009 offering the potential facility to mortgagors in arrears to remain in their property by allowing a social landlord to obtain a full or partial equity stake in their home. Secondly the Homeowners Mortgage Support Scheme (SMI) was established in April 2009, permitting mortgagors in financial difficulties to suspend interest payments for up to two years. On paper these reforms appear to increase mortgagors' protection but the low take up of these schemes suggest they are having little impact. It was reported in July 2009 that only 16 borrowers had been supported under SMI (Wood, 2009, p35) and in the three months prior to November 2009 only 92 borrowers had been helped under the MRS (Wood, 2009, p35). Given that annual repossessions run into the tens of thousands, these figures support the argument that overly rigid eligibility criteria prevent sufficient numbers of lenders from being helped to have any meaningful impact in improving mortgagors' protection (Wood, 2009, p35).

Legislative change has also been advocated. The Citizen's Advice Bureau argued that lenders of first charge mortgages should be prevented from exercising a power of sale or self help over a residential dwelling without court order and Andrew Dismore MP has attempted to introduce a private member's bill aimed at implementing this (Greer, 2009, p520). But the CML has cautioned against any major changes to the law, stating that this could have 'far-reaching effects for lenders, consumers and the economy' (Greer, 2009, p520). While these proposals would increase protection for mortgagors, it may cause lenders to become more careful about offering credit and a depressed lending market will hardly help the prospects of economic recovery (Greer, 2009 p524). The cost of lending would be increased with the result that access to credit for the wider population would be reduced. Finally there is little evidence that mortgagees are using the Horsham possession route on a wide scale (Greer, 2009, p521) and that in a depressed housing market it is actually in the financial interests of the lender not to do so (Wood, 2009,p35).

In conclusion currently a mortgagee has the technical right to evict a mortgagor from his home in the event of default without seeking a court order. This can be done by taking advantage of contractual provisions contained in the mortgage deed or by using statutory powers. The confirmation of this in Horsham prompted a series of reforms and proposals. Some reforms are credited with affording mortgagors greater protection than existed previously while other reforms have been criticised for having overly rigid eligibility criteria which prevent them from having any meaningful impact. There has been some call for legislative change in this area which would provide increased protection to existing mortgagors. However this would be at the price of increasing borrowing costs which would exclude more people from home ownership and damage the UK's prospects for economic recovery. So in the absence of evidence of wide scale use of the Horsham possession route by mortgagees such legislative change should be resisted.

Words 1700 TMA04 Bibliography. . Baker, J. Carter,E. Jones, R. Mawer, L. Rawcliffe, L. Williams, G. (2010) Law:Ownership and trusteeship - rights and responsibilities. Manual 3 Units 14-21, Oxford University Press, (11th ed). . Gray, K and Gray, S. (2009) Elements of Land Law, Oxford University Press, (5th ed). . Greer, S. (2009) Horsham Properties Group Ltd v Clark: possession - mortgagee's right or discretionary remedy? Conveyancer and Property Lawyer, Conv. 2009, 6, 516-524. . McAuslan, P. (2009) Mortgage arrears: the repossession crunch, Journal of International Banking and Financial Law, (2009) 3 JIBFL 137. . Poole, T. (2009) Property: Repossession rising. Legal Update Specialist, New Law Journal, 2009, 159 NLJ 21. . Wood, J. (2009) Horsham Properties Group Ltd v Clark: a year on, Coventry Law Journal, Cov. L.J. 2009, 14(2), 31-36. . www.lexisnexis.com - JOURNALS, HORSHAM - CLARK - McAuslan, P. (2009) Mortgage arrears: the repossession crunch, Journal of International Banking and Financial Law, (2009) 3 JIBFL 137. . www.lexisnexis.com - JOURNALS, HORSHAM - CLARK - Poole, T. (2009) Property: Repossession rising. Legal Update Specialist, New Law Journal, 2009, 159 NLJ 21. . www.lexisnexis.com - CASES (Search term - 'mortgagee', Judgment date - 2008, Court - tick for 'Queen's Bench Division (All)' and 'Chancery Division (All)') - MORTGAGOR - COVENTION RIGHT - Horsham Properties v.Clark [2008]EWHC 2327(HC)