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Secured recoveries

  • United Kingdom
  • Financial institutions - Secured recoveries

31-08-2017

News

Possession claims based on the expiry of a mortgage term – what (if any) protocol applies?

The Debt Pre-Action Protocol comes into force on 1 October and a recent communication from UK Finance has stimulated debate concerning the way in which the new protocol sits alongside the Mortgage Pre-Action Protocol (MPAP)

It is necessary to start with the ambit of the current MPAP. That states “This protocol applies to arrears …”. It also makes clear that if the claim seeks a money judgment as well as a possession order, MPAP will still apply. The new Debt Pre-Action Protocol states explicitly that it will not apply if another protocol (such as MPAP) applies. So it is very clear that where there is a claim for a possession order and money judgment based on arrears then MPAP, and only MPAP, will apply.

The potential difficulty arises in respect of claims for a possession order and a money judgment issued on the basis of the expiry of the mortgage term. Whilst not without doubt, it has generally been understood that MPAP did not apply to such claims as they do not arise from “arrears”. If MPAP does not apply to such claims then could the new Debt Pre-Action Protocol apply?

It would be surprising if the Rules Committee intended that the Debt Pre-Action Protocol should apply to a possession claim. The debate about the Debt Pre-Action Protocol has been extensive with the focus being entirely on money claims, specifically the issue of unsecured debt claims for money judgments by institutional claimants in circumstances where consumers may receive limited pre-issue correspondence. The consultation on the Debt Pre-Action Protocol did not include any suggestion it could have application to possession claims and its requirements do not sit well with mortgage possession claims.

However, as matters stand there is clearly scope for confusion. The Debt Pre-Action Protocol applies to claims by a business against an individual for “payment of a debt”. Our view is that a claim for a possession order is not likely to be considered a claim for “payment” of a debt. “Payment of a debt” implies a claim for a money judgment, which is, in technical language, a different “relief” from a claim for possession. However, on the face of it a claim for a money judgment after expiry of the term could indeed be a claim for a “payment of a debt”. Unfortunately the Debt Pre-Action Protocol does not make clear that such a money claim would be excluded if issued with a possession claim, thereby creating the risk that the Debt Pre-Action Protocol could apply to claims where possession and a money judgment are requested following the expiry of the mortgage term.

It is to be hoped that the Rules Committee will clarify the Debt Pre-Action Protocol before it goes live on 1 October 2017. If it does not then cautious lenders may wish to stop including a claim for a money judgment when issuing a possession claim based on the expiry of the mortgage term.

Notwithstanding that MPAP may not technically apply to end of term claims, lenders generally file an MPAP checklist (form N123) just to be safe. Lenders should continue to do that as the fact that a claimant has endeavoured to comply with the most helpful Protocol can only help them if issues about Protocol compliance are raised during the proceedings.

It has been suggested that lenders might try to comply with both MPAP and the Debt Pre-Action Protocol on claims based on the expiry of the mortgage term. That imposes an administrative burden on lenders and a potential for confusion on the part of their customers which seems unwarranted. If lenders wish to err on the side of caution they could include some additional points in their MPAP 15 business day letter which ensured there was some equivalence with the information provided in a Debt Protocol claim letter. For example the period for a response could be extended from 15 business days to 30 calendar days and where the debt has been assigned, the details of the original lender, when it was assigned and to whom.

Mortgage research

On 3 August 2017, the FCA launched a survey of mortgages in the UK with a view to collecting information that will help them understand more about people with mortgages and how they are managing them. The research will take place during August and September 2017 and the FCA’s research partners are writing to consumers inviting them to participate. The research is due to be published in early 2018.

Tackling unfair practices in the leasehold market – consultation

Land Registry figures show that leasehold made up 43 per cent of all new-build registrations in England and Wales in 2015, compared to 22 per cent in 1996. Concerns regarding the transparency and fairness of selling new houses on a leasehold basis and about the level of ground rents were raised in a House of Commons debate in December 2016.

The All Party Parliamentary Group on Leasehold and Commonhold is also advocating for reform in these areas.

The Government’s Housing White Paper ‘Fixing our broken housing market’ published in February 2017 highlighted the Government’s aim to improve consumer choice and fairness in the leasehold sector and committed to consult on a range of measures to tackle unfair and unreasonable abuses of leasehold.

As a consequence of the above, on 25 July 2017, the Department for Communities and Local Government opened a consultation (relating to England only) which seeks views on:-

1. prohibiting the sale of new build leasehold houses where the developer is not obliged to sell a house on a leasehold basis;

2. restricting ground rents on new leases to a ‘peppercorn’;

3. how to tackle existing onerous ground rents;

4. possible changes to the Help to Buy scheme in relation to leasehold houses;

5. providing freeholders on private estates with equivalent rights to leaseholders to challenge unreasonable service charges for the upkeep of communal areas and facilities via the First-tier Tribunal (Property Chamber).

All responses to the paper should be submitted no later than midnight on 19 September 2017. A link to the consultation paper can be found here.

Enforcement of suspended possession orders - consultation

On 29 June 2017, the Civil Rules Committee opened a consultation on whether amendments are required to rules and forms in light of the Court of Appeal Judgment in Cardiff County Council v Lee (Flowers) [2016] EWCA Civ 1034.

This was a social housing case in which the tenant appealed against the decision of the Court to retrospectively grant permission to enforce a possession order against him. The appeal was dismissed, however, the commentary provided within the Judgment, which can be applied equally to mortgage repossession actions, suggests that a warrant of possession must not be issued without the permission of the court where the order sought to be enforced is subject to the fulfilment of a condition. Such orders arguably include an order for possession suspended upon payments and an order suspending a warrant upon payments even where the original order was an outright order.

The consultation closed on 30 August 2017 and the outcome is currently awaited.

Case law updates

Christiana Properties Ltd v Annauth [2017] EWCA Civ 1070

Summary

CPL is the proprietor of a shop in Poole, Dorset. CPL let the shop to Mr Annauth and Mr Annauth’s sister guaranteed his rental obligations under the lease and agreed to indemnify CPL for any losses.

Mr Annauth fell into arrears in the payment of rent and CPL accepted the surrender of the lease. It was an express term of the surrender that it did not operate to release Mr Annauth or the guarantor from the obligations arising under the lease.

CPL instructed a debt collection agency to recover the money owed and in January 2013 an agreement was made by the debt collection agency on behalf of CPL with solicitors acting for the sister that the debt (circa £50k) would be paid in instalments of £50 per month. It was said that the account would be reviewed every six months and legal action would be taken if payments were missed.

In March 2015, CPL issued proceedings against Mr Annauth for recovery of the outstanding arrears of circa £55k. Mr Annauth defended the claim alleging that CPL was prevented from pursuing him by virtue of the compromise agreement.

CPL asserted that the agreement was made only with the guarantor. Mr Annauth contended, and the County Court found at first instance, that it was made with both the guarantor and Mr Annauth. CPL appealed the decision.

Held

On appeal, after carefully considering all of the documentation surrounding the agreement, the Court found that Mr Annauth was not a party to the compromise agreement and allowed the appeal.

Relevance to mortgage lenders

Whilst not your typical secured recoveries matter, the decision serves as a useful reminder to lenders that when reaching a compromise with a guarantor, a lender should always make it clear if that compromise is only intended to bind the guarantor and not the principal borrower.

Bank of Scotland v Gerard Thomas Herron [2017] NICh 15

Summary

The borrower appealed against an order for possession made on 23 October 2015 in respect of his residential property following a default in mortgage payments.

An order for possession was initially granted on 20 March 2013 and the borrower appealed. Master Ellison subsequently rescinded the order. A further order for possession was granted on 23 October 2015 and this order was also appealed by the borrower.

The borrower, a litigant in person, made a series of allegations in his grounds of appeal regarding alleged procedural irregularities and lack of evidence to support the claim. In addition the borrower claimed, amongst other things, that he was entitled to cancel the mortgage agreement as it was a secured credit agreement in accordance with EU Directive 85/577 (which is a directive to protect consumers in respect of contracts negotiated away from business premises).

Held

McBride J held firstly, that any irregularities need not be considered as the court held a full re-hearing rather than an appeal hearing. Secondly, she found that the borrower had signed the mortgage deed based on his concession in evidence that the signature on the deed ‘looked like’ his. Further, the fact that the borrower’s solicitor had subsequently been found guilty of criminal acts had no bearing on the validity of this mortgage. She also confirmed that the securitisation of the loan for a period of over two years, on the basis of equitable assignment, did not impact on the Bank’s ability to enforce its security. Finally, she ruled that the mortgage does not fall into the scope of the EU Directive and therefore it cannot be relied upon in this case. The judge confirmed that the Master was entitled to make an order for possession in accordance with the powers granted by Schedule 7 of the Land Registration Act (Northern Ireland) 1970, namely that the registered owner of a charge may apply to the court for an order for possession.

Relevance for Secured Lenders

This particular borrower is a well-known litigant in person who often attends court to support other personal litigants in repossession cases in Belfast. Each of the arguments raised in this case are typical of the defences raised by these litigants. It is helpful for lenders to have each of the arguments rebutted in a written judgment as a signal to other members of the group that their allegations cannot succeed.

Ulster Bank Ltd v Farzam Esmaili [2017] NIHC Ch14

Summary

The borrower sought to challenge the Bank’s action for possession of both commercial and residential premises that were charged to secure a loan. In this case, the Bank provided a loan of £987,762.50 in August 2006. The loan was secured against commercial premises, which were being purchased by the first Defendant borrower, and also against residential premises, which were owned by the borrower’s sister, by way of a third party charge. Following the commencement of enforcement action, the borrower’s sister transferred her property to her son without notification to the Bank.

It was argued by the borrower, notwithstanding the written terms of the facility letters that he signed, that the Bank agreed to provide finance for both the purchase and redevelopment of the commercial premises and as a consequence he was not required to repay the loan until the development was completed. The borrower alleged the agreement was made with a Bank senior manager in meetings and that he received assurance further funding would be provided once planning permission was secured. He maintained that he only accepted the loan on the basis of these representations.

Therefore, the case against the Bank was that the Bank’s oral representations at the meetings created a legally binding obligation and, alternatively, that a contract entered into by the customer could not be enforced against him if it was induced by misrepresentation on the part of the Bank. Finally, the borrower maintained that the Bank had fallen foul of sections 140A and 140B of the Consumer Credit Act 1974 (which concerns unfair relationships).

Held

Colton J considered that all the legal arguments raised by the borrower hinged on whether the representations had been made to the borrower by the Bank. The Judge held as a matter of fact that the Bank did not make the representations as alleged by the borrower. The Bank maintained that, although there was some discussion about the borrower’s plans regarding re-developing the commercial premises, that the loan was only for the purposes of purchasing the commercial premises and the Judge accepted this evidence and ruled that the loan was now enforceable against the security.

The Judge highlighted that all the loan documentation referred to ‘purchase’ of the commercial premises and there was no reference to development funding. The evidence showed the borrower was commercially aware. Notably, he raised issue with aspects of the facility letter prior to signing but did not query the absence of a provision regarding development of the premises. The Bank’s careful credit application process and written documentation significantly influenced the Judge in evaluating the evidence.

In addition, the Judge set aside the transfer of the residential premises to the sister’s son and considered this action as a deliberate act to avoid enforcement.

Relevance to secured lenders

Being a decision of the High Court of Northern Ireland, this decision is only persuasive in England and Wales. However, it highlights that oral representations made by a lender to a customer can have legally binding consequences even when a written agreement is in place. It also highlights the importance of careful and well documented lending procedures.

Shear v Clipper Holdings

Summary

The decision of Sheriff Mann in the case of OneSavings Bank v Burns [2017] SC BAN 20 in March 2017 caused concern for secured lenders as it cast doubt on the effectiveness of standard securities that are assigned as part of bulk debt purchase arrangements in relation to residential properties.

In essence Sheriff Mann held that the absence of certain words in the assignation setting out the sums outstanding at the date of the assignation (which words are specified in the Conveyancing and Feudal Reform (Scotland) Act 1970) (“the 1970 Act”), meant the assignation was invalid and did not effectively convey the security.

However, there exists a potential solution in the form of Lord Bannatyne’s decision in the case of Shear v Clipper Holdings which was decided in May 2017. In this case an application for interim interdict was made by the pursuer seeking to prevent the creditor from relying upon an expired calling up notice. The creditor had acquired its title by assignation. The assignation failed to specify the amount owed to the creditor at the date of the assignation.

Held

The borrower relied on Sheriff Mann’s decision in the OneSavings Bank case in contending that the creditor did not have title to enforce the security. The issue was considered by Lord Bannatyne in the Commercial Court of the Court of Session who refused the borrower’s application for interim interdict.

The main points from Lord Bannatyne’s judgment are:-

The borrower’s argument was extremely technical in nature. It sought to make the wording of Note 2 to Form A in Schedule 4 to the 1970 Act mandatory, such that failure to use this wording resulted in invalidity. The borrower’s argument failed to take account of modern developments in the law regarding the mandatory/directory dichotomy. Failure to follow statutory procedure does not automatically result in invalidity. Rather, the court should look to the statute to see if the scheme of the Act is such that invalidity should follow, and in doing so it should strive to be fair and exercise commercial sense.

Primary amongst the considerations is the question of the seriousness of the breach. In this respect Lord Bannatyne was of the view that the breach “cannot be characterised as serious.” He also determined that it would be unjust to rule in favour of invalidity expressing the view that if the breach in question led to invalidity, “…a sensible result would be wholly frustrated.”

The Court should look for a purposive interpretation. The statutory purpose can be seen in s.14 of the 1970 Act, which says that an assignation of a security will, on registration, mean that the security “shall be vested in the assignee as effectually as if the security or the part had been granted in his favour”. Lord Bannatyne agreed with the creditor that on the borrower’s argument, that result is not obtained. By stating the sum outstanding in the assignation, an “all sums due” security converts into a fixed sum security. This means it will no longer be “vested in the assignee as effectually as” if the security had been granted in his favour because the form of the security has altered.

The OneSavings Bank case “was not addressed in the same way” and Lord Bannatyne said “I simply do not agree with the decision the sheriff arrived at…”

No prima facie case had been demonstrated and even if it had, Lord Bannatyne said he would have refused the motion as he found that the balance of convenience “quite clearly” favoured the creditor. He concluded that the borrower was “doing nothing more than to rely on a technicality to delay payment” and made clear this would not be tolerated by the court.

Relevance for lenders

Lord Bannatyne was sitting alone as a judge at first instance. This means that in a similar way to Sheriff Mann, his decision is persuasive and not binding. That being said, Lord Bannatyne’s decision is that of a Lord Ordinary sitting in the Commercial Court of the Court of Session and is likely to be more persuasive than Sheriff Mann’s decision.

Unless and until an appellate court provides clarity, however, there is likely to be a degree of uncertainty about how courts will deal with similar challenges that arise in the future.

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