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Assessed - Legal protection of the mortgagee has gone too far. In the…

- - - - Where possession proceedings are brought by the legal mortgagee, if the mortgaged property is a dwelling property and the mortgage is paid in instalments the court is entitled to take the view that sums due under the mortgage, for the purposes of s.36(1) AJA 1970, are the arrears in instalments up to that point (s.8 AJA 1973).
        
        The court will stay possession proceedings by the legal mortgagee if the mortgagor of an instalment mortgage over a dwelling house can demonstrate that they can make up the arrears that they have fallen into within a reasonable period and that they will be able to make the remaining instalment payments as they fall due (s.8 AJA 1973).
      - Where possession proceedings are brought by the legal mortgagee over land which consists of or includes a dwelling house (domestic property) (s.36(1) AJA 1970 as amended by AJA 1973) the court may adjourn proceedings, stay or suspend judgement or postpone the date for delivery of possession (s.36(2) AJA 1970 as amended by AJA 1973) if it appears to the court that the mortgagor is likely to be able to within a reasonable period to pay any sums due under the mortgage (s.36(1) AJA 1970 as amended by AJA 1973).
        
        The court’s powers under s. 36 of the Administration of Justice Act 1970, are also not available if the mortgagor has voluntarily given up possession but later realises that it would be in his or her best interests to delay sale. This is illustrated by Barclays Bank plc v Alcorn [2002] All ER (D) 146, in which the court said that in such a case it had no jurisdiction to exercise its discretion under s. 36(2). The case was also one in which, even had the court had powers under s. 36(2), it would not, on the facts, have exercised those powers in favour of the mortgagor because the mortgagor had failed to establish that she would be likely to pay the debts within a reasonable time.
      - The Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase (2008) must be complied with if the legal mortgagee is bringing an action for possession. This is because the judge will expect it to be followed and if the mortgagee has not followed it then the court may strike out the case. It is an important mechanism for determining that the relationship between the mortgagor and the mortgagee, the contractual relationship, really has broken down and is irreparable or irretrievable before the court will countenance possession proceedings.
      - Domestic mortgages have greater protection against possession claims by mortgagees than commercial mortgagors.
      - Mortgagees will usually get a court order for possession to avoid any criminal liability under s.6(1) Criminal Law Act 1977 and s.1 Eviction Act 1977 as it insulates them from criminal proceedings because it is a criminal offence if they have to use or threaten the use of force to get the mortgagor from the land to gain vacant possession. Once the mortgagees get a court order they can employ bailiffs backed up by the police to remove the mortgagor from the land so that the mortgagee gets what they want, which is vacant possession so they can then sell something of real value.
        Court order necessary for possession of occupied premises: s1 Protection from Eviction Act 1977; s6 Criminal Law Act 1977
      - Mortgagee seeks possession to be able to subsequently sell the property with vacant possession.
      - The mortgagee has a right to possession before the ink is dry on the mortgage unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right.’ (Four-Maids Ltd v Dudley Marshall Properties [1957] Ch 317, 320, Per Lord Hardman).
      - However, possession proceedings are not dependant on default under the mortgage contract, they are a self-standing, self-evident right that the legal mortgagee has (Western Bank Ltd v Schindler [1977] Ch 1).
      - Bristol and West v Dace [1998] EWCA Civ 1468
        
        in this case the court was not prepared to postpone possession proceedings when the mortgagor said that they wanted to delay to possession proceedings because they were currently suing their neighbour.
        
        The court said no as it was far too risky because it is in no way guaranteed that they would win.
      - Cheltenham & Gloucester Building Society v Krausz [1997] 1 WLR 1558
        
        The court said that the legal mortgagee is entitled to go into possession and then able to decide when they want to sell the land.
        
        The court usually would not order a sale at a time when the mortgagee would get less money, than the loan that was outstanding.
        
        In this case the court took a subtly different approach to Palk in that they decided that they would not order a sale under s.91(2) where there was negative equity
        
        In Palk if the mortgagor has additional funds, they could draw on so that they can argue that the mortgagee will be paid off in toto (as a whole), that the mortgagee will get all their money back then the court probably would order a sale under s.91(2).
      - The courts can direct a sale if requested by one of the parties, usually the mortgagor under s.91(2) LPA 1925.
        
        Palk v Mortgage Services Funding plc [1993] Ch 330; [1993] 2 All ER 481
        
        The mortgagor owed approximately between £70-£80k more than the land was actually worth. They had fallen into negative equity. That the loan secured on the land was bigger than the value of the land
        
        In this case the mortgagee wanted to take possession of the land in order to rent the land out and use some of the income from rental to defray the costs of the increasing debt owned by the mortgagor.
        
        The mortgagor in that instant complained to the court and requested that the court order a sale of the land under s91(2) even though the land would be sold for less than the loan and the would not be fully discharged.
        
        The court was prepared to order the sale because they said it would be unfair in the particular circumstances for the mortgagor to lose possession and for the mortgagee to go into possession.
        
        Furthermore, the rental income would not cover the increasing debt. Therefore the debts of the mortgagor would continue to increase even though they were not in possession and there was no guarantee as to when this this increasing liability would be brought to a close.
        
        Importantly the mortgagor said that we will sell the land for less than is owed but we will make up the difference with other funds that we have. Therefore the mortgagee will get their money back.
      - Barclays Bank v Zinda
        
        The delay to possession proceedings will only happen once.
        
        Where the court delays possession or strikes a claim for possession from the legal mortgagee out based on the mortgagor coming up with a change of schedule that delineates new payments to expunge the arrears etc.
        
        If the mortgagor does not keep to that revised schedule and they fall behind again, no action can be brought under s.36(1) to request another postponement of the possession by the mortgagor because they will be in breach of an agreement that they made to the court to keep to the new schedule.
      - Palk v Mortgage Service Funding plc [1993] Ch 330, CA
        
        Sir Donald Nicholls V–C, At 337–8
        
        [A] mortgagee can sit back and do nothing. He is not obliged to take steps to realise his security. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. His interest in the property has priority over the interest of the (p. 1068) mortgagor, and he is entitled to proceed on that footing. He can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. If he takes possession he might prefer to do nothing and bide his time, waiting indefinitely for an improvement in the market, with the property empty meanwhile. That he cannot do. He is accountable for his actual receipts from the property. He is also accountable to the mortgagor for what he would have received but for his default. So he must take reasonable care to maximise his return from the property. He must also take reasonable care of the property. Similarly if he sells the property: he cannot sell hastily at a knock-down price sufficient to pay off his debt. The mortgagor also has an interest in the property and is under a personal liability for the shortfall. The mortgagee must keep that in mind. He must exercise reasonable care to sell only at the proper market value.
      - sorry we've sold your home: mortgages and their possessory rights - martin dixon
        
        Ropaiglealach v. Barclays Bank plc (not yet reported) is another case that attempts to define precisely the relationship between a mortgagee’s right to possession of mortgaged premises following default by the mortgagor and the court’s ability to defeat or defer this right under its statutory powers. More than that, the Ropaigealach decision illuminates brightly the true extent of a mortgagee’s possessory rights and may, if other mortgagees cannot resist the temptation to follow its lead, require the further intervention of Parliament to protect mortgagors of dwelling houses.
        
        First, assuming the mortgagee had taken possession, was this legitimate without order of the court? With considerable reluctance, all three members of the Court of Appeal held that because the mortgagee had a right to possession derived from the manner in which legal mortgages of land are created, there was nothing to prevent it taking possession without a court order. Particularly, there was nothing in the Administration of Justice Act 1970, s. 36, which abrogated the mortgagee’s right. Further, given that the court’s ability to grant discretionary relief under the section arose when the mortgagee “brings an action in which he claims possession”, there was no power under section 36 to deny possession when that was achieved by physical re-entry. Although there was recognition that it might appear absurd that a mortgagee’s right to possession could be controlled when possession was sought through the regulated processes of the court, but not when it was achieved by unregulated self-help, their Lordships felt that the long-recognised existence of the right and the clear words of section 36 left it with no alternative.
        
        It is difficult to fault the court’s reasoning in this respect, even though the danger for mortgagors is considerable. The right of possession is entrenched in the law of mortgages and the words of section 36 are clear. Yet, while it may be true that reputable institutional lenders are very unlikely to eject mortgagors forcibly without first obtaining a court order, the same cannot be said of marginal mortgage lenders who might be attracted by the speed and economy of securing possession by self-help, and with it the additional advantage of avoiding the section 36 jurisdiction. Again, although a mortgagee must be wary of committing an offence under the Criminal Law Act 1977, s. 6 (using or threatening violence to secure entry to occupied property), a mortgagee which has decided already to resort to self-help is unlikely to be deterred in practice from “encouraging” a mortgagor to quit. In any event, as Ropaigealach itself demonstrates, the simple commercial act of taking possession of a dwelling house without giving the mortgagor an opportunity to resist is undesirable.
        
        This brings us to the second issue. In this case, the mortgagor’s application was so framed that, in order to deal with the matter at all, the court had to assume that the mortgagee was indeed in possession prior to the auction. However, what if, as the Bank contended, it had never taken possession, but instead had sold to the purchaser under its power of sale on the basis that the purchaser had to eject the mortgagors or keep them out. Although the court only considers this briefly, it is clear that there are doubts over whether a mortgagor in such circumstances can apply for relief against the purchaser. Thus, a sale by a mortgagee overreaches the mortgagors’ equitable interests (Law of Propery Act 1925, s. 2(1)(iii)) and, in theory, brings the equity of redemption to an end (National & Provincial Building Society v. Ahmed [1995] 2 E.G.L.R. 127). This could mean that the mortgagors’ interest in the land is extinguished—with no possibility of relief—simply because the mortgagee has chosen to sell without first obtaining possession for itself.
        
        Following default by Mr. and Mrs. Ropaigealach, the joint mortgagors, Barclays Bank made valid but unsatisfied demands for payment and informed the mortgagors that it proposed to realise its security by selling the property at auction. Significantly, the mortgagors were not in possession at this time, as the premises were being refurbished. The mortgagee either knew of this, or believed the mortgagors had quit, but in any event the Bank did not seek an order for possession from the court. The property was sold and the title transferred to the purchaser. Mr. Ropaigealach then sought to deny that the mortgagee had the right to sell the property without first obtaining a court order for possession. The simple point is that such an application would have given the mortgagors an opportunity to apply for relief under the Administration of Justice Act 1970, s. 36. For its part, the Bank denied that it had ever taken possession, and argued that, in any event, it did not need a court order to do so, having a right to possession as mortgagee that was neither limited by its own contract nor abrogated by statute.
    - - The FCA’s remit thus covers most home loans that are secured by a legal charge over the borrower’s home and accordingly FSMA regulation plays a significant role in the promotion of home ownership within overall housing policy. - See for instance Nield, ‘Mortgage Market Review: Hardwire Commonsense?’ [2015] Consumer Law and Policy, on line 15 March 2015.
      - Within this remit, the FCA’s operational objectives are threefold, namely to provide consumers with an appropriate degree of protection, to protect and enhance the integrity of the markets, and to promote effective competition in the interests of consumers. - Section 1B(3) and s 1C–1E.
      - Any permission to carry out regulated mortgage business is subject to the statements of principle, codes of practice, and rules that the FCA may make. - Part IXA.
      - The FCA is under a duty to supervise compliance with expected standards of conduct and enjoys extensive monitoring and enforcement powers in order to do so. - Section 1M and Parts XI. See generally FCA, ‘The FCA’s Approach to Advancing its Objectives’ (July 2013).
      - One, if not the most significant, principle is that mortgage providers should ‘Pay due regard to the interests of its customers and treat them fairly’. - FCA Handbook, PRIN6.
      - This need for clear and consistent information is laudable, but the experience of the credit crunch has demonstrated its deficiencies in protecting borrowers.
    - - They apply to individual borrowers, but not companies. Thus they may be used to control the fairness of terms and practices governing many non-commercial mortgages.
      - An unfair term is not binding on the borrower and an individual borrower can challenge terms as unfair and thus of no effect. - CRA s 62(1).
      - Where the CMA or the FCA consider that a lender’s particular terms are potentially unfair they will enter into a dialogue with that lender to persuade them to alter their terms and may ask the lender to enter into an undertaking to that end. It is only where these informal means fail that regulators will resort to judicial proceedings. - See CMA, Consumer Protection: Guidance on the CMA’s approach to use of its consumer powers and the FCA, Enforcement Guide in the FCA Handbook.
      - The message is clear: lenders must make sure that their standard terms and conditions meet the standards of fairness required by the legislation, and illustrated by CMA and FCA guidance. - See generally Simmonds, ‘Bankers’ Documents and the Unfair Terms in Consumer Contracts Regulations 1999’ (2002) 17 JIBL 205.
      - Furthermore, lenders must ensure that the import of those terms and conditions are brought home to the borrower, both because they can be understood by any layman, and also because there is a process that ensures that borrowers are given an opportunity to read and consider these terms before they are bound.
    - - This is the Government’s response to an EU Directive seeking to embed consumer protection and reduce irresponsible lending practices so that financial instability, such as that witnessed in 2008 and triggered by the US sub-prime residential mortgage market, does not reoccur. It is worth considering how events in the world financial market do (and will continue to) influence regulation of mortgages in the UK.
  - - - The first argument was that the postponement of the contractual right to redeem for forty years was void in itself, in other words, that the making of such an agreement between mortgagor and mortgagee was prohibited by a rule of equity. It was not contended that a provision in a mortgage deed making the mortgage irredeemable for a period of years is necessarily void. The argument was that such a period must be a “reasonable” one, and it was said that the period in the present case was an unreasonable one by reason merely of its length. This argument was not the one accepted by the learned judge.
      - Now an argument such as this requires the closest scrutiny, for, if it is correct, it means that an agreement made between two competent parties, acting under expert advice and presumably knowing their own business best, is one which the law forbids them to make upon the ground that it is not “reasonable.” If we were satisfied that the rule of equity was what it is said to be, we should be bound to give effect to it. But in the absence of compelling authority we are not prepared to say that such an agreement cannot lawfully be made. A decision to that effect would, in our view, involve an unjustified interference with the freedom of business men to enter into agreements best suited to their interests and would impose upon them a test of “reasonableness” laid down by the Courts without reference to the business realities of the case.
  - - - A postponement will also be struck down if it is oppressive or unconscionable; unreasonableness is insufficient. This conclusion was reached in the following case, in a judgment that illustrates the courts’ reluctance to interfere with the freedom of contract of commercial parties.
        
        Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441, CA
      - The postponement of the right to redeem is not, per se, an unacceptable clog on the equity of redemption. A postponement will be struck down if it renders the right to redeem illusory. For example, in Fairclough v Swan Brewery Co, the right to redeem was held to be illusory where the borrower could not repay the loan until just six weeks prior to the expiry of the mortgaged leasehold term.
      - Knightsbridge Estates Trust v Byrne [1939] Ch. 441
        
        A company had mortgaged its freehold property to an insurance company on terms that the mortgage would be repaid over 40 years.
        
        Later the mortgagor wished to redeem the mortgage before that period had expired, but the mortgagee objected.
        
        The court held that the term postponing redemption for 40 years was valid.
        
        The agreement was a commercial one made by businessmen and the mortgaged property was a fee simple.
        
        Due to the great duration of the freehold estate (effectively it is perpetual), the company would recover an estate of equivalent worth when it did redeem the mortgage.
        
        The effect of this case is not, however, to make any postponement for a similar period valid.
        
        Were a domestic mortgage to be made irredeemable for such a long period, the court might still regard the bargain as oppressive and unconscionable. In fact most modern domestic mortgages expressly allow for early redemption, usually on payment of an extra sum.
        
        Greene MR
        At 453
        
        But in our opinion the proposition that a postponement of the contractual right of redemption is only permissible for a “reasonable” time is not well-founded. Such a postponement is not properly described as a clog on the equity of redemption, since it is concerned with the contractual right to redeem. It is indisputable that any provision which hampers redemption after the contractual date for redemption has passed will not be permitted. Further, it is undoubtedly true to say that a right of redemption is a necessary element in a mortgage transaction, and consequently that, where the contractual right of redemption is illusory, equity will grant relief by allowing redemption [. . .]
        
        Moreover, equity may give relief against contractual terms in a mortgage transaction if they are oppressive or unconscionable, and in deciding whether or not a particular transaction falls within this category the length of time for which the contractual right to redeem is postponed may well be an important consideration. In the present case no question of this kind was or could have been raised.
        
        But equity does not reform mortgage transactions because they are unreasonable. It is concerned to see two things—one that the essential requirements of a mortgage transaction are observed, and the other that oppressive or unconscionable terms are not enforced. Subject to this, it does not, in our opinion, interfere. The question therefore arises whether, in a case where the right of redemption is real and not illusory and there is nothing oppressive or unconscionable in the transaction, there is something in a postponement of the contractual right to redeem, such as we have in the present case, that is inconsistent with the essential requirements of a mortgage transaction? Apart from authority the answer to this question would, in our opinion, be clearly in the negative. Any other answer would place an unfortunate restriction on the liberty of contract of competent parties who are at arm’s length—in the present case it would have operated to prevent the respondents obtaining financial terms which for obvious reasons they themselves considered to be most desirable.
      - Fairclough v Swan Brewery Co Ltd [1912] AC 565
        
        The residue of a leasehold term of 20 years was mortgaged; the agreement being that the mortgage was not to be redeemed until a date six weeks before the lease was to end.
        
        Three years later the mortgagor sought to redeem early and the court upheld his right to do so.
        
        In this case, had the postponement been valid, the mortgagor would, on redemption, have recovered an estate which was nearly valueless and very different in character from the property mortgaged.
        
        Accordingly, in the case of leases, postponement of the contractual date for redemption is likely to be rather more objectionable, even where the mortgage is a commercial bargain made between businessmen.
      - freedom to contract on terms agreed by the parties is illusionary. however, this is not neccesarily a bad things as the courts look to prevent unconsionable terms from getting involved and therefore it actually means that the mortgagor is protected agaisnt bigger lenders who have the power to understand the law.