Does the law give protection to borrowers against repossession of their homes by the banks?

This article will discuss firstly what protection is offered to borrowers and how the better protection can be provided. Second this article looks at the protection to borrower’s families against repossession of their homes and whether this protection is satisfactory. Lastly this article will discuss rights of other family members who may be beneficiaries under a trust and enjoy rights of occupation.

Protection for borrowers

If a mortgage lender attempts to repossess a residential property, the borrower is protected in that, s/he can make an application to the court by virtue of s.36 of the Administration of Justice Act (“AJA”) and ask the court to exercise their powers and postpone or defer possession “…if it appears to the court that in the event of the court exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due…”. However, it soon became apparent that s. 36 AJA 1970, contained a drafting error in the use of the words “any sums due”. This became clear in Halifax Building Society v Clark[1] where the mortgage deed contained a clause stating that the entire debt became due on default.  This meant that the mortgagor had to be able to show means to repay the whole loan, rather than simply the arrears, for s.36 to apply.  So an amendment was passed in s.8 Administration of Justice Act (“AJA”) 1973, which stated that, when the court is considering whether they should use their powers to defer possession the court should treat “any sums due” as “only such amounts as the mortgagee would have expected to be required to pay if there had been no such provision for an earlier payment”.

In the case of Cheltenham & Gloucester BS v Norgan[2] the court held that it was important when determining a “reasonable period” under the s.36 AJA 1970,[3] to take into consideration the whole of the remaining term of the mortgage.  What they suggested was abandonment of existing practice of consideration of a short period of two years or more[4] to repay the amount of arrears. As a result what is “a reasonable period” has become more liberally interpreted and court now takes into account the remaining part of the original term of the mortgage. The mortgagor has to provide the court with a detailed budget showing a forecast and realistic evidence that s/he will be able to pay all the arrears. The court now has the power to reschedule arrears across the entire period of the remaining mortgage. This has been a definite shift in favour of borrowers.

Bypassing s.36 of AJA 1970

However, S.36 AJA 1970, as amended by s.8 AJA 1973, is not available where the mortgagee bypasses possession proceedings and seeks to enforce its security without a court order, through immediate sale. This can happen when a mortgagee exercises their right to sell without first obtaining a court order. This can happen in one of two ways. Firstly there can be a contractual term to that effect or there is an implied statutory right to sell by virtue of s.101(1) Law of Property Act 1925 (LPA).

In Ropaigealach v Barclays Bank Plc[5] the mortgagor family were not informed the house was being sold. They were on holiday and they were renovating the house. Therefore they did not receive a final demand for payment of the mortgage and subsequently heard of the sale through a neighbour. The Court of Appeal ruled that s.36 did not have any application where the lender sells without first obtaining a court order. Moreover, court order was not necessary where a mortgagee was seeking possession, unless the terms of the mortgage specify it expressly or by implication. Gray considers the decision strange as (i) it enables the lender to circumvent protection for mortgagors and (ii) it may contravene the Human Rights Act 1998.[6]

Another case in which the issue was considered was more recently considered is Horsham Properties Group Ltd v Clark[7]. Here the mortgagees had an implied statutory power of sale under s101(1)LPA because the mortgagors had defaulted on their mortgagee. The mortgage lender wanted to sell to release their security. This case came after the introduction of the Human Rights Act (“HRA”) 1998. The mortgagors argued that the possession claim and subsequent sale of their property to third parties breached Convention rights under HRA. The main argument made in this case was that Article 1 First Protocol which provided the right to peaceful enjoyment of possessions was infringed. The mortgagor argued this by showing the equity of redemption was a possession under the Article and they were deprived of this by the state which was not in public interest. The court rejected this argument. The court accepted that the mortgagor’s equity of redemption was a possession under the Article, but the court concluded that they had lost the right to redemption through the operation of contract rather than any statute. The upshot of this judgment is if the mortgagor is in arrears, the mortgage company can sell the residential property without seeking a court order. This will not violate any convention rights and the borrower will become evicted and become a trespasser in their own home. The HRA 1998 was by no means intended balance the rights of borrowers and give them more rights against lenders.[8]

How can the law give better protection?

The law in relation to repossession has now for some time been under review. The Home Repossession (Protection) Bill 2009 is being reviewed by Parliament. The bill proposes extra protection to borrower that face repossession. Parliament has said: “The Bill would amend the Law of Property Act 1925 to ensure that before a mortgagee (lender) can exercise their power of sale, the court must have first given its permission.”[9] If the bill is passed it will remove the problems that have been caused in cases like Ropaigealach and Horsham Properties Group.

Moreover, the Pre-Action Mortgage Protocol and House Possession Court Duty Scheme have offered some improved protection to borrowers. The Pre-Action Mortgage Protocol encourages both lenders and borrowers to discuss the mortgagor’s financial circumstances and obliges the lender to endeavour to aid the financial position before any possession can be sought. The scheme does not show signs of being more than an ineffective attempt of protection.[10] Greer has argued that the protocol has led to a marked reduction in the number of possessions.[11] Woods argues the Court Duty Scheme with the provision of free legal advice is a ‘significant step forward’ in the law providing better protection. Time will tell whether this will have a positive impact.

The Mortgage Rescue Scheme was a scheme that was introduced to provide the facility of borrowers in arrears to remain in their home and permit a social landlord to gain a half or even full share in the ownership of their home. However one of the criticisms advanced by Wood in relation to this scheme is that only a few numbers were helped in relation to repossessions. Wood goes on to argue that because of the excessively strict eligibility criteria is preventing thousands from being evicted and providing any significant level protection.[12] Another reform is that of the Homeowners Mortgage Support Scheme. This scheme allows borrower in arrears to apply to have their repayment suspended for up to two years. Again this seems like a good solution to the problem. Although a low number of people have taken this scheme up, this casts doubt on its effectiveness. The reason for this again is that advanced by wood by the excessively strict eligibility criteria.[13]

Protection of families

Legal owners and beneficiaries under a trust of land have rights of occupation but other people may have rights to occupy matrimonial homes independently of ownership rights, for example, spouses. Where the family member also enjoys a beneficial interest they can rely on actual occupation which can override the mortgagee’s interest. Under the Land Registration Act 2002 actual occupation is available where the mortgagor did not have “actual knowledge”[14] of the occupation. Second the occupation will not available where it “would not have been obvious on a reasonably careful inspection of the land”.[15] The effect of this provision is to introduce the old doctrine of notice based test into actual occupation. This means that paragraph 2 removes the old presumption laid down in Boland and prevents the overriding status of undiscoverable rights. This means that the mortgagor if does not know about the family member or if there existence is not discoverable then actual occupation cannot be claimed. The LRA 2002 introduces the actual and constructive based notice into actual occupation.

Conclusion

It is currently possible for housing lenders to evict an occupying borrower from his mortgaged home without needing a court order if the borrower is in default. This is done through the lender’s manipulation of the mortgage deed’s provisions. Horsham Properties Group, confirms the lender’s right to evict without court notice, incentivised reforms to protect occupying borrowers. While some reforms have given borrowers added protection from eviction, other reforms have very rigid criteria for eligibility and have not helped the public as a whole. There is a voiced desire for legislative change to provide more protection for existing borrowers. This protection would raise borrowing costs and exclude more people from the housing market; perpetuating this exclusion could risk the UK’s ability to make a steady economic recovery.

 


[1] [1973] Ch 307

[2] [1996] 1 WLR 343

[3] As amended by s.8 AJA 1973

[4] Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883

[5] [2000] 1 QB 263

[6] Gray, K and Gray, S. (2009) Elements of Land Law, Oxford University Press, (5th ed), p 771

[7] [2009] 1 WLR 1255

[8] Wood v UK (32540/96)(1997)24 EHRR CD69; Harrow LBC v Qazi [2004] 1 AC 983

[9] Home Repossession (Protection) Bill 2008-09 at http://services.parliament.uk/bills/2008-09/homerepossessionprotection.html

[10] McAuslan, P. (2009) Mortgage arrears: the repossession crunch, Journal of International Banking and Financial Law, (2009) 3 JIBFL 137, p.3

[11] 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, p.522

[12] Wood, J. (2009) Horsham Properties Group Ltd v Clark: a year on, Coventry Law Journal, Cov. L.J. 2009, 14(2), 31-36, p 35

[13] Ibid.

[14] Para 2(c)(ii), Schedule 3, LRA 2002

[15] Para 2(c)(i), Schedule 3, LRA 2002

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