The economic downturn has resulted in an increase in mortgage defaults and a consequential increase in mortgage possession actions. Whether the funds were borrowed to own a "dream" home or set up and operate a business, the straitened economy has caused lenders and borrowers alike to review their commitments and search for solutions.
In this article, we will consider the legal and procedural issues as they pertain to mortgage possession proceedings in the Cayman Islands, before focusing upon the specific issue of sale by private treaty. Before embarking on that process a brief historical note will put the subject into context.
History of the Mortgage
The law of mortgages is of some antiquity and has undergone considerable development over the years. From an English law perspective, a useful starting point would be the derivation of the word "mortgage" from the French, meaning "dead pledge" as the term was used in the Middle Ages (the concept being that once the obligation to repay the loan had been fulfilled the pledge would then "die"). The mortgage itself is not a debt; it is the lender's security for the debt.
Common law jurisdictions have seen the development of two principal forms of mortgage, namely a mortgage by demise, and a mortgage by legal charge. In the Cayman Islands, as in modern English law, there is now only one type of mortgage, namely the legal charge.
Over the course of its development the mortgage has given rise to much law and has become subject to numerous legal concepts, including the equity of redemption (and clogs thereon), foreclosure, and novel disseisin. Thankfully, today's mortgage is free of many of its previous complexities but there are still areas of difficulty and vagueness which inevitably give rise to disputes and court proceedings.
Mortgages in the Cayman Islands
We can now turn to mortgages in the Cayman Islands, which are governed by the Registered Land Law ("RLL"). Specifically, Division 3 of the RLL deals exclusively with legal charges.
One of the more interesting features of the mortgage possession process in the Cayman Islands, is the apparent intention of the RLL to ensure that the borrower is treated fairly. The issuance and service of proper notices of default (a concept designed to give the borrower a belated opportunity to keep his property by performing his obligations under the legal charge) appear motivated to allow the borrower a second chance. This concept is similar, at its core, to the old legal provisions preventing a lender from placing any "clogs" on the borrower's right to redeem his mortgage.
Though the emphasis on fairness to the borrower is evident, this does not, however, mean that lenders have no legal remedies when dealing with defaulting borrowers.
Lenders' Legal Remedies
So the borrower is in arrears with his mortgage payments. He imitates the action of the ostrich and sticks his head in the sand. What is the lender to do?
The lender should initially write to the borrower to remind him he is in arrears and to request that the borrower communicate with him. All too often there is no response and so the lender is forced to resort to its legal remedies under the terms of the legal charge.
The first steps in the mortgage possession process involve the proper service on the borrower of notices under RLL sections 64(2) and 72. The section 64(2) notice is in effect the "demand". Under section 72, if the borrower is in default for one month, the lender may serve on him notice in writing to pay the monies outstanding.
The timing of service of these notices was the subject of Bank of Butterfield v E. Levy and A. Levy in 2004. In that case the charge provided for the borrower to make repayment of the capital borrowed plus interest. The borrower made no payment. The Plaintiff bank served both section 64(2) and section 72 notices simultaneously. The Grand Court confirmed that, as the two notices were designed to accomplish different and separate goals, in appropriate cases it was possible to serve section 64(2) and section 72 notices concurrently.
If the borrower fails to comply with the section 64(2) notice within three months of the date of service, the lender may seek a court order entitling it to appoint a receiver or sell the charged property. In most cases, this will lead to the sale of the security (i.e. the property encumbered with the charge). In some jurisdictions the process is complicated further by the extension of statutory protection to residential properties and dwelling houses (for example Florida, under the Homestead Exemption in Florida, which provides an exemption from forced sale and restrictions on demise and alienation, utilised famously by O.J. Simpson). The RLL does not make a distinction between commercial and residential property. However, sale of the property - even without this additional statutory protection - is not always a simple or straightforward process for a lender in the Cayman Islands.
A Current Concern - Public Auction or Private Treaty?
Section 75 of the RLL deals with the process by which the lender sells the property. The lender must act in good faith when seeking to sell the mortgaged property. An issue recently before the Cayman Grand Court was whether the lender must first seek to sell the property by public auction or whether it can proceed directly to a sale by private treaty.
Inevitably, a "forced sale" by auction will lead to a reduction in the market value of the property. Potential buyers often sniff the opportunity for a bargain. In a down market too many public auctions can also depress property values further by indicating a micro-climate of cheap available property. This would certainly seem to make the lender's job more difficult in establishing that it has acted in good faith in obtaining the best price reasonably possible.
In Butterfield Bank v Jervis & Jackson in 2011 the learned Chief Justice concluded that it was the settled practice of the Court that the sale must be by public auction. The order could be "varied" to sale by private treaty, but only after a "fair attempt by the Chargee to sell by public auction". The Chief Justice ordered that the opportunity for sale by public auction (at a reserve price based upon independent valuation) must occur before the Plaintiff lender could restore its application to sell by private treaty.
The Chief Justice's thinking appears to have been guided by a long settled practice of the Court, albeit one which was not identified in his Judgment, along with notions of fairness to the defaulting borrower. The theory behind the Chief Justice's decision seems to be that sale by public auction is fair and will establish a market price. However, if an unfair (i.e. extremely low price) results from the public auction then more costs would be incurred by the lender, as it would have to make another Grand Court application in circumstances where it has already waited at least 4 months (and often much longer) to be placed in a position where the security can be sold.
In refusing the lender's application in Butterfield Bank v Jervis & Jackson, the Chief Justice ruled (without hearing argument on behalf of NBS) that his reasons would apply to NBS v Wellington, which came before him on the same date.
This issue came before the Grand Court again in Cayman National Building Society v. Cranston in 2011. Though the facts of the case departed significantly from those of Butterfield Bank v Jervis & Jackson, the legal analysis of Justice Quin did not rest heavily on these differences. Justice Quin relied instead on a plethora of case law and adhered to the script set out in the RLL (rather than an unspecified "long settled practice of the Court"). In his Judgment Justice Quin cites the decision of Chief Justice Malone in CNB v. Smith Pierson, holding that the Court has a general discretion, under section 18 of the Grand Court Law to impose "such conditions as were just when making orders".
Based on his review of the cases and the distinguishing features of the Butterfield case, Justice Quin concluded that this was an appropriate case to grant National Building Society leave to sell the property by way of private treaty rather than public auction. Justice Quin was able to find in favour of making the Order for sale by private treaty since, having reviewed case law that was not put before the Chief Justice, he was apparently persuaded that the "mischief" which concerned the Chief Justice could be avoided by not fixing a reserve price. Justice Quin cited with approval Justice Henderson's formulation (as set out in Scotiabank (Cayman Islands) Limited v Rankine) of how the true value of property can be ascertained, namely by having the property listed using the multiple listings service.
Notably, Justice Quin's rigorous legal analysis did not include reference to the 1986 case of Simmons v. Moxam in which the Court of Appeal set out guidelines for the sale of land pursuant to the Judicature Law, section 42(1). This case involved a judgment creditor Plaintiff (not a mortgagee) who applied for an order for sale of the judgment debtor's home in order to discharge a debt. It was noted by the Court of Appeal that, whilst section 42(1) of the Judicature Law provided for sale by public auction, the Court may approve sale by private treaty for special reasons. The Court of Appeal noted that there was no settled practice as to the sale of land and accordingly set out guidelines. It is not evident that these guidelines were considered in either of the more recent cases discussed above.
As matters stand the issue is unresolved, due to the recent conflicting decisions of Chief Justice Smellie and Justice Quin. This conflict must be considered and resolved so that borrowers and lenders alike have the desired certainty regarding the mortgage possession process. As the Cayman Islands property market continues to stagnate, a close eye will no doubt be kept on this most important aspect of mortgage possession law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.