A recent Supreme Court decision (May 2015) gives clarity to lenders on the impact of failing to comply with the Code of Conduct on Mortgage Arrears when seeking possession of a primary residence.
IRISH LIFE & PERMANENT V DUNNE
The case started in the Circuit Court in May 2011 when Irish Life & Permanent sought possession of the family home of two borrowers. The borrowers had defaulted on a 2007 loan, which was secured against their home.
The borrowers did not defend the court proceedings or take any part in them as they had been living overseas since 2010. As a result, no issue was raised as to whether the bank had complied with the code until the case came on for hearing in the Circuit Court.
The bank lost its application for possession in the Circuit Court due to its failure to issue a demand letter by a particular date. This issue was unrelated to the bank's compliance with the code, which was not fully considered by the Circuit Court. The bank appealed to the High Court. As a number of High Court judges had taken "differing views" on the consequences of non-compliance with the code, the High Court sought the opinion of the Supreme Court.
COULD THE BANK BREAK THE CODE AND STILL GET POSSESSION?
The Supreme Court had to consider whether a lender which fails to comply with the provisions of the code can nevertheless obtain an order for possession of a borrower's primary residence.
What is the Code of Conduct on Mortgage Arrears?
The code is issued by the Central Bank and it sets out the manner in which banks are to treat borrowers who are either in arrears or who are in danger of falling into arrears. The code only applies to principal residences and does not apply to investment properties. The current version of the code was published in 2013 and replaces the 2011 code. Provision 56 of the code contains the moratorium provision.
BREAKING THE CODE
The code requires lenders to go through a process with a borrower who is in arrears, or who is in danger of falling into arrears, in order to try and find a solution to the mortgage arrears problem. The code contains moratorium provisions which prevent lenders from bringing possession proceedings against cooperating borrowers until a certain period of time has elapsed.
The Supreme Court stated that the code's moratorium provisions are intended to give the lender and borrower a window to explore other solutions to the mortgage arrears problem. It said that if a financial institution ignores the moratorium and seeks possession as soon as the borrower defaults, then it is doing the very thing the code was designed to prevent.
"A court could not properly act to consider a possession application in those circumstances," the Supreme Court said. The Supreme Court found that "... where the breach of the Code involves a failure by a lender to abide by the moratorium referred to in the Code, but in no other case, noncompliance with the Code affects, as a matter of law, a relevant lender's entitlement to obtain an order for possession." This means that if a lender fails to comply with the moratorium provisions in the code, the court will not grant the lender an order for possession of a family home. However, breach of any other provision of the code will not affect a lender's entitlement to an order for possession. The reason for this is that the current legislation does not give the courts a role in assessing a borrower's proposal on arrears or a lender's debt resolution procedure. The Supreme Court said that if the law which enables a lender to obtain possession of a borrower's property is too heavily weighted in the lender's favour, it is for the Oireachtas (the Irish parliament) to address this.
HOW TO ESTABLISH COMPLIANCE WITH THE CODE
When a lender is seeking possession of a borrower's primary residence, it must prove to the court that it has complied with the code's moratorium provisions. The Supreme Court decision helpfully outlines the essential information that a lender should include in its court papers in order to show compliance with the moratorium provisions:
The lender's affidavit should state that the proceedings were started outside the moratorium period. Any correspondence evidencing this should be exhibited to the affidavit.
- If the lender contends that the full or normal moratorium period does not apply, the affidavit should explain why this is the case.
- If the borrower challenges the lender's evidence that there was no breach of the moratorium period or that it did not apply, the lender will need to provide further evidence in its affidavit in order to prove its case. The court hearing the case will have to consider what further evidence is necessary.
The decision of the Supreme Court was applied by the High Court in the more recent cases of Danske Bank v Higgins and Stepstone Mortgage Funding Ltd v Hughes. In the Danske Bank case, the High Court awarded the lender judgment in the sum of €253,959.68 against the borrowers. The borrowers had argued that their account should have been dealt with under the code. The Court found that the moratorium provisions in the code only apply where the lender is seeking an order for possession. In this case the lender was not seeking possession, but was seeking judgment of the loan amount.
In the Stepstone Mortgages case, the lender sought possession of the borrowers' family home, which the High Court granted. The borrowers argued that the lender had failed to comply with the code. The Court found that as the lender had issued proceedings outside of the moratorium period, it had no discretion or power to consider or act upon a breach of any other provision of the code and the lender was entitled to possession.
CLARITY FOR LENDERS
The Supreme Court has clarified the law for lenders. It is now clear that the courts will refuse to grant an order for possession where the lender did not comply with the code's moratorium provisions. However, breach of any other provision of the code has no effect on a lender's entitlement to an order for possession.
It remains to be seen whether legislation will be enacted to give the courts wider jurisdiction in repossession cases.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.