Since the 1980’s, the trend in England and Wales towards home ownership has steadily been on the increase, with over 68% of homes in England and Wales now being owner-occupied.
Following the “credit crunch”, the Council of Mortgage Lenders predicted huge rises in borrower arrears and repossessions. In 2009, the number of properties repossessed by lenders peaked at approximately 46,000 homes. Whilst the numbers of properties repossessed by lenders has not increased since this date, due to historically low interest rates, increased lender tolerance and the introduction of Government rescue schemes, many are calling for increased legal protection for borrowers who fall into arrears. This is of particular relevance now, following the Council of Mortgage lenders prediction that a further increase in mortgagee repossessions will be seen, when interest rates start to increase.
Obtaining possession of a property - The Law
This area of law is largely governed by case law, the Law of Property Act 1925, the Administration of Justice Act 1970 (as amended) and the contractual provisions contained within a mortgage deed.
Most modern mortgages contain an express term which grants lenders an express power of sale, should a borrower default on their mortgage payments. Lenders also enjoy an implied right to sell a property under Section 101 of the Law of Property Act 1925. However this right is almost always substantially varied or excluded by the express terms of the mortgage.
Where the express mortgage conditions do not exclude Section 101 of the Law of Property Act 1925 then the power of sale can only be exercised when the mortgage is made by Deed, and the power has arisen (i.e. the borrower is in arrears) and one of the following has occurred:-
1 - Notice requiring payment has been served, and three months has passed and the money still owing; or
2 - Interest is two months in arrears; or,
3 - The borrower is in breach of another provision in the mortgage deed or 1925 Act.
A power of sale operates as a self-help remedy for lenders, who can exercise this right without commencing possession proceedings. It allows a lender to sell a property to a third party, receive the purchase monies and pay off the mortgage debt with the monies received. The new owner is then at liberty to bring possession proceedings against the former borrower, who is effectively becomes a trespasser in the property.
This route is not widely used by mortgage lenders, however its effectiveness was tested case of Horsham Properties Group Ltd v Clark & Beech [2008] EWHC 2327(Ch). In this case the lender sold the property at an auction through receivers, following the exercise of its right to a power of sale. The new owner then commenced proceedings to evict the former borrowers, on the basis that they were trespassers. The court found that they had no power to refuse the request and ordered possession. In this case the original mortgage was a buy to let mortgage, however the right to a power of sale also arises in a standard owner occupier mortgage.
Many were in uproar following the decision in Horsham. The Ministry of Justice therefore issued a consultation paper on 29 December 2009, in which it sought views on its proposals to amend the law to prevent lenders from utilising a power of sale over residential owner-occupied mortgaged properties, without the lender either first obtaining a Court order, or the borrowers consent. The consultation period ended in April 2010, however no further steps have been taken by the Government to date to amend the law in this area.
Rather than invoke a power of sale, many lenders choose to commence possession proceedings against borrowers who have fallen into arrears, under Part 55 of the Civil Procedure Rules.
Unless there is evidence to the contrary in the mortgage deed, the lender is entitled to possession of mortgaged land from the moment the mortgage is made, regardless of default. However, most modern mortgages require payment to be made by a borrower in instalments. If this is the case, the mortgage deed usually provides that possession of the property is not available to the lender, until the borrower is in default. Following concerns that mortgage lenders were all too eager to repossess properties when a borrower fell into arrears, rather than considering alternative options, a Mortgage Pre-action Protocol (the Protocol) was brought into force on 19 November 2008.
The Protocol sets out the steps which lenders are expected to follow, before commencing proceedings under CPR 55 to recover possession of a property. The Protocol applies to all mortgages including those regulated by the Consumer Credit Act 1974.
Since it came into force, the Protocol has been amended to expand the steps a lender is required to take before possession proceedings are commenced. In addition, since its inception, a checklist has been introduced which must be completed by mortgage lenders to evidence their compliance with the Protocol.
The Protocol requires lenders to be open with borrowers about the level of outstanding arrears, to consider a reasonable request for payment by the borrower and to give the borrower at least 15 business days’ notice, in writing, of their intention to start possession proceedings. The Protocol also requires lenders to consider delaying possession proceedings, where the borrower can show that they have taken reasonable steps to sell the property at an appropriate price. However, the Protocol has been criticised by some because the only sanction available to a Court, where a lender has failed to follow the Protocol, is costs based.
Alternatively, if a property has been abandoned by the borrower(s) or the borrower(s) agree to give up possession, a lender can take possession of a property peaceably without obtaining a Court order.
Conclusion
For some time many have called for a greater legal protection to be afforded to borrowers, during possession proceedings. Whilst the Government remains reluctant to restrict a lenders right to recover possession of a property, it is apparent to many practitioners that the judiciary are finding ever increasing ways to suspend or stay orders for possession. Due to this many lenders are taking pro-active steps to agree reasonable payment terms with borrowers or find alternative means of dealing with the arrears, in order to avoid costly re-possession proceedings, which may result only in a suspended or deferred order of possession.
However, if as predicted, more borrowers fall into mortgage arrears when interest rates increase, it will be interesting to see whether lenders growing forbearance towards borrowers will continue.
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.
