Mortgage Shortfall - Limitation
Bristol & West v Bartlett [2002] EWCA Civ 1181; [2003] 01 EG 69) / West Bromwich BS v Crammer [2003] EWHC 2618 / Scottish Equitable plc v Thompson [2003] 07 EG 137, CA; [2003] All ER(D).

These Court of Appeal cases considered whether a claim by a mortgagee against a mortgagor for the shortfall after a sale by the mortgagee of mortgaged property enjoyed a 12-year limitation period under s.8 or s.20 Limitation Act 1980, or whether it enjoyed only a six-year limitation period under s.5 of that Act.

Bristol & West- The Facts
This case involved three appeals sharing essentially the same facts. The common facts in each of the three appeals were that: (a) Many years ago the mortgagees ('Bristol', 'Paragon' and 'Halifax') recovered possession of a house following default in payment of the mortgage. Unfortunately much more was owed than was obtained on the sale and they now wished to recover the shortfall. More than six years had passed since the problems arose but 12 years had not.

Each of the mortgagors mounted a limitation defence to those proceedings, contending that the effect of the sale and/or s.35 Land Registration Act 1925 was to discharge the liability arising under the covenant to pay in the mortgage deed, leaving an implied obligation to pay under a simple contract within the meaning of s.5 of the 1980 Act. That defence was dismissed in Bristol and Halifax, but was upheld in Paragon.

Were the mortgagee's claims statute barred? The Court of Appeal has now given much needed guidance on this question and the answer is largely helpful for lenders.

Limitation Act 1980
This Act imposes time limits by which various legal claims must be brought. Failure to bring a claim within the requisite period renders a claim void.

• The time limit for an action founded on simple contract is six years (s5).


• The time limit for an action "upon a specialty" (i.e. a deed) is 12 years. A mortgage deed being under seal is a specialty (Aiken v Stewart Wrightson Members Agency Ltd [1995] 1 WLR 1281). (S8)


• There are however special provisions that apply to mortgages in s20:

(1) No action shall be brought to recover-

(a) any principal sum of money secured by a mortgage or other charge on property (whether real or personal) .. after the expiration of twelve years from the date on which the right to receive the money accrued.

(b) subject to subsections (6) and (7), no action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of the land, or to recover damages in respect of such arrears, shall be brought after the expiration of six years from the date on which the interest became due.

The Borrower's Arguments
When a person enters into a mortgage there are normally two key documents.

The offer letter offering to lend the money. The acceptance of that offer gives rise to a contract. The lender agrees to lend and the borrower agrees to repay.

The mortgage deed: This document secures repayment of the money loaned under the contract. If the borrower does not repay the lender uses the mortgage to take the home, sell it and recover the money that way.

The principal argument of the borrowers in Bristol & West plc v Bartlett was that once the mortgage had been discharged, it was no longer possible to say that the shortfall monies were being claimed under the mortgage. There was simply an implied contract to repay, in respect of which the limitation period was six years. That argument was rejected by the Court of Appeal.

The Court of Appeal Decision
The true position, according to the court, is that the cause of action arises once there is a failure to make the payments due under the mortgage and that the accrued right is not taken away by the lender's subsequent exercise of the power of sale. "The right to sue for the mortgage debt arose at the time of that failure and, at that time, moneys were outstanding on the security of the mortgage". (See paragraphs 14 and 20 of the judgment of Longmore LJ).

Capital and interest
Having rejected the borrowers' arguments, the Court of Appeal went on to confirm that mortgage cases are governed by s20 (rather than s8). This is academic in the case of the principal sum, where the limitation period would be 12 years in either case, but is important in relation to interest.

"We therefore conclude that, in other than exceptional cases (which we cannot, at present, envisage), claims for a mortgage debt will be governed by section 20 of the Limitation Act, even if the mortgagee has exercised its power of sale before it issues proceedings. That means that it has 12 years from the accrual of the cause of action to sue for the principal of the debt, but only six years to sue for interest."

Apportionment
In dealing with interest the normal rules as to appropriation will apply, i.e:

"... in the absence of any appropriation by, first, the debtor, or, second the creditor, payments will go to discharge interest before they discharge capital".

In the absence of a pre-existing agreement defining to what part of a debt payments are to be appropriated, it is open to a debtor when making a payment to determine how his payment is to be treated (Lowther v Heaver (1889) 41 Ch D 248; Leeson v Lesson [1936] 2 KB 156).

If the debtor makes no appropriation before or at the time of payment the creditor has the right to do so (Seymour v Pickett [1905] 1 KB 715). The debtor's right can be exercised at any time until it is inequitable for him to be permitted to do so. It should be noted that payments can be appropriated to a statute-barred claim prior to judgment (Smith v Betty [1903] 2 KB 317). It seems where there has been no appropriation the law may well apply any payment made to interest before applying it to the capital to which the interest relates (Income Tax Commissioner v Maharajadhiraja of Darbhanga (1933) LR 60 IA ).

It follows that the first consideration is whether the mortgage terms and conditions provide for appropriation of payments as between interest and capital. If no provision is made, a borrower has a small window of opportunity to provide for appropriation to capital. However if that step has not been taken in the case of each payment by the time it is made, the lender will be free to appropriate sums to interest whether it is statute-barred or not, so as to ensure that as much of the debt as possible benefits from a 12 year limitation period. Further, even if the lender takes no steps it seems that the law will come to his assistance rather than that of the borrower.

The question of apportionment between payments has subsequently been considered in West Bromwich BS v Crammer [2003] EWHC 2618. This was a rather complicated case on the facts but the effect of it is that the usual rules as to appropriation of payments apply to mortgage repayments. The likely effect is that payments will be applied to clear interest first unless the borrower appropriates the payments to capital.

Scottish Equitable plc -v- Thompson (2003) 7 EG 137 (CS) CA

The principle in the Bristol and West case was applied last year by the Court of Appeal even where the mortgage was an interest only mortgage and did not contain a covenant to repay the principal sum (Scottish Equitable plc v Thompson [2003] 07 EG 137, CA; [2003] All ER(D).

The period of limitation for recovering the principal sum advanced under a mortgage by deed is 12 years and this remains the period even if the property is repossessed and sold by the mortgagee.

Key Points

• Claims for a mortgage debt will be governed by section 20 of the Limitation Act. This means that the period of limitation for recovering the principal sum advanced under a mortgage by deed is 12 years even if the property is repossessed and sold by the mortgagee.


• The cause of action arises once there is a failure to make the payments due under the mortgage and that right is not taken away by the lender's subsequent exercise of the power of sale.


• The mortgagee who has exercised its power of sale before it issues proceedings has 12 years from the accrual of the cause of action to sue for the principal of the debt, but only six years to sue for interest.


• Mortgage terms and conditions should ideally provide for appropriation of payments as between interest and capital.


• In the absence of any appropriation by, first, the debtor, or, second the creditor, payments are likely to be treated as discharging interest before they discharge capital. The application of this rule will mean that interest is paid off first, leaving the capital debt, which may be recovered within 12 years, outstanding.

David Bailey 020 7544 5585 davidb@sghlaw.com