Repossessing a mortgaged property: how difficult can it get?
It is a common perception that when a borrower falls into arrears, the mortgage lender 'simply' repossesses the property; but every mortgage lender knows that the reality of the lending market is somewhat different, and how repossessions are often more difficult to obtain than the general public is prepared to believe.

Cheryl Bates, partner in the "Services to Lenders" group, looks at current case law and reflects on changes since a time when mortgage lenders had a strictly protected right to repossess mortgaged properties…

The foundations of mortgagees' entitlement to repossess: how secure are they?
Prior to 1970 the right of a mortgage lender to enter into possession of a mortgaged property was one which the common law protected strictly.

The courts were unable to grant defaulting borrowers relief against their lender's contractual claim for possession. The sole exception was that "the application itself might be adjourned for a short time to afford to the borrower a chance of paying off the mortgagee in full or otherwise satisfying the mortgagee but only if there were a reasonable prospect of this happening" - Birmingham Citizens Permanent Building Society –v- Caunt [1962] [1962 1 ALL ER 163 (CH)] -.

The Payne Committee considered that this was too severe and recommended that the Court's discretion should be exercised with regard to the interests of mortgage lenders as well as borrower and with due regard to the terms of the mortgage.

This 'discretion' was therefore embodied in Section 36 AJA 1970. If it appeared to the court that the borrower was likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default, the Court could exercise such discretion to give the borrower more time and /or leeway.

However, most mortgages provide for the principal to become immediately payable if instalments are in arrears. Therefore, the court could only suspend if it appeared the borrower could repay the whole mortgage debt within a reasonable period of time.

The case law that followed was inevitably the product of the Courts trying to redress a situation that appeared absurd, and finding ways to defuse the whole effect of Section 36.

Section 8(1) Administration of Justice Act 1973 was introduced to succeed where Section 36 had failed, limiting sums to be repaid to only such amounts as the borrower would have been expected to be required to pay if there had been no such provision for earlier repayment i.e. only those payments of interest which were in arrears, not the whole mortgage. Section 36 and 8 operated in unison as the legislators had intended. It became the practice in ordinary cases to allow up to 2 years if it appeared that the borrower was likely to be able to clear the arrears in that time. That is until the decision in Cheltenham & Gloucester Building Society v Norgan.

The controversial approach of the "Norgan" case: how threatening is it?
In Cheltenham & Gloucester Plc ("C&G")–v- Norgan [5.12.95][1996 1 ALL ER 44 (CA)], following rather protracted proceedings, the borrower was granted a period of 4 years to discharge the arrears.

C&G appealed. The Court of Appeal decided that what is or is not a reasonable period must be determined by reference to the circumstances of the individual case. The decision stressed the duty of the court to take all circumstances into account and highlighted the unfettered discretion vested in the court under s 36, which allegedly accorded with the policy behind the legislation.

In fact, the Court of Appeal judgment appeared to go even further. It stated that "one begins with a powerful presumption of fact in favour of the period for the mortgage being the reasonable period".

The Norgan decision therefore required the Courts to start out with the strong presumption that the residue of the length of the term was the period to be given to defaulting borrowers to clear the arrears. This was revolutionary, shifting the delicate balance of the rights of mortgage lender and borrower clearly in favour of the latter.

Whilst the object of the traditional building society mortgage is to give the borrower the term of the mortgage to pay off the capital whilst giving the mortgage lender a continuous flow of interest for being held out of its capital during the term, the Norgan decision undermined this object by giving the borrower the period of the mortgage to repay the capital and interest.

The Norgan decision became the leading authority on the question as to how the courts should approach the assessment of a 'reasonable period' for the purposes of Section 36.

The balance re-established by the Courts: how adequate is it?
In National & Provincial Building Society –v- Lloyd [06.12.95][1996 1 ALL ER 630 (CA)], it was affirmed that the Court should have some "evidence" on which to exercise its discretion. The borrower’s proposal contained no evidence that a sale could take place within a year and was nothing but a mere expression of hope for the future.

The case enforced the principle that the question of a reasonable period of time depends on the particular case. It also made it clear that a court should only exercise its discretion to suspend an order for possession if there was sufficient evidence to lead the court to the conclusion that the borrower was likely to be able to pay any sums due under the mortgage "within a reasonable period of time".

In Bristol & West Building Society –v- Ellis [24.4.96], [1996 EG CS 74 (CA)] the judges felt the court must be shown some evidence of (1) the likelihood of a sale, (2) that the proceeds of the sale would discharge the debt and(3) the period within which such a sale was likely to be achieved.

The period should not necessarily be equated with "short" but what was "reasonable having regard to the circumstances in the individual case". Important factors were the extent to which the mortgage debt and arrears were secured by the value of the property. Where there was a risk as to the adequacy of the security a short period of suspension may only be reasonable or if there was insufficient evidence as to sale value the normal order would be for possession.

In National & Provincial Building Society ("N&P") v Lynd [28.06.96],[1996 NI 47 CHD(NI)] although a moderate approach was taken by the Court who concurred that in the case of Norgan the balance of the term of the mortgage was the proper approach, it was also affirmed, following on from the above mentioned Lloyd case, that if a borrower declined to put any material before the court on which to exercise its discretion, the mortgage lender would be entitled to a remedy based on its contractual rights.

In effect it was up to the borrower asking for relief from the consequences of its breach of contract, to submit to the Court his best realistic proposals to clear the arrears. The court would then arrive at the period it would take to discharge the arrears at that rate by focusing on how much the borrower could afford to pay. Finally, considering all the circumstances, the court could determine if the period was in fact "reasonable".

In Cheltenham & Gloucester Plc –v- Krausz [22.10.96],[1997 1ALL ER 21 (CA)] the court stated that Section 36 circumscribed the rights of a mortgage lender only where the proceeds of sale were likely to discharge the debt. It was not intended that Section 36 should have any wider power to curtail the mortgage lender’s right to possession namely to allow the borrower to sell the property where the proceeds would not discharge the debt unless other funds were available to make up the deficit.

The current practice of the Courts: who does it protect?
It seems obvious in retrospect that the introduction by the Norgan case of the presumption in favour of the term of the mortgage as the relevant "reasonable period" was the wrong starting point.

Mortgage lenders carrying out the important function of assisting would-be house owners in the acquisition of property are disadvantaged by delay in the proper recovery of arrears from defaulting borrowers. The Norgan decision failed to take account of the fact that mortgage lenders do not resort to litigation lightly. Having already followed the guidelines issued by the CML prior to the issue of proceedings a mortgage lender should be entitled to recover the arrears owed at the earliest possible opportunity, not at the end of the mortgage term.

As stated in the above mentioned "Lynd" decision, by requiring a borrower to put forward his/her best realistic proposals to discharge the arrears the court can focus on how much (s)he can afford and can then calculate the period it will take to discharge the arrears at that rate.

It should however be kept in mind that the Courts still consider Norgan to be good case law. It is often quoted by District Judges at first instance to justify lengthy suspensions on low terms. Subsequent case law however suggests that a strict Norgan approach would only be appropriate in cases where there is sufficient equity in the property to clear the mortgage at the end of the term. In any other cases a court should only exercise its discretion having considered evidence that indicates a likelihood that the arrears would be cleared in a reasonable period of time. Where there is no such evidence a mortgage lender should be allowed to rely on its contractual rights to obtain possession.

David Bailey 020 7544 5585 davidb@sghlaw.com