Cases
EBS v Gillespie
[2012] IEHC 243
Laffoy J.
Status of Judgment: Approved
The relevant facts.
5. By the Charge the defendant charged by way of first fixed charge in favour of the plaintiff with payment of all monies thereby secured, or intended to be thereby secured, all of the property registered on Folio 38596 and part of the property registered on Folio 36513 of the Register of Freeholders, County Donegal. On 17th May, 2002 the defendant was registered as full owner with absolute title on both folios. On the same day there was registered a charge for present and future advances repayable with interest as burdens on both folios and the plaintiff was registered as owner of the Charge on each folio. However, in the case of Folio 36513 it was provided that the Charge applied to “Plan 18 JG of this Folio”. It is that entry on Folio 36513 which identifies the part of the lands registered on the folio which is the subject of the Charge and the claim for possession in these proceedings.
6. In the grounding affidavit, Ms. Belton averred that by letters of loan offer dated 17th December, 2001 and 24th September, 2002 the plaintiff agreed to provide the defendant with “20 year repayment loans in the sum of €393,618.80 and €70,000 respectively”, which loans were given account numbers 59164985 and 59393969 respectively. It was further averred that the said loans were subject to a variable interest rate, which at the date of the issue of the loan offers was 5.50%, and that the “said loan was repayable on demand but until demand was made in monthly instalments over the term of 20 years”. Neither of the letters of loan offer has been exhibited in the proceedings. Ms. Belton averred that the defendant had defaulted under account 59164985 since February 2003 and in respect of account 59393969 since April 2003 and particularised that averment.
7. The provisions of the Charge, apart from the charging clause (Clause 3.01A(iii)) the effect of which I have already outlined, which are of relevance are the following:
(a) The expression “Offer Letter” is defined in the definitions clause (Clause 1.01) as meaning any offer letter from the plaintiff to the defendant offering loan facilities to the defendant.
(b) The covenant to pay is contained in Clause 2.01 which provides:
“The [defendant] shall pay to the [plaintiff] on demand or on the happening of any of the events specified in Section 5.01 all monies now owing or which may from time to time be or become due and owing or payable by the [defendant] to the [plaintiff] in any manner whatsoever …”.
That provision then elaborates on what may be subsumed in “all monies”, including, advances to, or charges or liabilities incurred on behalf of, the borrower, including, inter alia, legal charges occasioned by enforcement of the Charge, and so forth. It is provided in Clause 2.01 (b) that the monies thereby secured shall bear interest at such rate or rates at such times and subject to such terms as shall have been agreed in writing between the defendant and the plaintiff as well after as before any demand or judgment. Clause 2.03 provides that all interest shall accrue “in accordance with the terms of the Offer Letter”.
(c) Section 5 deals with enforcement of the security. Clause 5.01 provides, insofar as is relevant for present purposes, as follows:
“All monies (including accrued interest) hereby secured shall become immediately payable and this security immediately enforceable … on demand by the [plaintiff] for repayment of the monies secured hereunder OR upon the happening of the following events (whatever the reason for such event):-
(a) If the Borrower fails to pay on the due date any money payable or interest due by it from time to time to the [plaintiff] .
…”
(d) The powers of the plaintiff are set out in Section 9. Clause 9.01, which deals with entry into possession, provides as follows:
“At any time after the security hereby constituted shall have become enforceable, the [plaintiff] may at its discretion enter upon or take possession of the Mortgaged Property or any part thereof and may sell … the Mortgaged Property ….”
Clause 9.07 provides that the power of sale conferred on mortgagees by the Conveyancing Act 1881, as amended, shall apply to the security without the restrictions therein contained as to giving notice or otherwise. It then stipulated a deemed legal date for redemption by providing that for the purpose of any sale under such power –
“the monies hereby secured shall be deemed to have become due immediately after the execution of these presents although no demand shall have been made.”
It was averred by Ms. Belton in her grounding affidavit that the plaintiff is desirous of exercising its power of sale.
(e) Counsel for the plaintiff pointed out that the Clause 11.19 provides that in the event that there is any conflict between the terms of the Charge and “the Offer Letter”, the terms of the Charge shall prevail.
8. The only document exhibited on behalf of the plaintiff and represented as a demand for repayment of the sums due by the defendant to it is a letter dated 28th May, 2009 from Patrick J. Farrell & Co., the plaintiff’s solicitors, to the defendant. In the first paragraph of the letter it is stated that the solicitors were instructed by the plaintiff in relation to the arrears on accounts 59164985 (the total debt being expressed as “€,16,156.22” and as including arrears of €4,917.25) and 59393969 (the total debt being €59,360.08, including arrears of €2,831.27). There is an obvious typographical error in relation to account 59164985; it appears that the correct amount of the total debt at the time was €316,156.22. The letter went on to state that the plaintiffs solicitors’ instructions were that the defendant had failed to provide the plaintiff with satisfactory proposals as to how he intended “discharging the arrears and to maintain the accounts in satisfactory order”. The letter then went on to state:
“As your accounts are in arrears, it is open to our client to demand repayment of the entire loans. Accordingly, we are instructed to advise you that if we do not receive repayment of the above loans in full within twenty one days from the date of this letter we are to issue High Court legal proceedings for repayment of the full amount owing in each loan account and recovery of possession of the premises together with an order for the [plaintiffs] costs.”
9. The next step in the process in accordance with the evidence adduced by the plaintiff was that by letter dated 4th November, 2009 from Patrick 1. Farrell & Co. to the defendant, which referred to previous correspondence and, in particular, the letter of 28th May, 2009, the defendant was called upon “to surrender possession of this premises to our client”. The letter is headed “Srath na Corcra Derrybeg County Donegal”, which I assume corresponds to the property the subject of the Charge.
10. In the grounding affidavit Ms. Belton averred that, as of the date of the grounding affidavit (28th February, 2011), the sum of €386,441.25 was due and owing by the defendant to the plaintiff on the two loan accounts. In his first replying affidavit, the defendant acknowledged that that was the balance due at 28th February, 2011, despite the fact that he had made payments of €274,655.64 to the plaintiff. However, the history of the dealings between the plaintiff and the defendant was not as limited as the plaintiffs grounding affidavit suggests.
11. While these proceedings were not initiated until 18th January, 2011, the plaintiff had issued proceedings, which were not disclosed in the grounding affidavit, by way of special summons on 4th January, 2010 under record No. 2010/1SP (the 2010 Proceedings), of which these proceedings, in their original form, were a replica. Apparently the 2010 Proceedings were never served on the defendant and they were struck out on the second occasion on which they were listed in the Master’s Court, that is to say, on 22nd June, 2010.
12. Following on the letter of 28th May, 2009 and before the request for possession dated 4th November, 2009 and after that request but before either the 2010 Proceedings or these proceedings were initiated, there had been direct interaction between the defendant and the plaintiff in relation to the accounts. In his affidavits sworn on 21st March, 2012 and 26th April, 2012, the defendant has set out –
(a) payments stated to total €24,135.36 (but aggregating €21,517.68 on my arithmetic), which he made to the plaintiff in June, July and November 2009 and in January, February, March, April, May, June, July and September 2010 on loan account 59164985; and
(b) payments totalling €4,807.04 which he made in July 2009 and January, February, May, June, July and September 2010 on loan account 59393969.
13. In his affidavit sworn on 26th April, 2012 the defendant has averred that in or about the month of January 2010 he reached an arrangement with the plaintiff that it would treat the loan as an interest only loan for a period of six months and that he would pay the sum of €2,000 per month for six months. The matter was to be reviewed after six months. On foot of that arrangement he made payments during 2010 which are recorded in the preceding paragraph. The defendant exhibited a letter dated 6th January, 2010 from the plaintiff to him, which was in reply to a letter from the defendant which must have been dated the 17th December, 2009, and in which it was stated that the plaintiff was –
“… prepared to accept monthly payments of €2,000 in respect of ‘interest only’ to be charged on the above accounts for a period of six months from January 2010.”
The defendant was asked to ensure that the agreed sum was lodged by him strictly on a monthly basis without fail. It was stated that the plaintiff would review the position after the six month period had expired. The letter referred to the two loan accounts secured by the Charge.
14. In the affidavit sworn on 26th April, 2012 the defendant has also recorded that two ejectment actions which were instituted against him by the defendant in the Circuit Court, County Donegal in 2004 and 2008. He has averred that the 2004 proceedings were discontinued in October 2007, when he discharged the arrears then due. In relation to the 2008 proceedings, he reached an agreement with the plaintiff in September 2008 and the proceedings were settled and not continued, although a formal notice of discontinuance was never served on his solicitors or filed in the Circuit Court office. As I have stated, the 2010 proceedings were commenced on 4th January, 2010. The defendant has disposed that the same firm of solicitors acted for the plaintiff in both ejectment proceedings in the Circuit Court and in the 2010 Proceedings as are representing the plaintiff in these proceedings. By letter dated 28th April, 2010 to the defendant, the plaintiff informed the defendant that his account had been debited with a sum set out in a fee note furnished by the plaintiff’s solicitors in accordance with the terms of the Charge. The relevant fee note was enclosed. The total amount due on the fee note was €2,707.38. This obviously related to the 2010 Proceedings because it refers to the professional charges for acting in connection with the plaintiff against the defendant “in relation to High Court proceedings”. The defendant has suggested in his affidavit that the discontinuance of the 2010 Proceedings demonstrates that the plaintiff did not intend to pursue him in the Courts, but that it changed its mind later.
15. The final step in the process adverted to by the defendant is a letter dated 30th November, 2010 from the plaintiffs solicitors to the defendant, which was a verbatim replica of the letter of 28th May, 2009 referred to at para. 8 earlier, save that the arrears on account No. 59164985 were then €27,353.04 and the total debt was €322,433.07 and the arrears on account No. 59393969 amounted to €5,278.66 and the total debt amounted to €59,136.81.
16. None of the matters averred to by the defendant which are outlined in the preceding paragraphs have been disputed by the plaintiff, although a supplemental affidavit was sworn on 17th April, 2012 by an in-house solicitor of the plaintiff setting out the arrears and the balance due on each loan account as at that date. The balance on account 59164985 was €271,261.90 and the arrears outstanding amounted to €76,229.07, whereas the balance due on account 59393969 was €49,815.08 and the arrears outstanding amounted to €14,147.15. It is difficult to reconcile those figures with the figure in the letter of the 30th November, 2010, but that is not an issue the Court has to resolve on this application.
Submissions
17. There are three limbs to the defendant’s case that the plaintiff is not entitled to an order for possession.
18. First, it was submitted by counsel for the defendant that the letter of 28th May, 2009 did not constitute a valid demand so as to give the plaintiff the entitlement to realise the security created by the Charge. In this connection, counsel relied on the commentary in Paget ‘s Law of Banking, 13th Ed. at para. 13.3, where it is stated that both the High Court and the Court of Appeal in England and Wales has adopted as a fair working definition of a valid demand the following passage from the judgment of Walker J. in the Australian case of Re Colonial Finance, Mortgage, Investment and Guarantee Corpn. Ltd. (1905) 6 SRNSW 6 at p. 9:
“… there must be a clear intimation that payment is required to constitute a demand; nothing more is necessary, and the word ‘demand’ need not be used; neither is the validity of a demand lessened by its being clothed in the language of politeness; it must be of a peremptory character and unconditional, but the nature of the language is immaterial provided it has this effect.”
19. Secondly, even if the demand in the letter of 28th May, 2009 was of a peremptory character and unconditional, counsel for the defendant submitted that the demand was vitiated by the subsequent events, which I have outlined earlier. It was submitted that the plaintiff, in entering into the new arrangement with the defendant which is evidenced by the letter of 61h January, 2010, did not do so on a basis that was without prejudice to its reliance on the demand contained in the letter of 28th May, 2009. The plaintiff, it was submitted, could not have sought repayment of the entire debt, say, three months into that arrangement. The effect of the arrangement was to undo the demand and take away its unconditionality.
20. Thirdly, if the plaintiff is constrained to fall back on the later demand of 30th November, 2010, which on the evidence it would appear was not followed by a fresh request for possession, it was submitted by counsel for the defendant that on the authority of the decision of the High Court (Dunne J.) in Start Mortgages v. Gunn [2011] IEHC 275, given that the demand post-dated the coming into operation of the Act of 2009, which repealed s. 62(7) of the Act of 1964, the Court does not have jurisdiction to make an order for possession pursuant to s. 62(7). Indeed, it is reasonable to infer that the application on foot of the plaintiffs notice of motion dated 20th January, 2012 to amend the special summons was a reaction to an affidavit sworn by the defendant’s solicitor, Sean Boner, on 25th November, 2011, in which it was pointed out that the provisions of Chapter 3 of Part 10, including s. 97(2), of the Act of2009 only apply to mortgages created after the commencement of Chapter 3 of Part 10, which commenced on 15th December, 2009.
21. The position adopted by counsel for the plaintiff was that the plaintiff was relying on the provisions of the Charge, in particular, clause 5.01(a). It was also relying on the demand in the letter dated 28th May, 2009, which was a valid demand. The defendant had defaulted prior to the coming into operation of the Act of 2009 and subsequent events, including the arrangements entered into by the plaintiff with the defendant, did not alter or revoke the validity of the demand. It was emphasised that in his affidavits, the defendant has accepted that the arrears are due and owing on foot of the Charge.
Conclusion
22. The plaintiff has invoked the statutory jurisdiction conferred by s. 62(7) of the Act of 1964. That sub-section before its repeal by the Act of 2009 provided:
“When repayment of the principal money secured by the instrument of charge has become due, the registered owner of the charge … may apply to the court in a summary manner for possession of the land or any part of the land, and on the application the court may, if it so thinks proper, order possession of the land or the said part thereof to be delivered to the applicant, and the applicant, upon obtaining possession of the land or the said part thereof, shall be deemed to be a mortgagee in possession.”
It is instructive to consider subs. (7) in the overall context of s. 62. Sub-section (1) gave a registered owner of land power to charge the land with payment of money. Sub-section (2) stipulated that there should be executed on the creation of a charge, otherwise than by will, an instrument of charge in the prescribed form but added –
“until the owner of the charge is registered as such, the instrument shall not confer on the owner of the charge any interest in the land”.
Sub-section (6) provided:
“On registration of the owner of a charge on land for the repayment of any principal sum of money with or without interest, the instrument of charge shall operate as a mortgage by deed within the meaning of the Conveyancing Acts, and the registered owner of the charge shall, for the purpose of enforcing his charge, have all the rights and powers of a mortgagee under a mortgage by deed, including the power to sell the estate or interest which is subject to the charge.”
Sub-sections (1), (2) and (6) were amended by the Act of 2009 but the amendments are not material for present purposes.
23. It is also instructive to refer to the observations of Geoghegan J. in Bank of Ireland v. Smyth [1993] 2 I.R. 102, which were obiter, as to the nature of the discretion conferred on the Court by s. 62, subs. (7). He said (at p. 111):
“The words ‘may, if it so thinks proper’ in s. 62, sub-s. 7 mean no more, in my view than, that the court is to apply equitable principles in considering the application for possession. This means that the court must be satisfied that the application is made bona fide with a view to realising the security…. It had been held in Northern Banking Company Ltd. v.Devlin [1924] 1 I.R. 90 that even though the Registration of Title Act, 1891, conferred on a registered owner of a charge the rights of a legal mortgagee under the Conveyancing Act, 1881, nevertheless a registered owner of a charge, unlike a legal mortgagee, could not obtain an order for possession for the purposes of a sale out of court, because the legal mortgagee’s right to possession arose by virtue of his estate in the land at common law, and not by virtue of the Conveyancing Act, 1881 . This yawning gap in the rights of a legal chargeant was heavily criticised by Glover in his Registration of Land in Ireland, 1933. The position was corrected by s. 13 of the Registration of Title Act, 1942, which is in identical terms to s. 62, sub-s. 7 of the Registration of Title Act, 1964. The historical background to the subsection therefore reinforces me in the interpretation which I give to it. I do not believe that the Oireachtas intended a wide discretion which could take sympathetic factors into account.”
24. The initiation of these proceedings post-dated the repeal of s. 62(7) by virtue of the Act of 2009 with effect from 1st December, 2009. The repeal of s. 62(7), as is the case in relation to the repeal of any enactment, is subject to the provisions of s. 27 of the Interpretation Act 2005 (the Act of 2005). Section 27(1) of the Act of 2005 provides that the repeal does not –
“… affect any right, privilege, obligation or liability acquired, accrued or incurred under the enactment.”
Sub-section (2) of s. 27 provides that, where an enactment is repealed, any legal proceedings, including civil proceedings, in respect of a right, privilege, obligation or liability acquired, accrued or incurred under the enactment-
“may be instituted, continued or enforced . ..as if the enactment had not been repealed.”
In order to determine whether, notwithstanding the repeal of s. 62(7), the jurisdiction of the Court to make an order for possession under that provision is alive as regards the plaintiffs claim against the defendant in these proceedings, the crucial question is whether it has been established that the plaintiff had acquired as against the defendant a right to seek the statutory remedy in the form of an order for possession of the property secured by the Charge prior to 1st December, 2009. The answer to that question turns on the application of the requirements of s. 62(7) in the context of the agreement between the plaintiff and the defendant embodied in the Charge to the facts. In performing that exercise, because it is the easiest course to adopt, I propose looking at the matter from the historic perspective and considering whether the plaintiff has established that it had a right to seek an order for possession prior to 1st December, 2009. However, it is not to be inferred that I consider that such approach is the only approach to answering the crucial question.
25. In order to establish that its claim for possession came within s. 62(7) prior to 1st December, 2009, the plaintiff has to establish compliance with the two requirements expressly set out in the sub-section, namely:
(a) that repayment of the principal monies secured by the Charge had become due by that date; and
(b) that the plaintiff was the registered owner of the Charge.
Requirement (b) was clearly complied with. As regards requirement (a), it is necessary to consider what was agreed between the plaintiff and the defendant in relation to repayment of the principal money secured by the Charge. Apart from those two requirements, the Court must be satisfied that it would have been proper to afford the plaintiff the statutory remedy of an order for possession against the defendant to enforce the right acquired. Having regard to the observations of Geoghegan J. in Bank of Ireland v. Smyth quoted earlier, I consider the Court would have to be satisfied not only that the application was made bona fide with a view to realising the plaintiffs security, but also that the power of sale had arisen and was exercisable by virtue of the terms of the agreement between the plaintiff and the defendant contained in the Charge.
26. The Charge in this case was an “all sums” charge. In my view, where a lending institution is seeking relief on foot of an “all sums” mortgage or charge and, as in this case, the terms of the loan offer and its acceptance are not spelt out in the deed of mortgage or charge, the loan offer and acceptance should be exhibited. As I have already indicated, that was not done in this case. At the hearing, counsel for the plaintiff offered to file an affidavit exhibiting the two offer letters. However, in this case, it is possible to identify whether repayment of the principal money secured by the Charge had become due before 1st December, 2009 and whether the plaintiff was entitled to enforce its security by obtaining possession and exercising its power of sale before that date by reference to the terms of the Charge on its own. By virtue of the terms of the Charge as agreed between the plaintiff and the defendant, the position immediately prior to 1st December, 2009 was as follows:
(a) The security constituted by the Charge was enforceable even if the demand contained in the letter of 28th May, 2009 was not a valid demand, because, by virtue of clause 5.01(a), the defendant having defaulted in making payments due under the Charge, all of the monies secured had become immediately payable and the security immediately enforceable.
(b) The plaintiff’s power in accordance with clause 9.01 to enter upon and take possession of the secured property was exercisable because the security had become enforceable.
(c) The plaintiff’s power of sale had arisen because it was expressly agreed that, for the purposes of any sale, the legal date for redemption occurred immediately after the execution of the Charge.
(d) The plaintiff’s power of sale as mortgagee was exercisable. The statutory power of sale conferred on a mortgagee by s. 19 of the Act of 1881, prior to its repeal by the Act of 2009, could be varied or extended by the mortgage deed and the section applied only if and as far as a contrary intention was not expressed in the mortgage deed. As the statutory power of sale applied “when the mortgage money has become due”, in this case, by virtue of the terms of the Charge (clause 9.01), the power of sale was exercisable after the security had become enforceable, which I am satisfied had happened before 15th December, 2009. Moreover, it was expressly provided in the Charge (clause 9.07) that the power of sale was exercisable without the restrictions contained in s. 20 of the Act of 1881 as to giving notice or otherwise.
Having regard to the foregoing, I am satisfied that prior to the repeal of s. 62(7), the plaintiff had acquired a right to seek an order for possession under that provision and by virtue of s. 27 of the Act of 2005, the plaintiff was entitled to institute these proceedings to obtain the appropriate remedy to enforce that right.
27. In relation to the specific arguments advanced on behalf of the defendant, I would make the following observations. First, neither the right of the plaintiff to enforce the security by entering into possession with a view to a sale nor the exercise of the power of sale required the issue of a prior demand or notice to the defendant, having regard to the provisions of the Charge which I have outlined earlier, so that the question of the validity of the demand contained in the letter dated 28th May, 2009 is not an issue which can determine the entitlement of the plaintiff to the remedy it seeks. Nonetheless, I would observe that, notwithstanding the misstatement of the total amount owing to the plaintiff on foot of account 59164985, due to what is an obvious typographical error, I am satisfied that the letter constituted a valid demand, in that it is clear that what was being demanded was repayment of the entire monies due on foot of the two loan accounts. Secondly, even though the forbearance given by the plaintiff to the defendant in the letter of 6th January, 2010 effectively postponed the enforcement by the plaintiff of its right to possession, I do not consider that the actions of the plaintiff are properly construed as a waiver of its rights under the Charge which arose from the default of the defendant. The letter itself made it clear that the position would be reviewed by the plaintiff at the expiry of the six month period. Thirdly, having regard to the terms agreed between the plaintiff and the defendant in this case as set out in the Charge, on the basis outlined earlier, I am satisfied that the plaintiff had acquired a right to seek an order for possession before the repeal of s. 62(7).
Order
28. Subject to a number of matters being addressed, I consider that the plaintiff is entitled to an order pursuant to s. 62(7) of the Act of 1964 for delivery of possession to it of the lands registered on Folio 38596 of the Register of Freeholders, County Donegal, and the part of the land registered on Folio 36513 of the Register of Freeholders, County Donegal, referred to as Plan 18JG on the said folio. The matters which require to be attended to are as follows:
(a) Order 9, rule 14 of the Rules of the Superior Courts (the Rules) requires that an affidavit of service of a summons in an action for recovery of land shall state that the deponent does not know of and does not believe that there is any person, other than those who have been served, in actual possession or in receipt of the rents and profits of the land sought to be recovered, or any part thereof. There is no such statement in the affidavit of service sworn by Aidan McCarron on 19th April, 2011, although there is verification that that is the case in the grounding affidavit of Ms. Belton (at para. 32). A corrective affidavit of service must be filed.
(b) There is a very odd averment in the grounding affidavit of Ms. Belton at para. 34 to the effect that the defendant’s wife “is habitually resident in the property”, which I assume is totally incorrect. On the basis of that assumption, a corrective affidavit must be filed.
(c) Lest anything turns on it later, the two relevant Offer Letters should be exhibited in a supplemental affidavit, which should be filed.
(d) In the light of my observations at para. 16 above, the balance due by the defendant to the plaintiff on each of the loan accounts should be reviewed.
29. While it is strictly speaking not a matter for the Court in these proceedings, I feel constrained to observe that I am at a loss to understand how the plaintiff could properly fix the defendant with the costs of the 2010 Proceedings, which were never served on the defendant.
30. Finally, I will hear further submissions from the parties in relation to the costs of these proceedings and the question of a stay. In relation to costs, I would point out that there is no reference to costs in the order dated 27th February, 2012, which gave liberty to amend the special summons, and, in particular, it is not clear whether the costs were reserved.
Cheltenham & Gloucester Building Society v Norgan
[1995] EWCA Civ 11 [1996] WLR 343, [1996] 1 WLR 343, 28 HLR 443, [1996] 1 All ER 449, [1995] EWCA Civ 11, (1996) 28 HLR 443
LORD JUSTICE WAITE:
The rights of mortgagees to take possession of a dwelling house, whether by virtue of their legal estate in the land or in fulfilment of some express term of the mortgage operating in the event of default or arrears, have for many years been moderated by statutory powers giving the court discretion to suspend possession orders on appropriate terms. The mortgage to which this appeal relates is a term mortgage – that is to say a charge under which no instalments of capital are repayable and the whole principal debt remains outstanding until a specified date in the future, with the mortgagor being liable in the meantime for instalments of interest only. The appellant mortgagor fell into arrear with her interest payments. Thereupon, under the terms of the mortgage, the whole mortgage debt became immediately repayable. The mortgagee sought and obtained a possession order, execution of which was suspended by a series of orders on terms as to payment of current interest instalments and payment-off of arrears with which the mortgagor made strenuous efforts to comply, but without complete success, so that she remained in default, both under the terms of the mortgage and the terms of the suspension. A final application for a renewed suspension was dismissed by the District Judge on 28 September 1993. His order was upheld on appeal by His Honour Judge O’Malley in the Shaftesbury County Court on 27 June 1994. The mortgagor now appeals from that order by leave of this court.
Since the case is said by both sides to involve considerations of principle which would be relevant to all home mortgages – whether term or instalment – it will be as well to begin with a brief account of the statute and case law.
THE LEGAL BACKGROUND
The position at common law was that the court had only a very limited jurisdiction to grant relief to a mortgagor in default under the payment terms in the mortgage against the mortgagee’s consequent claim to possession. It could do no more than to adjourn the application “for a short time to afford the mortgagor a chance of paying off the mortgagee in full or otherwise satisfying him; but this should not be done if there is no reasonable prospect of this occurring” – Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883 per Russell J at p 912. The rigour of this restriction was first mitigated by Section 36 of the Administration of Justice Act 1970 which provides:
36 (1) Where the mortgagee under a mortgage of land which consists of or includes a dwelling house brings an action in which he claims possession of the mortgaged property….. the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of it exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.
(2) The court –
(a) may adjourn the proceedings, or
(b) on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may
(i) stay or suspend execution of the judgment or order, or
(ii) postpone the date for delivery of possession,
for any such period or periods as the court thinks reasonable
(3) Any such adjournment, stay, suspension or postponement as is referred to in subsection (2) may be made subject to such conditions with regard to payment by the mortgagor of any sum secured by the mortgage or the remedying of any default as the court thinks fit.
(4) The court may from time to time vary or revoke any condition imposed by virtue of this section
The reference in sub-section (1) to “any sums due under the mortgage” was restrictively interpreted in case law (Halifax Building Society v Clark [1973] Ch 307 per Sir John Pennycuick V-C at page 313) as referring to the entire mortgage debt. The effect was to restrict S 36 relief in practice to a very limited range of cases – “for, if the mortgagor was already in difficulties with his instalments, the chances of his being able to pay off the whole principal as well in a reasonable time must be considered fairly slim” (Habib Bank Ltd v Tailor [1982] 1 WLR 1218 per Oliver LJ at p 1222). That led to the enactment of S 8 of the Administration of Justice Act 1973, which provides:
8 (1) Where by a mortgage of land which consists of or includes a dwelling-house, or by any agreement between the mortgagee under such mortgage and the mortgagor, the mortgagor is entitled or is to be permitted to pay the principal sum secured by instalments or otherwise to defer payment of it in whole or in part, but provision is also made for earlier payment in the event of any default by the mortgagor or of a demand by the mortgagee or otherwise, then for purposes of section 36 of [ the 1970 Act] (under which a court has power to delay giving a mortgagee possession of the mortgaged property so as to allow the mortgagor a reasonable time to pay any sums due under the mortgage) a court may treat as due under the mortgage on account of the principal sum secured and of interest on it only such amounts as the mortgagor would have expected to be required to pay if there had been no such provision for earlier payment.
(2) A court shall not exercise by virtue of sub-section (1) above the powers conferred by section 36 of [the 1970 Act] unless it appears to the court not only that the mortgagor is likely to be able within a reasonable period to pay any amounts regarded (in accordance with subsection (1) above) as due on account of the principal sum secured, together with the interest on those amounts, but also that he is likely to be able by the end of that period to pay any further amounts that he would have expected to be required to pay by then on account of that sum and of interest on it if there had been no such provision as is referred to in subsection (1) above for earlier payment.
The side note at 88/5/9 of the Supreme Court Practice succinctly summarises the effect of those two sections, in the common situation (also applicable in this case) where the whole mortgage debt becomes repayable on default, in this way:
“In such a case the Court may, in exercising its discretion under S 36, treat the sum due under the mortgage as being only the arrears of instalments or interest. It may exercise its jurisdiction under the section if it appears that the borrower is likely to be able within a reasonable period to bring his payments up-to-date by paying off all arrears at the date of the order and the payments falling due after the date of the order.”
The editors later comment in the same passage that the question as to what exactly is a “reasonable period” for bringing the payments up to date is one on which there is little guidance. It is the question which lies at the heart of this appeal.
Dicta in two authorities have been particularly relevant to the debate. They are:
(1) First Middlesbrough Trading and Mortgage Co Ltd v Cunningham [1974] 28 P & C R 69.
This was a case of default under an instalment mortgage. The original mortgage principal was £850 repayable by instalments of capital and interest at the rate of £3 per week. By the date of the hearing before the judge the amount of the instalments in arrear was £142 and the total balance then owing on the mortgage was £514. The judge had made an order for possession in favour of the mortgagee but suspended it for so long as the instalments due under the mortgage plus a further specific amount off the arrears were paid weekly. Although S 8 had by then been enacted, the case had to be decided, because of the date of the hearing at first instance, under S 36 as interpreted under the previous law without reference to S 8. Scarman LJ made it plain that he did not share the interpretation put upon S 36 in the Halifax v Clark decision but proceeded on the basis that it was right – i.e. that the “sums due” were the whole of the mortgage debt. In determining what would be a reasonable period for repayment of “any sums due under the mortgage” for the purposes of S 36 (2) he asked that question independently under the separate heads of repayment of the outstanding principal and future interest on the one hand and the repayment of arrears on the other.
As to the former he said (at page 75):
“Since the object of the instalment mortgage was, with the consent of the mortgagee, to give the mortgagor the period of the mortgage to repay the capital sum and interest, one begins with a powerful presumption of fact in favour of the period of the mortgage being the “reasonable period.”
As to the latter he said (continuing in the same passage):
“Arrears had however arisen. The judge, considering all the circumstances, took the view that the mortgagor would be able to maintain her agreed instalments and to pay a specified sum per week off the arrears on the basis (and I need not go into the detail of it) of the order he in fact made. Those arrears will be paid, under the judge’s order, if it be complied with, well within the stipulated period for the repayment of the mortgage by the agreed instalments.”
(2) Western Bank v Schindler [1977] Ch 1
That was an instance of a more unusual case, where the mortgagee was seeking possession as of right – that is to say in the absence of any default in payment by the mortgagor – in simple reliance on the legal estate conferred on it under a charge carrying a right to possession as soon (in the vivid phrase) as the ink was dry on it. The Court of Appeal held by a majority (Buckley and Scarman LJJ) that a distinction must be drawn between cases where the mortgagor is in default and those where he is not. In the former (default) case a reasonable period for the purposes of S 36 (2) must be measured “by what is reasonable for the purposes indicated in the conditional clause in subsection (1)” (Buckley LJ at page 14B); in other words it must be a reasonable period for the mortgagor to “find the necessary money or remedy the default” (Scarman LJ at 19C). In the latter (no default) case, Buckley LJ said (14 F-G):
“in a suitable case the specified period might even be the whole remaining prospective life of the mortgage.”
Goff LJ dissented from the majority on the issue as to whether S 36 had any application at all to cases where the mortgagor was not in default, but on the issue (as to which he was in agreement with the other members of the court) as to the application of that section to default cases he said that it was:
“clear the purpose of the section is to enable the court in any of the ways specified in sub-section (2) to grant a limited time, which may of course in a proper case be extended by a further exercise of the statutory powers, within which the mortgagor may put the matter right”.
THE FACTUAL BACKGROUND
The appellant Christina Norgan has lived with her husband and their family (now consisting of five sons aged from 6 to 18) since 1974 in a period farmhouse in Wiltshire with some 8 acres of land said now to be worth about £225,000. In November 1986 her husband required business finance and he accordingly arranged to realise his half share of the property by selling it to his wife and thus constituting her the sole owner. On 28 November 1986 he conveyed the property into her sole name in consideration of a payment of £90,000 which was financed by means of a mortgage with the Guardian Building Society (“Guardian”) executed on the same date by the wife under which the property was charged with repayment to Guardian of a sum of £90,000. The terms of that charge (“the mortgage”) were that the principal sum should be repaid at the expiration of a term of 22 years with interest at 11.25% payable in monthly instalments. The mortgage was pension-linked and guaranteed by the husband. It was subject to Guardian’s Standard Mortgage Conditions, which included a power to vary interest by charging Guardian’s standard rate currently in force, and also a provision that if at any time any monthly instalment should be in arrear and unpaid for one month after becoming due, Guardian would be entitled to take possession of the property.
Mr Norgan suffered misfortune in his business activities, as a result of which the appellant, his wife, ran into difficulty in keeping up the interest payments under the mortgage which began to fall into arrear. In April 1990 Guardian was taken over by the plaintiffs who were formerly the Cheltenham and Gloucester Building Society and are now Cheltenhamand Gloucester PLC. I will refer to them simply as “Cheltenham”. By the date of the Cheltenham takeover the arrears of interest due under the mortgage were in the region of £7000.
Cheltenham is a member of the Council of Mortgage Lenders, which publishes a statement (“the CML Statement”) of current practice of mortgage lenders when dealing with mortgage arrears and possession cases. The current (February 1995) CML Statement contains the following in a section headed “Alleviating Arrears Problems”:
” 7. Lenders have the following measures which they can use to help some borrowers in arrears difficulties
(a) In the case of a repayment loan the term of the loan can be lengthened, although in most cases this does not make a significant difference to the monthly payments
(b) An endowment mortgage can be changed to a repayment, or interest only, mortgage with a subsequent reduction in monthly outgoings…..
(c) Part of the interest can be deferred for a period. This is particularly appropriate where there is a temporary shortfall of income (for example, because of an industrial dispute or a temporary illness), or where there has been a rapid increase in interest rates. Lenders would generally be willing to accept, for a reasonable period of time, the most the borrower could reasonably afford. However this is not a solution where, because of a permanent reduction in income, a borrower is unable to afford anywhere near the full mortgage repayments and there is no prospect of a change in the situation in the future.
(d) Linked to (c) is the possibility of capitalising interest. This is appropriate where arrears have built up but full monthly repayments can be resumed. The arrears can be added to the capital sum owed and repaid over the life of the loan.
……
8. In addition, lenders try to ensure that the borrower is aware of any income support or other social security benefits that may be available, and, in appropriate cases, many advise the borrower to consider letting the property or taking in a lodger……”
On 14 May 1990 Cheltenham applied to the county court for a possession order. The claimed arrears of interest instalments then stood at £7216. By the date of the hearing on 12 November of that year this figure had increased to £14,744. The then current rate for the interest instalments was £1251 per month. The District Judge, being told that Mrs Norganwas proposing to re-finance the mortgage, made a possession order, but suspended it in the first instance for 28 days, directing that if the arrears were not cleared the mortgagor wold be at liberty to apply for a further suspension on terms as to payment of current instalments and a proportion off the arrears. The mortgage was not re-financed, and Mrs Norgan applied for such a suspension, which was granted by the District Judge on 17 December 1990, when she varied the suspension terms to provide for payment by Mrs Norgan of the current instalments of interest plus £445 per month off the arrears. Had those conditions been fully complied with, the claimed arrears (amounting by then to £16,023) would have been paid off within about three years.
No payments off the arrears were made, however, and Cheltenham obtained a warrant for possession. On 22 April 1991 the District Judge suspended the warrant on the ground that a sum of £11,000 would be paid very shortly, and such a sum was indeed paid by Mrs Norgan in May 1991. There were no further payments, however, during the summer and Cheltenham again applied to issue the warrant. Mrs Norgan obtained a further suspension on terms as to payment of the current instalments of interest and £551 per month off the arrears. There was then a period of substantial improvement in the payment record, but only a slight inroad was made on the claimed arrears. By the autumn of 1992 they stood at £15,000. Nearly a year later (after an interval occupied by exploration of Mrs Norgan’s eligibility for payment of Housing Benefit) the Benefits Agency on 9 September 1993 began payments (back-dated to June of that year) to the credit of Mrs Norgan’s mortgage account with Cheltenham. The claimed arrears remained substantial, and Cheltenhamapplied once again to issue the warrant.
That application, together with the mortgagor’s cross-application for a further suspension, was heard by the District Judge on 28 September 1993. He refused any further suspension and gave leave to issue the warrant, but granted a stay pending the mortgagor’s appeal to the judge.
The hearing of that appeal before Judge O’Malley occupied three days, fragmented between dates in November 1993 and February and May 1994. Mrs Norgan appeared in person, with her husband acting as spokesman. Cheltenham was represented by counsel. The judge (as appears from the careful and detailed judgment which he later handed down) was taken through the authorities. He was confronted with the difficulty that the figures could not be agreed. There were disputes as to the extent (if any) to which the claimed arrears of interest fell to be reduced to take account of the impact of MIRAS, as to whether the buildings insurance premium (which the mortgagor was liable to reimburse to the mortgagee) was excessive because of the high rate of cover insisted upon by Cheltenham, and as to whether Cheltenham were entitled – when adding to their security the legal costs which they had incurred in the various antecedent proceedings – to treat them as augmenting the amount on which the interest payments were calculated. The judge, in the interests of keeping an already long hearing within bounds, did not attempt to adjudicate all these matters (to which I shall refer as “the disputed items”). Instead he followed the course of taking a figure which took some account of the disputed items by reducing the claimed arrears as at the date of the hearing before him from £23,000 to £20,000 and proceeding on that as an approximate basis for the exercise of his discretion.
He then proceeded to announce his conclusion on the case in the following terms:
What, then, is a reasonable time within which to require the repayment of this sum? There is scant assistance to be derived from the decided cases. The experience of this court in appeals of this kind suggests that a period of two to four years is the maximum that will ordinarily be allowed. It is noteworthy too that District Judge Parmiter, whose article is written to assist mortgagors, refers to a Judicial Studies Board “recommendation” of two years, with many judges apparently thinking “in much longer terms”. He makes no reference to the dictum of Scarman LJ, although it is relatively well known to judges exercising this jurisdiction. I am persuaded by Mr Nesbitt that Lord Justice Scarman’s starting point, in First Middlesbrough Trading and Mortgage Co Ltd. v. Cunningham (1974) 28 P & C P 74, of the whole of the rest of the term must be viewed in the context which existed before the passing of the 1973 Act. In the result I consider that a reasonable time for the defendant to get up to date with the mortgage payments should be a far shorter period than that contended for by Mr. Norgan. I would specify a period of the order of four years. In reaching this conclusion I take account of the fact that there is at present and there will for a considerable time be ample security for the plaintiff’s loan. The Statement of Practice of the Council of Mortgage Lenders does not bind the plaintiffs to a particular course of action. It could be a factor in determining the length of the period regarded as reasonable for payment of arrears. However the difficulty for the defendant in the present case is the magnitude of the arrears, and I am not persuaded that the plaintiffs in any way contributed to the size of those arrears.
The defendant’s case for the suspension of the warrant depends very largely on the whole of the rest of the term being held to be the reasonable period for payment of the arrears. My rejection of this submission and my finding that only a far shorter period would be reasonable, makes it impossible for the court’s power under section 36 to be exercised in the defendant’s favour. There is a prospect that, given time, the finances of the Norgan family may improve sufficiently to discharge the liabilities under the mortgage. Mr. Norgan is an able and resourceful man, but I am not satisfied that on the balance of probabilities the family finances will so improve. Whether the family is allowed the chance must be left to the plaintiffs to decide. They have established their claim to possession in law and have obtained an order for possession. They are entitled to enforcement of that order unless the defendant can establish the contrary. In this, as I find with much regret, she has failed. The appeal is dismissed.”
When Mrs Norgan’s application for leave to appeal came to be considered by this court (Simon Brown and Roch LJJ) on 12 October 1994, leave was granted (and a further stay on possession pending hearing of this appeal) on the basis that, as Lord Justice Simon Brown expressed it:
“it seems to me that the time has come when this court should give some further and fuller consideration to the whole question of what is envisaged in the concept of “a reasonable period” within section 36 (1); and what may be its touchstones and perhaps its parameters ….. To my mind, this represents in many ways an ideal case for clarification of these important questions on appeal, not least because of the continuing security represented by the property and the excellence of the judgment below.”
As to the disputed items, he said:
“efforts should be made to crystallise in money terms the differences between the parties, and thereby to clarify the consequences respectively of success or failure on the various arguments…..”
Unfortunately that last request has not been complied with. At this appeal hearing, at which both parties have been represented by counsel (neither of whom appeared below), a mass of new material has been laid before the court on the disputed items, but no figures are agreed. Mr Waters, counsel for Cheltenham, has told us that on his clients’ calculations the claimed arrears, on the footing that all the disputed items were to be resolved in Cheltenham’s favour, amount at present to £29,000. The opposite figure, if Mrs Norgan should win on all those items, is £14,500. Faced with a disparity of that order, it would clearly be impossible for this court to embark upon the exercise of considering the practicability of Mrs Norgan (who has put in evidence detailed particulars of her budget and income) being able to pay off the relevant arrears within any and if so what period of time. We have been compelled to confine our consideration to the issue of principle to which this appeal gives rise.
THE ISSUE OF PRINCIPLE
The judge’s statement that in the experience of his court “a period of two to four years is the maximum that will normally be allowed” as reasonable for the purposes of S 36 (2) accords with the comment in the Supreme Court Practice, where the passage from which I have already quoted continues:
“The exercise of the discretion under S 36 is by far the commonest matter which arises for decision in disputed mortgage actions. What is a “reasonable period” for bringing the payments up-to-date is a question on which there is little guidance. In practice, in any ordinary case a period of at least two years will be allowed to the borrower if it appears that he is likely to be able to clear off the arrears in that time and he may be allowed a much longer time.”
The opposing arguments which Mr Croally and Mr Waters have developed in their helpful written and oral submissions are as follows. Mr Croally contends that there is a primary assumption that a reasonable period is the term of the mortgage, and for that he relies on the dicta already cited from Cunningham and Schindler. That assumption is reinforced, he says, in the present case by the fact that there is sufficient equity to protect the mortgagee’s eventual entitlement to repayment of the principal debt in full in 2008, that the mortgagor has deposed on affidavit to budgeting proposals under which (with the help she now receives from the DSS) there is a reasonable prospect of her being able to pay off the arrears in full by the expiry of the mortgage term, and that such a proposal would accord with the policy declared on the face of the CML statement. Mr Waters contends that such an approach takes too narrow a view of the court’s discretion. The delaying powers under S 36 represent a substantial interference with the contractual right which the parties have themselves freely negotiated, namely the right of the mortgagee to repayment in full of the whole mortgage debt as soon as a default occurs. In the exercise of its discretion, therefore, the court is bound to be even-handed in its approach to the claims of each side, matching a concern on the one hand that the mortgagor should be allowed a proper opportunity of making good his default with a concern that a mortgagee who has contracted for a steady flow of interest punctually paid by instalments as they fall due should not be compelled to wait for payment through an enforced capitalisation of interest. Given the number of these cases which comes before the courts every day, it would lead, so Mr Waters submits, to unnecessary cost and delay if in every case the court was required to undertake the sort of detailed inquiry which would be necessary if one is to weigh to a nicety the effect on the one hand upon the lender of having to submit to a phasing of repayment of arrears over the whole remaining term of the mortgage and the ability on the other hand of the mortgagor to maintain such payments. It would be sufficient for the purposes of a just and fair exercise of the discretion if the courts were to be encouraged to adopt, as the judge did in this case and as many other judges (with encouragement from the White Book) regularly do, a period of years (be it two, four or six – Mr Waters leaves us to say which should be chosen) that can, without being applied blindly or rigidly, be adapted by the courts to the demands of each case.
CONCLUSION
There is no doubt that Mr Waters’ argument has strong pragmatic advantages. In the present plight of the housing market possession cases play a major part in the case-load for the county courts. That is particularly true of the District Judges, who deal with those cases in such numbers that they develop a “feel” for them and have achieved an excellent disposal record. It is not surprising that they have found it convenient to adopt a relatively short period of years as the rough rule of thumb which aids a just determination of the “reasonable period” for the purposes of Sections 36 and 8. Nevertheless although I would not go quite so far with Mr Croally as to say it should be an “assumption”, it does seem to me that the logic and spirit of the legislation require, especially in cases where the parties are proceeding under arrangements such as those reflected in the CML statement, that the court should take as its starting point the full term of the mortgage and pose at the outset the question: would it be possible for the mortgagor to maintain payment-off of the arrears by instalments over that period?
I accept all the grounds urged on us by Mr Waters for saying that the dicta relied on in Cunningham and Schindler were directed to situations different from the circumstances of this case and most other cases of it kind, but they nevertheless in my judgment provide confirmation of the view that such is the right approach. I would acknowledge, also, that this approach will be liable to demand a more detailed analysis of present figures and future projections than it may have been customary for the courts to undertake until now. There is likely to be a greater need to require of mortgagors that they should furnish the court with a detailed “budget” of the kind that has been supplied by the mortgagor in her affidavit in the present case. But analysis of such budgets is part of the expertise in which the District Judges have already become adept in their family jurisdiction and I would not expect that to present too great a difficulty. There will be instances, too, in which preliminary adjudication will be necessary to determine, when calculating the amount of arrears and assessing the future instalments for their payment-off, which items are to be attributed to the mortgagor’s current payment obligations and which to his ultimate liability on capital account. The present case has shown – through the disparity introduced by the disputed items – how problematic that may sometimes prove to be. They are nevertheless disputes that it will be essential to resolve – in this case and others where they arise – before the court can undertake an accurate estimate of the amount which the mortgagor would be required to meet if the arrears were to be made repayable over the full remainder of the mortgage term. There may also be cases, as Mr Waters points out, in which it is less obvious than in this case that the mortgagee is adequately secured – and detailed evidence, if necessary by experts, may be required to see if and when the lender’s security will become liable to be put at risk as a result of imposing postponement of payments in arrear. Problems such as these – which I suspect will arise only rarely in practice although they will undeniably be daunting when they do arise – should not however be allowed, in my judgment, to stand in the way of giving effect to the clearly intended scheme of the legislation.
There is another factor which, to my mind, weighs strongly in favour of adopting the full term of the mortgage as the starting point for calculating a “reasonable period” for payment of arrears. It is prompted by experience in this very case. The parties have been before the court with depressing frequency over the years on applications to enforce, or further to suspend, the warrant of possession, while Mrs Norgan and her husband have struggled, sometimes with success and sometimes without, to meet whatever commitment was currently approved by the court. Cheltenham has (in exercise of its power to do so under the terms of the mortgage) added to its security the costs it has incurred in connection with all these attendances. One of the disputed items turns upon the question whether such costs fall to be allocated to capital or to interest account. What is not in dispute, however, is that one day, be it sooner or later, those costs will have to be born by the mortgagor, and if the day comes when she decides – or is compelled by circumstances – to move to more readily affordable accommodation, her resources for re-housing will be correspondingly reduced. It is an experience which brings home the disadvantages which both lender and borrower are liable to suffer if frequent attendance before the court becomes necessary as a result of multiple applications under S 36 – to say nothing of the heavy inroads made upon court hearing time. One advantage of taking the period most favourable to the mortgagor at the outset is that if his or her hopes of repayment prove to be ill-founded and the new instalments initially ordered as a condition of suspension are not maintained but themselves fall into arrear, the mortgagee can be heard with justice to say that the mortgagor has had his chance, and that the S 36 powers (although of course capable in theory of being exercised again and again) should not be employed repeatedly to compel a lending institution which has already suffered interruption of the regular flow of interest to which it was entitled under the express terms of the mortgage to accept assurances of future payment from a borrower in whom it has lost confidence.
It follows, for all these reasons, that in adopting for this case a period of repayment (four years) unrelated to the remaining term of the mortgage (thirteen years) the judge in my view fell into error. The fault was not his. He applied to a case which he examined with outstanding care and clarity a practice of convenience which has been developed to deal with a widely framed statutory discretion in respect of which guidance from authority has been limited.
In view of the long history of this litigation, and the anxiety it has involved, in particular for Mrs Norgan and her family, it would have been the wish of this court to determine all outstanding issues for ourselves, so that each side might have left this court knowing exactly where they stood. But, as Lord Justice Evans made clear to the parties at the hearing, there are too many matters unresolved, on evidence which is still not wholly complete, to enable us to do so. I would therefore allow the appeal and remit the case to the county court for:
1. A determination of the disputed items and a finding as to what precisely is now, or (as they case may be) will at the expiry of the mortgage term be, due from the mortgagor on capital and interest instalment account respectively – including in the latter account a precise figure for the current interest in arrear.
2. A calculation of:
(a) the instalments which the mortgagor would be required to pay if the arrears so found were to be made payable by instalments over the whole of the remaining period of the mortgage term.
(b) the instalments of interest currently due under the mortgage
3. A determination of the question whether, in the light of the court’s findings as to the current and prospective ability of the mortgagor to discharge the instalments under 2 (a) and (b), there are any unusual circumstances justifying a departure from the remaining term of the mortgage as the period that is prima facie “reasonable” for the purposes of Sections 36 and 8.
4. A determination of the question whether, in the light of its conclusions under 1, 2 and 3, this would be a suitable case in which to exercise the court’s discretion to suspend the warrant of possession for any and if so what period.
SIR JOHN MAY: I entirely agree with the judgments of Lord Justice Waite and Lord Justice Evans in this appeal. I also agree with their remarks about the care and thoroughness with which this case was heard below. I found the learned Judge’s judgment of great help on the hearing of this appeal. However, although we are differing from the latter for the reasons to which my lords have referred, I do not think it necessary to add any comments of my own except to say that I also agree with the Order proposed.
LORD JUSTICE EVANS: I entirely agree with the judgment of Lord Justice Waite and that this appeal should be allowed and the case remitted to the County Court on the terms proposed by him.
I especially agree with his remarks as to the care with which the case was heard by H.H. Judge Stephen O’Malley and his thorough judgment was prepared. It is only because this appeal has provided an opportunity to reconsider the basic principles on which the statutory power to defer possession for a “reasonable period” should be exercised that it has become necessary to set aside his order, which was in conformity with authoritative descriptions of practice in the past.
The question posed by the statute is whether “the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage”, where the relevant default consists of a failure to pay sums as they fall due (Administration of Justice Act, 1970, section 36). When Sir John Pennycuick V-C held in Halifax B.S. v. Clark [1973] Ch. 307 that “any sums due” could refer to the entire mortgage debt, when that had become due by reason of the previous failure to pay instalments of interest, Parliament moved rapidly to enact that in such circumstances “a Court may treat as due under the mortgage …. only such amounts as the mortgager would have expected to be required to pay if there had been no such provision for earlier payment” : section 8(1) of the Administration of Justice Act 1973.
It may be noted that this section might have said, but it did not, that regard should be had to such amounts as the mortgager would have been liable to pay, etc., rather than the broader concept of amounts which he “would have expected to be required to pay”. This suggests that it is relevant, indeed necessary, to have regard to published statements of the lender’s policies in case of default. These include the Statement of the Council of Mortgage Lenders which Lord Justice Waite has quoted.
The Guardian Building Society, whose successors the respondents are, advanced £90,000 to the appellant on terms that it would be repaid after the expiry of 22 years with payments of monthly instalments of interest throughout that period.
Because this is a term mortgage rather than a repayment mortgage, it is axiomatic that, acceleration provisions apart, the lender has budgeted for the principal sum to remain outstanding until the expiry of the term.
Suppose then that interest payments become overdue. Putting the accelerated payment provisions to one side, as the Court is empowered to do, the lender is disadvantaged because he is not receiving interest on the capital sum outstanding, and it becomes necessary to consider whether a “reasonable period” for the borrower to make good the default could extend to cover the whole of the remaining part of the original term, or whether the starting point for fixing that period should be a shorter and perhaps even a conventional number of years. I am unable myself to see why two years rather than one, or four rather than five, should be regarded as the correct starting point, nor how it is possible to establish any period without taking into account how long the original period was.
For this reason alone, I would respectfully agree with the observation of Scarman L.J. in First Middlesborough Trading and Mortgage Co. Ltd. v. Cunningham (1974) 28 P & CR 69 that “one begins with a powerful presumption of fact in favour of the period of the mortgage being the “reasonable period” (page 75), even in a repayment mortgage, as that one was. Certainly, that consideration applies with even greater force to a term mortgage, as we have here.
It is at this stage that the published policy of the lenders, as set out in the CML Statement, to which the respondents subscribe, becomes directly relevant. A “reasonable period” implies that the interests of both parties have to be taken into account. When the borrower is likely to be able to make regular payments, of whatever amount, then in general it can be said that the longer the period then the more “reasonable” it will be for him. Although it may not often be reasonable to expect the lender to wait longer than the original term, the question of principle raised by this appeal is whether he can reasonably be required to wait until then.
The property in question must by definition be a dwelling house which in the present case is occupied as it has been for many years by the appellant and her family. For the respondents, this is one of very many transactions where their interests are financial only. There can be cases, no doubt, where the lender has some other direct interest, for example, where the value of the security may be threatened if the period allowed is unduly long, but this is not such a case. The respondents claim protection for their reasonable financial interests only.
The CML Statement shows that mortgage lenders such as the respondents have a number of options available to them, when payments are in arrears. They include even extending the term of the loan (paragraph 7(a)) as well as deferring payments of interest (paragraph 7(c)) and, of direct relevance in circumstances such as these, capitalising the interest payments which are in arrears (paragraph 7(d)). The Statement continues:-
“Possession
10. Lenders seek to take possession only as a last resort. They are in business to help people to buy homes, not to take their homes away from them. In some cases, however, …. “.
Given these statements of policy, I do not see how the respondents can properly say that it is not appropriate to take account of the whole of the remaining part of the original term when assessing a “reasonable period” for the payment of arrears. If the case is one where the interest might reasonably be capitalised, depending no doubt on the borrower’s likely ability to pay the increased amount of interest instalments, then the principal sum will be increased, and the arrears extinguished accordingly. If that is one possibility which ought reasonably to be considered, then it cannot be wrong or unreasonable to consider what the prospects are of the borrower paying the arrears of interest in full by the end of the term, including interest on interest where that is what the terms of the mortgage require in addition to the contractual instalments of interest. In all cases, the value or likely future value of the security will also be relevant.
For these reasons, as well as those given by Lord Justice Waite, I would answer the question of principle as indicated by him.
It is unfortunate, to say the least, that despite the clear indication given by Lord Justice Simon Brown, when granting leave to appeal, the parties came to the hearing without agreement as to the arrears. Instead, they produced a considerable volume of evidence which appears to be directed to the various differences that have arisen between them. The respondents’ representatives in Court were unable to produce even a statement of what they say the figures are. So these issues have to be determined at a yet further hearing before the County Court, unless in the light of the judgment of this Court the figures, and perhaps even the terms of a possession order, can be agreed.
One of these issues may be relevant in deciding what a reasonable period is in the circumstances of this case. Since taking over the Guardian in 1990, the respondents have maintained the differential between the rates which they charge their own borrowers and those, which were .25% higher, which were charged by the Guardian before the merger. As Mr Croally for the appellant deftly observed, if the respondents are entitled to do this, which he disputes, then they cannot claim that they are losing interest by reason of their inability to recover the amount of their loan to the appellant and then re-lend it, at a lower rate, to a customer of their own.
In conclusion, a practical summary of our judgments may be helpful in future cases. Drawing on the above and on the judgment of Lord Justice Waite, the following considerations are likely to be relevant when a `reasonable period’ has to be established for the purposes of section 36 of the 1970 Act : –
(a)How much can the borrower reasonably afford to pay, both now and in the future?
(b)If the borrower has a temporary difficulty in meeting his obligations, how long is the difficulty likely to last?
(c)What was the reason for the arrears which have accumulated?
(d) How much remains of the original term?
(e) What are relevant contractual terms, and what type of mortgage is it i.e. when is the principal due to be repaid?
(f)Is it a case where the Court should exercise its power to disregard accelerated payment provisions (section 8 of the 1973 Act) ?
(g)Is it reasonable to expect the lender, in the circumstances of the particular case, to recoup the arrears of interest (1) over the whole of the original term, or (2) within a shorter period, or even (3) within a longer period, i.e. by extending the repayment period? Is it reasonable to expect the lender to capitalise the interest, or not?
(h)Are there any reasons affecting the security which should influence the length of the period for payment?
In the light of the answers to the above, the Court can proceed to exercise its overall discretion, taking account also of any further factors which may arise in the particular case.
Order:appeal allowed with costs here and below (without prejudice to any question that may arise as to whether the respondents can seek to recoup those costs and their own costs); liberty to apply in relation to costs; case remitted to the county court (if possible to Judge O’Malley) on the terms set out at pages 22 and 23 of this judgment; legal aid taxation for the appellant; leave to appeal to the House of Lords refused; costs of the application to adduce further evidence reserved to the county court.
Bristol and West Building Society v Ellis & Anor
[1996] EWCA Civ 1294 (24 April 1996)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1996/1294.html
Cite as: [1996] EWCA Civ 1294, (1996) 73 P & CR 158
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JISCBAILII_CASE_PROPERTY
LORD JUSTICE AULD: The Appellant, Bristol & West Building Society, was the mortgagee of the matrimonial home of the Respondents, Mr and Mrs Ellis and their two children. The mortgage loan, which was made in 1987, was £40,000 repayable in one sum at the end of 25 years on the maturity of an endowment assurance policy for that sum. The monthly interest-only payments were £432.40. Subsequently the mortgage loan was increased to £60,000 and with it the monthly interest payments.
In 1990 Mr Ellis left Mrs Ellis and the two children. By then they had fallen into substantial arrears with their interest payments. In August 1990 Bristol & West sought in the Bristol County Court possession and an order for payment of the arrears, then amounting to £8,449.30. On 19th October 1990 Mr Registrar Keogh made a suspended order for possession on terms that Mrs Ellis paid in reduction of the arrears £5,000 immediately and thereafter £200 per month in addition to the normal monthly payments of interest.
Mrs Ellis did not comply with that order, and by early January 1995 the arrears of interest amounted to over £16,000 which, with the mortgage debt of £60,000, left her owing Bristol & West over £76,000. The building society applied to the County Court for a warrant for possession, which the Court granted. On 10th April 1995 Mrs Ellis applied to District Judge Bolton in the County Court for suspension of execution of the warrant. In her affidavit evidence in support of that application, she deposed that she was dependent on social security benefits and assistance from her family, but could meet the interest payments as they fell due from both those sources. She indicated that she could make an immediate lump-sum payment in the region of £5,000 but that thereafter she could only pay a token sum of about £10 per month in further reduction of the arrears of interest. She said that her intention was to discharge the entire debt by selling the house after her children had completed their university education, a period which she “anticipate[d was] … likely to be in approximately three to five years”. Relying on two estate agents’ estimates of likely sale price for the house she suggested that it was worth between £80,000 and £85,000, a range of valuation which, she maintained, was sufficient to cover the then redemption figure of over £77,000 plus costs. Those estimates were higher than previous ones advanced by Mrs Ellisbefore the slump in property values in the late 1980s, and were challenged by Bristol & West.
District Judge Bolton ordered suspension of the execution of the warrant, but on terms that Mrs Ellis should pay the arrears, then amounting to £16,805.16, by payment of a lump sum of nearly £5,000 within a month and the balance at the rate of £10 per month in addition to the monthly instalments of interest. At that rate it would take Mrs Ellis 98 years to pay off the arrears. The District Judge imposed no term as to sale of the house.
Bristol & West appealed that order to His Honour Judge McNaught, arguing that neither 98 years nor a period of 3 to 5 years was a reasonable period for suspension of the execution of the warrant within section 36 of the Administration of Justice Act 1970, as extended by section 8 of the Administration of Justice Act 1973. Those provisions enable a court to suspend execution of a possession order for such period as it thinks reasonable
“…if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage…”
The Judge took as his starting point that he should only interfere with what he called the District Judge’s exercise of discretion if it was plainly wrong. He then considered, not the period of 98 years which it would take Mrs Ellis to extinguish the arrears in accordance with the District Judge’s order, but the 3 to 5 years’ period until sale of the house which appears to have been the reason for it, though not reflected in its terms:
” The evidence which I have got … suggests that, at the moment, there is a small equity in the property and Mrs. Ellis’s intention, which I accept, is that, in maybe three years’ time, she agrees the house will be sold, but in the important period when she has a son who is getting on his feet with a degree and a daughter who is doing A-levels, now is not the right time to sell the house. I think it was a merciful thing that District Judge Bolton did. Not everyone would have done it. Some people might have hardened their hearts … The law says a reasonable time, and it will take a very long time, many years, before arrears of over £10,000 can be met. But I think the formula that he came to was one that a reasonable district judge operating locally could come to, and I am not inclined to interfere with it.
Mr Michael Duggan, on behalf of Bristol & West, submitted that whether the order upheld by the Judge is looked at solely on its terms, so as to envisage a period of 98 years for payment of the arrears, or on its unexpressed basis, that Mrs Ellis would discharge her entire mortgage debt on sale of the house within 3 to 5 years, it did not satisfy the requirement of section 36 that the period of repayment should be “reasonable”. Mr Duggan submitted that, in making such an order, the District Judge had acted outside the bounds of the discretion given to him by the provision and that the Judge should have recognised that and should have ordered the issue of the warrant. Mr Duggan’s point was that the periods of repayment provided for or contemplated by the order were so long that they were unlawful, not simply discretionary periods with which the Judge could decide he need not interfere.
Mr Jan Luba, on behalf of Mrs Ellis, acknowledged that a period extending many decades after the end of the mortgage period could not be a reasonable period for repayment within section 36, but submitted that a period of 3 to 5 years until sale of the house was reasonable in the circumstances. The difficulty about that argument is that District Judge Bolton, whatever his expectation, did not express the order so as to suspend it for a period within which Mrs Ellis was required to sell the property. He suspended it only on terms that she pay £10 a month towards the arrears, in addition to payment of an initial sum, for a period over six times the length of the outstanding term of the mortgage. Similarly, Judge McNaught, in his short judgment, while clearly of the view that the order as expressed was for an unreasonably long period, did not vary it to reflect the District Judge’s apparent expectation. It is difficult to see how, on the face of the order, Bristol & West could rely on that expectation to obtain immediate possession if, after 5 or more years, Mrs Ellis refused to sell the property while continuing to pay the interest and monthly instalments of £10 in reduction of the arrears. It seems to me that, subject only to the possibility of variation provided by section 36(4), it would be stuck with the order in that form until the end of the mortgage period in 16 years’ time, and with the prospect of substantial arrears of interest still unpaid at that time. The existence of a power of variation in the County Court is no basis for this Court, on appeal from it, to uphold an invalid order. I am, therefore, of the view that the order under appeal cannot stand.
Having regard to this Court’s power in RSC O. 59, r. 10(3) to make its own order in the matter, I consider also the issue of reasonableness of the 3 to 5 years’ period apparently underlying the District Judge’s order.
In the absence of unusual circumstances and where discharge of all arrears by periodic payments is proposed, the outstanding period of the mortgage, whether term or repayment, is the starting point in determining the reasonableness of the period for payment of sums due under a mortgage. See Cheltenham & Gloucester Building Society v. Norgan [1996] 1 All ER 449, CA.
However, that convenient starting point is not available to a mortgagee who cannot discharge the arrears by periodic payments and whose only prospect of repaying the entire mortgage loan and accrued and accruing interest is from the sale of the property. In such a case the only general guidance is that the reasonableness of the period is a matter for the Court in the circumstances of the case. See Royal Canada Trust Co. of Canada v. Markham [1975] 1 W.L.R. 1416, CA and National & Provincial Building Society v. Lloyd [1996] 1 All ER 630, CA.
The prospect of settling the mortgage debt, including arrears of principal and/or interest, by sale of the property raises a number of questions on the reasonableness of any period which a court may consider allowing for the purpose.
The critical matters are, of course, the adequacy of the property as a security for the debt and the length of the period necessary to achieve a sale. There should be evidence, or at least some informal material (see Cheltenham & Gloucester Building Society v. Grant (1994) 26 H.L.R. 703, CA), before the Court of the likelihood of a sale the proceeds of which will discharge the debt and of the period within which such a sale is likely to be achieved. If the Court is satisfied on both counts and that the necessary period for sale is reasonable, it should, if it decides to suspend the order for possession, identify the period in its order.
The instinct of the courts in determining a reasonable period for this purpose seems to have been to adopt the common law approach before the 1970 Act – see Birmingham Citizens Permanent Building Society v. Caunt [1962] Ch. 883, at 182 G-H, per Russell J. – of fixing on a “short” period. See Markham and Target Home Loans Ltd v. Clothier [1994] 1 All ER 439, CA. However, in Markham neither the County Court Judge nor the Court of Appeal considered what, in the circumstances of that case, might have been a reasonable period. The defendants had called no evidence and the Judge had not fixed any period in his order. The Court of Appeal contented itself with ruling that he should have fixed a period, but only after hearing evidence on the matter. In Clothier the Court of Appeal, on the strength of evidence before it, but not before the County Court Judge, made an order for possession, suspending it for 3 months.
In Lloyd Neill LJ, with whom Bennett J agreed, after reviewing the above authorities, held that the word “reasonable” in the statute should not necessarily be equated with “short”; what was a reasonable period was “a question for the court in the individual case”. He said at 638a-b:
“… if there were, in a hypothetical case, clear evidence that the completion of the sale of a property, perhaps by piecemeal disposal, could take place in six or nine months or even a year, I see no reason why a court could not come to the conclusion in the exercise of its discretion under the two sections that, to use the words of the section ‘the mortgagor [was] likely to be able within a reasonable period to pay any sums due under the mortgage’. The question of a ‘reasonable period’ would be a question for the court in the individual case.”
Mr Duggan, on behalf of the building society sought to extract from the that passage a principle that a year is about the maximum period that a court could consider reasonable for this purpose. Whilst that may be a likely maximum in many cases, I do not read Neill LJ’s words as establishing it as a rule of law or as a matter of general guidance. It all depends on the individual circumstances of each case, though the important factors in most are likely to be the extent to which the mortgage debt and arrears are secured by the value of the property and the effect of time on that security.
Where the property is already on the market and there is some indication of delay on the part of the mortgagor, it may be that a short period of suspension of only a few months would be reasonable (see e.g. Clothier). Where there is likely to be considerable delay in selling the property and/or its value is close to the total of the mortgage debt and arrears so that the mortgagee is at risk as to the adequacy of the security, immediate possession or only a short period of suspension may be reasonable. Where there has already been considerable delay in realising a sale of the property and/or the likely sale proceeds are unlikely to cover the mortgage debt and arrears or there is simply no sufficient evidence as to sale value, the normal order would be for immediate possession. See e.g. Abbey National Mortgages PLC v. Rochelle Bernard, unreported, 4th July 1995, CA and Lloyd.
Mr Duggan submitted that, here, the material, formal or informal (see Grant, per Nourse LJ at 705), before the District Judge and Judge was insufficient to satisfy them that Mrs Elliswould or could sell the property within 3 to 5 years or that its sale proceeds when sold would be sufficient to discharge the mortgage debt and arrears. As to the time of sale, all that the District Judge had was her statement in her affidavit that she anticipated selling within 3 to 5 years when her children completed their education. As to value, the evidence was not compelling: two estate agents’ estimates of between £80,000 and £85,000 as against the redemption figure at the time of just over £77,000 plus costs. As a result of Mrs Ellis’spayment of the lump sum ordered by the District Judge and subsequent payments, the total figure of indebtedness is now about £70,000, including about £10,000 arrears of interest. Given the inevitable uncertainty as to the movement of property values over the next few years and the reserve with which the courts should approach estate agents’ estimates of sale prices (see Clothier, per Nolan LJ at 445), no court could be sanguine about the adequacy, now or continuing over that period, of the property as a security for the mortgage debt and arrears. In my view, the evidence was simply insufficient to entitle the District Judge to contemplate, behind the order he made, a likelihood that the house would or could be sold at a price sufficient to discharge Mrs Ellis’s overall debt to Bristol & West within any reasonable period, and certainly not one of up to 3 to 5 years.
It follows that, even if the District Judge had made an order, defining a specific period – either 3 or 5 years – for the sale of the property, I would not have regarded the evidence before him or the Judge as sufficient to enable him to fix on it as a reasonable period for the purpose of section 36 of the 1970 Act; If I am right about that, it is not a case in which this Court should be deterred from interfering with the decisions below because of its traditional reluctance to interfere with their exercise of discretion. It is a case in which the Court should interfere because the courts below lacked the material to enable them properly to exercise their discretion in the way they did.
I do not consider that the material available below, or to this Court, would justify any order other than one of immediate possession. I would, therefore, allow the appeal with an order for the costs of the appeal and before the Judge in favour of Bristol & West.
Cheltenham & Gloucester Building Society v Krausz & Anor [1996] EWCA Civ 780 (22nd October, 1996)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1996/780.html
Cite as: (1997) 29 HLR 597, [1996] EWCA Civ 780, [1997] 1 WLR 1558, [1997] WLR 1558, 29 HLR 597
LORD JUSTICE PHILLIPS:
This appeal raises an important issue as to the extent of the jurisdiction of the Court to suspend a warrant for possession of a dwelling house.
The Facts
On the 30th January 1987 the Guardian Building Society, whose rights the Plaintiffs have inherited, lent to the Defendants (“the Mortgagors”) £58,300, secured by a mortgage on their home, 8 Springhill, Clapton, London, E5 (“the property”). I shall refer to the Plaintiffs and to their predecessors in title as “the Mortgagees”. On the 12th February 1990 a possession action was commenced by the Mortgagees against the Mortgagors, who had defaulted on their repayment obligations. On the 25th July 1991 an order for possession was made. On four occasions warrants for possession were issued. On each occasion an accommodation was reached between the Mortgagors and the Mortgagees, under which the warrant was discharged. On each occasion the terms of that accommodation were breached by the Mortgagors and a fresh warrant was issued. The fifth warrant fell due to execution on the 12th June 1995.
On the 23rd February 1995 the Mortgagors obtained a written valuation of their home from a firm of chartered surveyors, who reported:
Although the area could be considered reasonably popular, this particular house is in such a poor state of repair needing a substantial amount of money spent on it, that we are of the opinion that its current value is no more than £65,000. We ought to point out that should the property be offered at auction we doubt whether it would reach that level.
The Mortgagors then contacted the MYA Charitable Trust. This Trust purchases properties from owners who are facing dispossession and then lets the properties to them. The Trust offered to buy 8 Springhill from the Mortgagors for £65,000 on this basis. The Mortgagees were not prepared to agree to this sale. They considered that the property had a value of about £90,000, based on what has been described as a “drive-by” valuation.
On the 7th April 1995 the Mortgagors informed the Mortgagees that they intended to apply for an Order that the property be sold, pursuant to Section 91(2) of the Law of Property Act 1925 (“LPA”), and requested the Mortgagees to agree to this application being made to the County Court. On the 18th April 1995 the Mortgagees refused their consent. On the 9th June the Mortgagors applied to District Judge Silverdale for :
(1) An Order suspending the Warrant for Possession on the grounds that the Defendants have found a purchaser for their property and will apply to the High Court of Justice for an Order pursuant to Section 91(2) of the Law of Property Act 1925.
By this time arrears had grown to the extent that the total mortgage debt amounted to some £83,000. The District Judge dismissed their application. The same afternoon they appealed to Judge Green Q.C. on short notice. He allowed their appeal and ordered a stay of execution of the warrant for possession pending an application which the Mortgagors undertook to make promptly to the High Court under Section 91(2) of the LPA. Against that Order the Mortgagees now appeal, with the leave of this Court. The appeal is resisted solely by the Second Defendant. Mr. Krausz has been declared bankrupt and his trustee makes no claim to any interest in the property.
There were two issues before Judge Green. The first was whether he had jurisdiction to suspend the warrant for possession. The second was, if he had such jurisdiction, whether in his discretion he should exercise it. Before us the primary argument advanced by the Mortgagees was that the Judge had no jurisdiction to suspend the warrant. Alternatively, the Mortgagees have sought to challenge the manner in which the Judge exercised his discretion. So far as the latter issue is concerned the Judge was anxious to evaluate the strength of the Mortgagors’ contention, supported by their valuation, that the market value of the property was £65,000. He offered the Mortgagees a short adjournment to enable them to obtain a valuation in support of their contention that the property had a higher value. They declined this offer. In these circumstances the Judge concluded that it was appropriate, if he had the jurisdiction, to suspend the warrant for possession pending the determination of an application by the Mortgagors under Section 91(2). He went on to decide, not without some reservations, that he had jurisdiction to take this course.
On the 31st August 1995 the Mortgagors issued an Originating Summons in the Chancery Court claiming an Order that the property be sold to the Trust, pursuant to the power of the Court conferred by Section 91(2). Directions were given on the 15th November 1995 as a result of which the Action was transferred to the Shoreditch County Court on the 20th March 1996. That Court has not yet provided a hearing date, perhaps because the result of this appeal has been awaited.
On the 26th June 1995 the Mortgagees obtained a valuation of the property for the purposes of the Section 91 proceedings. On the day of the hearing of this Appeal the Mortgagees sought leave to adduce this by way of further evidence. We refused their application. It did not seem to us that the Mortgagees, having declined the opportunity to place such evidence before the Judge, could properly seek to improve their case by putting it before us at the very last moment.
With this introduction I turn to consider the principal issue raised by this appeal, the question of jurisdiction.
The Law
This appeal requires consideration of the inter-relationship of two areas of the law relating to the mortgage of a dwelling house:
(1) The circumstances in which the mortgagor is entitled to an order for the sale of the mortgaged property;
(2) The circumstances in which the Court has jurisdiction to suspend entry into possession of the dwelling house by the mortgagee.
Mortgagor’s Right of Sale
S.91 of the Law of Property Act 1925 (“LPA”) provides as follows:
(1) Any person entitled to redeem mortgaged property may have a judgment or order for sale instead of for redemption in an action brought by him either for redemption alone, or for sale alone, or for sale or redemption in the alternative.
(2) In any action, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money, the court, on the request of the mortgagee, or of any person interested either in the mortgage money or in the right of redemption, and, notwithstanding that-
(a) any other person dissents; or
(b) the mortgagee or any person so interested does not appear in the action;
and without allowing any time for redemption or for payment of any mortgage money, may direct a sale of the mortgaged property, on such terms as it thinks fit, including the deposit in court of a reasonable sum fixed by the court to meet the expenses of sale and to secure performance of the terms.
The origin and history of these provisions are described by Sir Donald Nicholls, V.C. in Palk v Mortgage Services Funding Plc [1993] Ch.330 at p.335. The Vice Chancellor also cited the statement of Lord Jessel, M.R. about the essentially identical provisions of Section 25(2) of the Conveyancing and Law of Property Act 1881:
The Act is a remedial Act, one effect of it being to allow a mortgagor whose property is worth more than the mortgage-money, but who cannot raise it, to obtain a sale and get the benefit of the surplus.
Union Bank of London v Ingram (1882) 20 CH.D 463 at p.464. Until Palk it was the practice of the Chancery Court only to entertain an application for sale by the Mortgagor if the proceeds of sale were expected to be sufficient to discharge the entirety of the mortgage debt. In such circumstances the mortgagor might initiate proceedings by bringing an action for sale under S.91(1), or, if the mortgagee sought to foreclose, the mortgagor could apply for an order for sale in place of foreclosure. The practice thus reflected the heading to S.91: Sale of mortgaged property in action for redemption or foreclosure.
Palk established, for the first time, that the Court has power under Section 91(2) to make an order for sale on the application of a Mortgagor, notwithstanding that the proceeds of sale will be insufficient to discharge the mortgage debt. In Palk the mortgagees had obtained an Order for possession with the intention, not of proceeding to sell the property but of waiting in the hope that the market might improve. The mortgagor was anxious that the property should be sold so that the proceeds would reduce the mortgage debt, on which interest was accruing at an alarming rate. The Court of Appeal held that, as the mortgagees could buy the property themselves if they wished to speculate on an increase in its value, in the interests of fairness the property should be sold.
In Palk the Mortgagor had initially applied for an order for sale to the Eastbourne County Court. It is not clear on what basis that Court entertained the claim, for the jurisdiction of the County Court to make an order for sale is limited to cases where the value of the property does not exceed £30,000. It also appears from the judgment in the Court of Appeal that the mortgagees obtained an order for possession, which was suspended pending the result of their application. It is not clear which Court made the order for possession, or which court suspended that order. What does seem clear is that no challenge was made of the jurisdiction to suspend the possession order.
In Palk the issue was simply whether or not the property should be sold. No issue arose as to the terms on which it should be sold. As to that matter, Section 91(2) empowers the Court to direct a sale “on such terms as it thinks fit”. In cases before Palk, where the proceeds of sale were likely to exceed the mortgage debt, the Court was prepared to entrust the sale to the mortgagor on the basis that the mortgagor had a keener interest than the mortgagee in obtaining the best price. We have not been referred to any case, however, where there was a contest between the mortgagee and the mortgagor as to who should have conduct of the sale.
Barrett v. Halifax Building Society (1995) 28 H.L.R. marks the next development in this area of the law, and one which demonstrates the importance of the present appeal. In that case the Plaintiffs had mortgaged their home and then defaulted on their repayment obligations. The situation was one of negative equity – the mortgage debt substantially exceeded the value of their home. On August 6th 1992 the mortgagees obtained a possession order, with a view to exercising their power of sale. There were numerous suspensions of this order to give the Plaintiffs a chance to discharge the instalment arrears. What then occurred was explained by the Judge as follows, at p.636:
“On March 6th, 1995 there was a further suspension of the order for the purpose of leaving mortgagors in possession of the property themselves to find a buyer notwithstanding that there was a deficit over the sum secured so that the property would be on the market, lived in and without it becoming known to the market that it was subject to a forced sale, thereby increasing the realisations available to discharge at least part of the amount due”
The Plaintiffs then applied to the Chancery Court for an order for sale pursuant to Section 91 LPA. By the time that their Action came on for hearing they had negotiated a sale of the property, subject to contract. They sought an order that they be permitted to proceed with that sale and to remain in possession until completion. The Judge summarised the evidence on which they relied as follows at p.637:
The evidence of the plaintiffs, including the expert evidence of a valuer, is that it is a recognised feature of today’s property market that where a mortgagee obtains possession of property and sells in the exercise of its power of sale it is able to obtain a price which is usually not as good as the price which might have been obtained by the mortgagor had the mortgagor remained in possession and the fact of the forced sale not become apparent. It is also the plaintiffs; evidence that if the mortgagee building society were to take over the sale or were now to obtain possession and proceed to sell itself there would be likely to be a delay of some months at least before a fresh purchaser could be found and a sale completed.
The Mortgagees resisted the Order sought. They did not contend that they would be able to obtain a better price but urged that if the sale went ahead it would break their established policy not to permit borrowers with negative equity themselves to conduct the sale of their property without also at the same time making proposals for the repayment of any resulting deficit. The Judge held that this was not a material circumstance which he ought to take into account when exercising his discretion. He held at p. 640:
I am left, therefore, with a case which, on the evidence before me, there is no discernible advantage to the building society in refusing to allow this sale to complete, whereas there is an obvious advantage to the mortgagors to complete their proposed sale at what is accepted as the best price that is likely to be obtainable in the current market.
He proceeded to grant the Plaintiffs the Order that they sought.
Just as in the case of Palk the report does not suggest that in Barrett any challenge was made by the mortgagees to the order suspending possession pending the Plaintiffs’ application to the Chancery Court.
The consequences of the procedure followed in Barrett appear to me to be far reaching. In any case in which there is negative equity it will be open to the mortgagor to resist an order for possession on the ground that he wishes to obtain a better price by remaining in possession and selling the property himself. In not every case will the primary motive for such an application be the wish to obtain a better price than that which the mortgagee is likely to obtain on a forced sale. Often the mortgagor will be anxious to postpone for as long as possible the evil day when he has to leave his home. This Court has ample experience of hopeless applications for leave to appeal against possession orders designed to achieve just that end. There will be a danger, if the mortgagee does not obtain possession, that the mortgagor will delay the realisation of the property by seeking too high a price, or deliberately procrastinating on completion. At present there is a simple procedure for seeking possession in the County Court and the issue tends to be whether there are arrears and whether the mortgagor is likely to be able to discharge these in a reasonable time. If possession is to be suspended whenever this appears reasonable in order to give mortgagors the opportunity to sell the property themselves, the Courts are going to have to enter into an area of difficult factual enquiry in order to decide in the individual case whether or not this course will be to the common benefit of mortgagor and mortgagee. Furthermore there will be obvious practical difficulties for mortgagees in monitoring the negotiations of mortgagors who are permitted time to market their properties.
For these reasons it seems to me that the procedure followed and the decision reached in Barrett tend fundamentally to undermine the value of the mortgagee’s entitlement to possession.
Having touched on the implications of the issue raised in this case I turn to consider whether, in law, the County Court has jurisdiction to suspend possession in such circumstances.
Suspension of Possession
The right of a mortgagee to enter into possession of the mortgaged property was one which the common law protected strictly. The position was accurately stated by Russell J. in Birmingham Citizens Permanent Building Society v. Caunt [1962] 1 Ch. 883 at p. 912:
Accordingly, in my judgment, where (as here) the legal mortgagee under an instalment mortgage under which by reason of default the whole money has become payable, is entitled to possession, the court has no jurisdiction to decline the order or to adjourn the hearing whether on terms of keeping up payments or paying arrears, if the mortgagee cannot be persuaded to agree to this course. To this the sole exception is that the application may be adjourned for a short time to afford to the mortgagor a chance of paying off the mortgagee in full or otherwise satisfying him; but this should not be done if there is no reasonable prospect of this occurring. When I say the sole exception, I do not, of course, intend to exclude adjournments which in the ordinary course of procedure may be desirable in circumstances such as temporary inability of a party to attend, and so forth.
The rigours of the common law in this respect were mitigated by Section 36 of the Administration of Justice Act 1970 (“AJA”), which provided:
(1) Where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession of the mortgaged property, not being an action for foreclosure in which a claim for possession of the mortgaged property is also made, the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.
(2) The court-
(a) may adjourn the proceedings, or
(b) on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may-
(i) stay or suspend execution of the judgment or order, or
(ii) postpone the date for delivery of possession,
for such period or periods as the court thinks reasonable.
It seems likely that the draughtsman of this section intended to confer on the Court power to suspend possession where the mortgagor was in a position to pay arrears of instalments within a reasonable period. He overlooked the fact that most mortgages provide for the principal to become immediately payable if instalments are in arrears. It was held in Halifax Building Society v. Clark [1973] Ch.307 that in that event, the Court was only given power to suspend if it appeared that the mortgagor would be able within a reasonable time to repay the total mortgage debt. To reverse the effect of this decision Section 36 was amended by Section 8(1) of the Administration of Justice Act 1973, which provided:
8 Extension of powers of court in action by mortgagee of dwelling-house
(1) Where by a mortgage of land which consists of or includes a dwelling-house, or by any agreement between the mortgagee under such a mortgage and the mortgagor, the mortgagor is entitled or is to be permitted to pay the principal sum secured by instalments or otherwise to defer payment of it in whole or in part, but provision is also made for earlier payment in the event of any default by the mortgagor or of a demand by the mortgagee or otherwise, then for purposes of section 36 of the Administration of Justice Act 1970 (under which a court has power to delay giving a mortgagee possession of the mortgaged property so as to allow the mortgagor a reasonable time to pay any sums due under the mortgage) a court may treat as due under the mortgage on account of the principal sum secured and of interest on it only such amounts as the mortgagor would have expected to be required to pay if there had been no such provision for earlier payment.
(2) A court shall not exercise by virtue of subsection (1) above the powers conferred by section 36 of the Administration of Justice Act 1970 unless it appears to the court not only that the mortgagor is likely to be able within a reasonable period to pay any amounts regarded (in accordance with subjection (1) above) as due on account of the principal sum secured, together with the interest on those amounts, but also that he is likely to be able by the end of that period to pay any further amounts that he would have expected to be required to pay by then on account of that sum and of interest on it if there had been no such provision as is referred to in subsection (1) above for earlier payment.
The effect of Section 36, as amended, on the power to suspend possession is as follows:
(1) The power can be exercised to enable the mortgagor to pay off instalment arrears due under the mortgage agreement from sources other than the sale of the mortgaged property, but
(2) If the mortgagor intends to sell the mortgaged property to provide the source of payment, the Court must be satisfied that the proceeds will be sufficient to discharge the entirety of the mortgage debt: Royal Trust Co. of Canada v Markham [1975] 1WLR 1416; National and Provincial Building Society v Lloyd [1966] 1 All ER 630.
Before the decision in Palk it seemed that Section 36 AJA and Section 91 LPA were complementary. An application under Section 91 would only be contemplated where the proceeds of sale were expected to exceed the mortgage debt. In these circumstances Section 36 gave the Court the power to suspend possession in order to enable an application for sale under Section 91 to be made. It is, however, quite clear that Section 36 does not empower the Court to suspend possession in order to permit the mortgagor to sell the mortgaged premises where the proceeds of sale will not suffice to discharge the mortgage debt, unless of course other funds will be available to the mortgagor to make up the shortfall.
A mortgagor seeking relief in the circumstances of Palk is thus unable to invoke any statutory power to suspend the mortgagee’s right to enter into possession.
For the mortgagors, Mr. Smith argued that the provisions of S.36 did not define exclusively the jurisdiction of the Court to suspend possession. The Section was accurately headed “Additional powers of court in action by mortgagee for possession of dwelling-house” The Court enjoyed in addition a power to suspend possession as part of its inherent jurisdiction. He referred us to the general statement or principle, albeit in a criminal context, of Lord Morris of Borth-y-Gest in Connelly v DPP [1964] A.C. 1254 at 1301:
There can be no doubt that a court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction. I would regard them as powers which are inherent in its jurisdiction. A court must enjoy such powers in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of its process.
Mr Smith elaborated his argument as follows:
On an application by a mortgagor for sale under Section 91 LPA the Court has power to order that the mortgagor be entrusted with the sale and that he remain in possession while effecting the sale: Barrett. Should the mortgagee attempt to frustrate such an Order by entering into possession, the Court seized of the Section 91 application must have an inherent power to restrain him from doing so. In these circumstances, the County Court must also have an inherent power to suspend an order or warrant for possession, at least for such short period as is necessary to enable the mortgagor to make a Section 91 application.
In my judgment this argument breaks down at a number of stages.
In Royal Trust Co. v. Markham Sir John Pennycuick, when delivering the leading judgment of this Court cited with approval the passage from the judgment of Russell J. in Caunt which I have myself cited above. He then said at p.1420:
“A characteristic instance in which that sole exception is applicable is where the mortgagor has entered into, or is about to enter into, a contract for the sale of the property at a price which will enable the mortgage to be paid off in full…
So, as the law stood before 1970, the mortgagee had a right, subject only to that one exception mentioned by Russell J., to possession, and it was not in the power of the court to refuse him possession.”
Megaw L.J. added at p. 1423 :
There was, as I think is clear, no power, before the enactment of section 36 of the Administration of Justice Act 1970, for a court to grant a stay or suspension of execution of an order for possession in a mortgagee’s action, such as the present one, based on default in payment or breach of other obligations. Therefore, if there be such power to suspend or stay the execution of the order for possession, it can come only from the provisions of section 36 of the Act of 1970 as amended by section 8 of the Administration of Justice Act 1973.
In my judgment the very specific delimitation of the power given by Section 36 makes it clear that the legislature did not intend that the Court should have any wider jurisdiction to curtail the mortgagee’s right to possession. That right enables the mortgagee to exercise his power of sale in the manner he chooses and in the confidence that he can offer a purchaser vacant possession. Section 36 circumscribes that right where the proceeds of sale are likely to discharge the mortgage debt. It does not do so where the mortgage debt will not be fully discharged, and it is in those circumstances that the mortgagee’s rights are of particular importance.
I recognise the principle of the inherent jurisdiction of the Court, as explained by Lord Morris in Connelly, but I question whether that principle can justify the Court in exercising its power to order a sale of mortgaged property under Section 91 in circumstances where the mortgagee is seeking to enter into possession in order to sell property in which there is negative equity and where the sole object with which the mortgagor seeks that order is to prevent the mortgagee exercising his right to possession so that the mortgagor can negotiate his own sale while in possession.
Even if one assumes that the Chancery Court has power to order sale of mortgaged property on terms that displace the mortgagee’s right to possession, I do not consider that it follows from this that the County Court, as part of its inherent jurisdiction, can properly suspend an order or warrant for possession in order to enable a mortgagor to apply to the High Court for an Order under Section 91. It seems to me incumbent on the mortgagor to seek from the High Court any relief which that Court is empowered to give before the possession warrant takes effect.
In the present case the Judge purported in 1995 to suspend a warrant for possession that was properly issued pursuant to an order for possession made in 1991. For the reasons I have given I consider that he had no jurisdiction to make such an Order and this appeal should be allowed.
LORD JUSTICE MILLETT:
I have had the advantage of reading in draft the judgment of Phillips L.J. with which I am in full agreement.
Palk was a case in which the mortgagee had no wish to realise its security in the foreseeable future, whether by sale or foreclosure. It established that in such a case the mortgagor might obtain an order for sale even though the proceeds of sale would be insufficient to discharge the mortgage debt. It does not support the making of such an order where the mortgagee is taking active steps to obtain possession and enforce its security by sale. Still less does it support the giving of the conduct of the sale to the mortgagor in a case where there is negative equity, so that it is the mortgagee who is likely to have the greater incentive to obtain the best price and the quickest sale.
Both these steps were taken in Barrett v Halifax Building Society (1995) 28 HLR 634. I have serious doubt whether that case was rightly decided. In fairness to the Judge it should be said that it does not appear to have been argued as a matter of principle; the mortgagor’s application was resisted on purely pragmatic grounds, and somewhat feeble ones at that.
For the reasons given by Phillips L.J. I agree that this appeal should be allowed.
LORD JUSTICE BUTLER-SLOSS:
I agree with both Judgments and that this appeal should be allowed.
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