Mortgages, sale of property and human rights

Horsham Properties Group Ltd v (1) Paul Clark (2) Carol Beech and GMAC RFC Ltd (Third Party) and The Secretary of State for Justice (Intervener) [2008] EWHC 2327 (Ch)

Now this is a complicated little case which, I suspect, will give rise to more questions (and litigation) than it answered.

Mortgages: a very short introduction

Prior to 1970, if A granted B a mortgage over A’s land then, unless the mortgage contract provides otherwise, B was entitled to recover possession of it at any time. There is no need for A to default under the terms of the contract or do anything like that. B’s right to possession arose immediately and the court had no power to refuse B’s claim for possession, save for a very limited discretion to adjourn to allow A to sell the property or otherwise raise the money to pay off the mortgage – see, for example, Citizens Permanent Building Society v Caunt [1962] Ch 883.

This, as will be immediately apparent, is not a good thing. Unless borrowers could negotiate some contractual protection, it left them at the mercy of (unscrupulous) lenders and it made a mortgage a very unattractive method of financing the purchase of property. The Payne Committee of 1968 recommended giving the court powers to adjourn or suspend possession proceedings on terms relating to the repayment of the mortgage by installments.

This report gave rise to the Administration of Justice Act 1970 (and, indirectly, the Administration of Justice Act 1973.) The effect of those Acts is that, in respect of residential property, where possession is sought by a lender, then the court has the power to suspend the possession order on terms that the defendant pay the mortgage plus a sum off the arrears. The court has a very wide discretion at this stage and should ask itself whether the arrears can be repaid over the remaining term of the mortgage (see Cheltenham & Gloucester Building Society v Norgan [1995] EWCA Civ 11). In practice, this is the most significant right available to borrowers who find themselves in financial difficulties and, in most cases, is sufficient to keep a borrower in their home.

The facts

Mr Clark and Ms Beech had purchased a property with the benefit of a loan from GMAC, which was secured on the property as a mortgage in the usual way. During the course of the mortgage, Mr Clark and Ms Beech fell into arrears.

The mortgage provided that, if the mortgage fell into arrears, GMAC could appoint a receiver, which they duly did. Then, again pursuant to the mortgage contract, the receiver sold the property at auction. (Although GMAC appeared to be relying on their contractual powers, it should be noted that s.101 Law of Property Act 1925 would have provided another way of achieving a similar result. This becomes important later on.)

The property was purchased by Horsham Properties Group Ltd (“Horsham”).

At this stage (a) the sale of the property had raised sufficient monies to discharge the mortgage and (b) Mr Clark and Ms Beech were still in occupation of the property.

Having purchased the property, Horsham then issued trespasser proceedings against Mr Clark and Ms Beech, seeking to recover possession of the property. The effect of this was to bypass all the protections contained in the Administration of Justice Acts, something which had been found to be perfectly lawful by the Court of Appeal in Ropaigealach v Barclays Bank [2000] QB 263.

The arguments

Ms Beech argued that the Ropaigealach decision had to be re-examined in light of the Human Rights Act 1998. In particular, she argued that:

(a) the power to appoint a receiver and / or sell the property should be interpreted as arising only once the court had sanctioned such a step; or

(b) the protection of the Administration of Justice Acts should continue to apply even where the claim for possession is brought by someone who has purchased the property from a mortgage company.

She framed these arguments in the light of Article 1 of the First Protocol (“A1P1”) to the European Convention on Human Rights (right to peaceful enjoyment of possessions) and argued that, if they were rejected, there should be a declaration of incompatibility.

The decision

The Court (Briggs J) had no difficulty in accepting that, in losing the right to pay off the mortgage, one had lost a “possession” within the meaning of A1P1. However, he did not find that there had been any deprivation of that possession by the State. He gave two reasons for this:

(a) the current situation had arisen because of the contractual provisions (and an admitted default by Mr Clark and Ms Beech) and not because of any State action; however

(b) the position would have been no different if GMAC had relied on its various statutory powers (s.101 Law of Property Act 1925) since those statutory powers did not interfere with any right, but merely created a ‘default’ position which the parties were free to alter as they saw fit.

In case he was wrong about this, Briggs J went on to consider whether the ability of GMAC to sell the property without a court order was in the public interest. He found that it was – the power to sell without a court order was an integral part of the economic basis for mortgage lending, without which, the mortgage market would not exist. There was no need for an individual assessment of the proportionality of exercising this power in any given case because the appropriate bargain had already been struck and relied, by analogy, on Lord Scott in Quazi v LB Harrow [2004] 1 AC 983.

The suggestion that the protection of the Administration of Justice Acts should apply, regardless of who was bringing the possession claim, was dismissed in very short order. Those powers could only apply so long as a mortgage remained in force. The sale of the property at auction had raised sufficient monies to discharge the mortgage. If there was no mortgage then there was no scope for the Acts to apply.

A possession order was made.

The good, the bad and the ugly

There is some (but not much) good news in this case. It is very encouraging that no-one seemed the slightest bit surprised to be dealing with a Human Rights Act 1998 argument in the context of a dispute between private parties under a private contract. If this case encourages practitioners to raise more HRA arguments in such cases then it can only be a good thing.

Briggs J was also heavily influenced by the fact that it was common ground that Mr Clark and Ms Beech had been in arrears and had broken the terms of their mortgage agreement. He expressly left open the possibility that he would come to a very different conclusion if the powers of receivership and sale had been used without such default having occurred.

The bad news is more obvious. This is quite a loophole for any lender who wants to get around the protections of the Administration of Justice Acts and in the current market, the temptation to do so will, one suspects, lead many more lenders to use this route. The importance of scrutinising your mortgage terms and conditions is plain.

As to the ugly nature of this case. Sadly, the discussion of the law of proportionality was some 4 years out of date. The idea that proportionality simply cannot arise on the facts of an individual case because it is presumed that all questions of proportionality have been dealt with at a higher level (whether in statute or in the market place) is, to put it mildly, one of hot topics in current human rights thinking.

The European Court of Human Rights has made clear in Connors v UK (2005) 40 EHRR 9 and McCann v UK (19009/04), that each person faced with eviction proceedings should be able to have a court assess the proportionality of the proposed eviction and, whilst the House of Lords haven’t quite gone as far as this yet, in both Kay v LB Lambeth [2006] UKHL 10; [2006] 2 AC 465 and Doherty v Birmingham CC [2008] UKHL 57, they made clear that the approach of Lord Scott in Quazi could not stand.

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.
Posted in Housing law - All, Mortgage possession, Possession and tagged , .

10 Comments

  1. I’ve seen some s.101/receivership possessions, but all involved Buy to Let mortgages, where I understand it is pretty common. Using this route against residential mortgages is nasty – and I’m not surprised it was GMAC doing it.

    I agree that the reliance on Quazi means that the decision is, to some extent, out of date. I suspect you are right that there will be further challenges.

  2. @NL – Yes, I too have seen quite a few receivership cases involving BTL mortgages but this was the first one I’d seen in the owner/occupier context.

    One of my professional joys is fighting the ‘sub prime’ / ‘off high street’ lenders in mortgage possession cases. The argument that usually gets them rushing to settle is one based on the Unfair Terms in Consumer Contracts Regulations 1999.

    J

  3. Wow. I haven’t heard of this before. I’m rather gobsmacked this could operate with a residential mortgage. I can’t help but wonder why lenders don’t take this route more often?

  4. There is now a rather hyperventilated account of the case in the Financial Times.

    I’m wondering which un-named lawyers they found to respond with ‘astonishment’, certainly not any who deal with property litigation – we were somewhat surprised to se this used on a residential mortgage, but it happens all the time with BTL. The FT also manages not to mention that it is a contractual point – the power to appoint receivers was in the mortgage agreement, as was the power of sale, although s.101 LPA 1925 would also confer that. And, while I’m getting all aerated, the Court most certainly didn’t suggest that the mortgagors ‘lost their equity when they fell into arrears’. The Court said – old old law this – that the equity of redemption is extinguished when a contract for sale is made. It doesn’t mean the mortgagor wouldn’t get any left over ‘equity’ in terms of the proceeds of sale, it means that their right to the ownership of the property once the mortgage is paid off is extinguished once a contract for sale is made (not when they enter arrears).

    Honestly, these slow, dim and inaccurate journos…

  5. Pingback: Btl Repossesion Without Court Order Lawful - House Price Crash forum

  6. Sorry to respond to your comment of 10 November so late, but I am interested in your point about the loss of the equity of redemption not meaning the loss of the equity. I have read various commentries on the case and have not seen any other discussion on the distinction between equity of redemption and equity, and was never clear if the borrower did lose their equity. I wondered how you formed your view that the two are different. Is there a particular authority or commentary on the point? Thanks

  7. Suzanne,

    I don’t think I can put it much clearer than in the comment above. Equity of redemption is the right to recover ownership once a mortgage liability is paid off. It has nothing to do with ‘equity’ in the sense of the sale value of the property over and above the mortgage liability.

  8. Hi NL & Suzanne

    The point regarding the ‘right to redemption’ being lost; was to do with the fact that once the receivers had sold the property, Mrs Beech was not left in a position to sell the property herself; so as to exercise an ‘equitable right to redemption’.. which is what most mortgagors seek to do; i.e the right to redeem the debt themselves by either re-mortgage, sale of the house etc. Likewise, there was no longer any equitable right to redeem the mortgage, because the property had been sold literally ‘over her head’ and for all intense and purpose without her knowledge… this meant that MJ Briggs could not look to rely on any protection for Mrs Beech under the equitable maxim of redemption either ….. also based on the fact that she was in default of the mortgage terms and conditions at the time of the sale.

    Suzanne, I think I understand where you are coming from, you are saying that if there was equity in the property at the time of the sale, say of £2k…. when it was sold by GMAC, it would appear that Ms Briggs lost that £2k at the time of the sale? I think your way of thinking is spot on.. she lost it. Had she not been in default at the time of the sale, M J Briggs may have come to a different conclusion in order to protect not only her right to her home, but also her right to the equitable gains built up over the years in the property. I think you make an interesting point. Being in default of mortgage payments seems that not only your human right is affected but also all right to your home to a lender such as GMAC, who themselves are not a conventional mortgage lender, they literally only give homeowners funding against their homes for pure investment purposes, with the intention of selling your home on firstly to investors (undercover of course); then on the open market for an additional profit. I was one of the lucky ones, I re-mortgaged away from them years ago!

    • Hi Lorna, NL, Suzanne

      Since the Horsham case a whole lot more properties have been repossessed by sub-prime lenders.

      I think Lorna is spot on, the shrewd thing to have done is to have got away from these bandits back in the day.

      The sad situation is a lot of borrowers are still suffering with these toxic mortgages without real chance of paying off the debt or re-mortgaging – basically just paying payments until they default, so as the lender can swoop.

      I’m starting to think that is is not only libor rates being rigged, but so is the entire economy, including the judiciary (sad as I am to say this about the Judiciary), rigged in favour of the banks, if a borrower is not servicing the loan, then they administrator can’t get the monies due to the investors – repo is all that is left, no chance of thinking the house you work to pay for will ever be owned by you at all – not these days – all mortgages whether stated in the lease or not via a subprime lender is on lease with NO option to buy!

  9. I have a case where LPA/Fixed Charge receivers have been appointed, in a money demand business mortgage situation where the property is also the mortgagors home. I am looking at using s91(2) LPA 1925 to attempt to get the property back to sell, and inter alia the Art 8 proportionality argument as although the mortgage document gave the bank the contractual right to appoint and sell, they did not give the mortgagor a chance to redeem when there was no threat to their security, there being sufficient equity and the mortgagor had alternative funding set up to pay off the mortgagee. I have not been able to find any recent cases on s91 at all let alone mortgage repossession using human right arguments. Has anybody else seen any or got any ideas?

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