I can distinctly remember my university lectures on mortgages. Not the content – I don’t think I ever really understood that – but the “gap” that existed (and still exists) between the popular understanding of what a mortgage is and what, in law, it amounts to. In particular, I remember being amazed that a mortgage was, in effect, a right to immediate possession of the property, regardless of whether there was any default on the part of the borrower (the right to possession arises “before the ink is dry” as it was put in various cases).
That unqualified* right to possession has come to the fore again in Thakker v Northern Rock Plc [2014] EWHC 2107 (QB) (Lawtel only from what I can see). The facts are quite simply (and, in my experience, common). Northern Rock had lent £242,000 to Mr & Mrs Thakker to allow them to buy a house. There were some further advances so that just over £259,000 was eventually secured against the home. Mortgage payments were missed and possession proceedings issued.
Mr & Mrs Thakker sought to defend (and counter-claim) the proceedings on the basis that they had an equitable set-off, in particular, the bank had been in breach of the Mortgage Conduct of Business Rules made under the Financial Services and Markets Act 2000 (now the Mortgages and Home Finance: Conduct of Business sourcebook – see here). The argument was that the damages could be applied to reduce or extinguish the arrears (and, pausing there, that argument plainly is right).
The bank applied to strike out the defence, contending that it wasn’t a defence to a possession claim, following the decision in National Westminster Bank Plc v Skelton [1993] 1 WLR 72, where it was held that:
… the bank’s claim is one simply for possession, not payment. The general rule established by long-standing authority is that except in so far as his rights are limited by contract or statute, a mortgagee by way of legal charge is entitled to seek possession of the mortgage property at any time after the mortgage is executed: see, for example, Mobil Oil Co. Ltd. v. Rawlinson, 43 P. & C.R. 221 ; Barclays Bank Plc. v. Tennet (unreported), 6 June 1984; Court of Appeal (Civil Division) Transcript No. 242 of 1984 and Citibank Trust Ltd. v. Ayivor [1987] 1 W.L.R. 1157 .
Faced with this argument the Circuit Judge granted the application; the argument could work as a counter-claim for damages, but not as a defence to a possession claim; the right to possession was absolute. The counter-claim might give rise to sufficient funds to enable the judge to exercise the discretionary powers under the Administration of Justice Acts of 1970 and 1973, but it didn’t impeach the right to possession itself.
An appeal to the High Court was dismissed. In the absence of a contractual provision postponing the right to possession in the event of a failure to comply with the relevant regulatory provisions, there was no basis for saying that the right to possession had not arisen. The judge was fortified in this view by the fact that Defending Possession Proceedings didn’t mention the possibility of such a defence.
Comment
Now, this is what I mean about the “gap” between popular understanding and the law. Very, very few people realise that their mortgage company has (unless the contract provides something else) an absolute right to possession, even if the mortgage company have broken all the regulatory codes going (or similar). It would, I think, come as a shock to them to learn that such default by the bank wasn’t a defence to a possession claim per se, but was, at best, a possible source of damages which might be used to reduce arrears so as to bring the discretionary powers of the court into play.
I confess that I don’t really see why mortgage companies should have an absolute right to possession; the modern (residential) mortgage is very different in structure and usage from that found in 1925. Why shouldn’t the mortgage company have to prove some operative default before a discretionary power for possession arises? How is an absolute rule compatible with the rights of the occupier under Art.8 and A1/P1, ECHR (‘tho, I accept, the 1970 and 1973 Acts might solve any incompatability). Perhaps the authors of DPP might consider asking if we can come up with an arguable defence that they could mention in the next edition? :-)
*unless qualified in the mortgage deed itself, but the point is that it is unqualified as a matter of general law
The judgment is also available on Westlaw.
It is concerned only with the point discussed above. Those more familiar with civil procedure than me will have to comment upon this issue: while ‘no other defence is pleaded’ aside from equitable set-off, the judgment refers to the ‘discretionary or second stage’ – suggesting there will be an s 36 argument in the next phase back with the judge despite its absence from the pleadings.
It is, however, tolerably clear that the situation is not good: arrears of £53,000 on a total debt of £585,000. In 2010. The precise facts are not apparent but I suspect the mortgagors would have to pull something really special out of the bag in order to satisfy Norgan such that a postponement would be granted.
Moreover, what we do know about the counterclaim ‘defence’ seems quite unattractive, being an allegation of negligence by the mortgagee regarding adding a further indebtedness of £259,000 to the original £242,000. I suspect this is simply an allegation of lending too much, something Northern Rock has form for in the shape of the legendary 125% mortgage.
Worse still, the damages claim will probably slam directly into the barrier of causation – the courts might well hold that who truly caused the losses were the mortgagors and the mortgagees merely occasioned them. It boils down to whether the courts think mis-selling should lead to debt cancellation, which I doubt. The O’Brien/Etridge defence goes to voiding the contract and consequentially the security and thus does not have this problem. It is also more apt in that this kind of wrong is, conceptually, a vitiating factor (usually misrepresentation and/or undue influence) leading to rescission rather than a failure to perform a contract leading to damages. However, here the debt survives thanks to the requirement to make counter-restitution of monies paid pursuant to the void contract. The mortgagee can then move in on this personal debt, getting a charging order or petitioning for bankruptcy. Trying to claim damages to avoid this issue seems desperate.
The counterclaim would therefore just delay the inevitable. All in all, practically and conceptually, (and, I accept, I don’t have the full facts) it appears to be largely if not totally misconceived. While I agree that in principle there shouldn’t be an automatic right to possession in a modern commodity mortgage, it could well be that in practice that the s 36 process is more than adequate to counterbalance this problem given sufficiently robust judicial application. However, given the facts of Thakker, I suspect we won’t have the opportunity to find out if this is the case.
I agree that we just don’t know enough about the facts of this case, but I’m not so sure that these MCOB defences are always as hopeless as you seem to think. I run them quite regularly and lenders generally huff and puff but then make offers. MCOB does impose some pretty important obligations on lenders and very, very few seem to comply with them. Given that s.150, Financial Services and Markets Act clearly provided for damages for breaches of the guidance, I’d be cautiously hopeful about pushing such a defence.
I’ll have to defer to your experience of s 150 and real-life offers. Do you get relatively nominal damages or something related to the indebtedness? Has this been settled by appellate authority? In other words, are the damages substantial enough to offset the arrears?
I see nothing in s 150 to indicate a non-standard measure of damages, but I admit this is outside my knowledge. I do rather suspect at some point a lender would press the point and take matters to appeal, arguing that only actual losses subject to the usual principles of causation are recoverable – which do not go the debt and interest but only to much smaller associated costs.
As far as I am aware, there is no authority on how s.150 damages work. I have never taken one to trial as I’ve always had an offer which was good enough to let the client make Norgan payments afterwards. But I regularly get offers in the tens of thousands of pounds (plus costs). You have to be careful though – the self-certified mortgage where the client lied as to their income is not the case to take! The high pressure sales techniques on vulnerable or elderly people is a different matter.
You are right Skelton and the mortgagee’s general rights are very tough.
Sometimes it is worth arguing that the mortgagee’s subsequent conduct estops it from immediate enforcement and that it is then no longer acting in good faith – see Megarry & Wade – 25-025 and
paras 24-25 Dunbar Assets v Dorcas [2013] EWCA Civ 864
Going slightly off at a tangent here; during the 1990s, and increasingly recently, it has been worth challenging the level of arrears in order to be able to make Norgan offer on the basis that most sub-prime lenders (and most recently a main High St one) are making a Norgan offer impossible either to make or to achieve. They do this by inflating the arrears to include other sums such as penalties, interest on arrears and late-payment fees. DPP argues that these should not be classed as arrears and interprets s8 AJA 1973 that way. Where a defendant is struggling to make a Norgan offer I have found that most lenders do not abide by the CPR for particulars of claim i.e. PD 55A, 55.4 (2.5)(3) (a-b). Where the court is persuaded to adjourn with a direction to the Claimant to provide these details it is often enlightening as to the true level of arrears i.e. missed payments of capital and interest, not additional costs. I have often been successful in this, arguing that whilst the other costs can add to the balance outstanding under the contract, it cannot constitute arrears as it will inevitably make a Norgan offer meaningless in practice and often impossible to achieve. Lenders are using some of the same old tried and tested ( and roundly rejected) arguments from the 1990s. Sadly we are having to rehearse them all over again with a new generation of lenders’ solicitors and District Judges.
I make this point in the context of Thakker because they may well have been able to make a Norgan offer if the above were applied to the arrears.
Yes, the “what are the arrears” argument is a good one and has some very helpful caselaw behind it. One of the most enjoyable mornings I ever had in court was (winning) an argument about this before a DJ who, at the end of our hearing, gleefully remarked that he’d be asking all the LPC (or whatever) advocates for the mortgage companies in the afternoon list to deal with the point. He rather confidently predicted a number of adjournments would be needed.
So it looks like s 36 is being applied robustly, and is therefore a practical solution to the immediate right to possession problem. In fact, if these penalties and costs are valid under the contract, s 36’s application to arrears makes it more powerful than relying on damages to offset the debt pursuant to the ‘no default, no right to possession’ argument.
Mortgage companies do not have an absolute right to possession.
Unfortunately we appear to be mixing 2 things here – what the position is where there is
1. no breach, and
2. where there are breach(es)
No Breach
The ink is dry argument sets out the matter too simply, even with the rider “except in so far as his rights are limited by contract or statute” especially with residential property. One also needs consider what the limitations applied by statute are.
The mortgage is by way of security for payment of debt and (most cases) the money was lent on the terms with a purpose of it being repaid over say 25 years.
The powers a lender has must be exercised in good faith, (though if exercised in good faith it can properly exercised notwithstanding it would disadvantage the borrower).
Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee. Downsville Nominees Ltd v First City Corpn Ltd [1993] AC 295 at 312
We also have article 8 & article 1 of protocol 1 and the case of Zehentner v Austria.
Where the advance is repayable by instalments the mortgage deed usually provides that the mortgagee will not be entitled to possession until default and such a provision may be implied, for example from the terms and circumstances of the mortgage; however, the court will not lightly restrict the mortgagee’s right. Fisher & Lightwood
I think it worth pointing out s103 Law of Property Act 1925. This does relate to sale, but does have some knockon effects re possession since claims for possession must be made in good faith relating to security.
103 Regulation of exercise of power of sale.
A mortgagee shall not exercise the power of sale conferred by this Act unless and until—
(i)Notice requiring payment of the mortgage money has been served on the mortgagor or one of two or more mortgagors, and default has been made in payment of the mortgage money, or of part thereof, for three months after such service; or
(ii)Some interest under the mortgage is in arrear and unpaid for two months after becoming due; or
(iii)There has been a breach of some provision contained in the mortgage deed or in this Act, or in an enactment replaced by this Act, and on the part of the mortgagor, or of some person concurring in making the mortgage, to be observed or performed, other than and besides a covenant for payment of the mortgage money or interest thereon.
There is also s36 Administration of Justice Act 1970
Also … general rule is that the mortgagee is entitled to possession unless there is a reasonable prospect of the mortgagor’s paying him off in full or otherwise satisfying him within a short time. Mobil Oil v Rawlinson Nourse J. The bit in bold is the common law situation
Breach(es)
“Faced with this argument the Circuit Judge granted the application; the argument could work as a counter-claim for damages, but not as a defence to a possession claim; the right to possession was absolute. The counter-claim might give rise to sufficient funds to enable the judge to exercise the discretionary powers under the Administration of Justice Acts of 1970 and 1973, but it didn’t impeach the right to possession itself.”
That would be correct
But are not the provisions of the Administration of Justice Acts something to plead as a matter of defence to a claim for possession and thus matters relating to that to be pleaded as part of the defence. Albeit it would be correct that simpliciter breach of MCOB would not amount to a defence, unless it could be argued that MCOB directly or more likely indirectly e.g. causing the lack of arrears, prevented the power of sale from arising.
In Mobil Oil v Rawlinson Nourse J. stated “The principle is that a mortgagor cannot unilaterally appropriate the amount of a cross-claim, even if it is both liquidated and admitted (and a fortiori if it is unliquidated or not admitted), in discharge of the mortgage debt. On that footing the origin and nature of the cross-claim and its relationship to the mortgage debt are wholly irrelevant.”
That would be correct but the court did not address the situation where it is a case of setoff
The primary means of enforcement of the duties under the FCA Handbook is action by the regulator. However, by s 138D(2) FSMA (as amended, formerly s 150) a contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.
One of the normal incidents of a statutory duty which gives rise to a private right of action is that an injunction will lie to prevent the breach:Stevens v Chown [1901] 1 Ch 894 at 904. If a refusal by a regulated person to act fairly in accordance with MCOB threatens cause actionable loss to a customer, there is no reason in principle why the Court cannot intervene to restrain the unfairness.
Now on Bailii
The end of para 17 makes it clear that the defendant did not plead that in consequence of the mcob breaches the mortgagee is in some way estopped from asserting its rights to possession, the pleaded case raises no substantial question on its face as to the existence or enforceability of the right to possession.
Presumably the defendant did not plead (as suggested by Chris Maynard) that in consequence an injunction should be granted restraining possession being obtained as being unfair.
One infers from the wording of the judgement that the statutory power to adjourn under the administration of justice act 1970 was pleaded as a defence.
The judge did say that stay of the order or suspension of execution of the judgement , could be considered at the second stage
The point about the strength of mortgage remedies is well made. We need to stop treating mortgages only as if they were consumer products (“here is a list of ingredients, but everyone’s ingredients are the same, so please be aware and tough luck”), and engage in some meaningful reform:
1. Turn possession into a remedy, not a right which must be pleaded and justified
2. No possession of a dwelling without a possession order – in law as in fact
3. Limitation for recovery of money reduced to six years like most other contracts. A promise that the 12 year period will not “normally” be relied on is up there with the chocolate teapot.
Question; Can an equitable mortgage be enforced when no written mortgage contract exists and the company have been served four notices to produce and finally an estoppel?
It’s possible to establish a mortgage by estopel – Kinnane v Mackie-Conteh ([2004] EWHC 998; [2004] 19 EGCS 164, though the decision has attracted criticism because it is difficult to see why it is “unconscionable” when the parties have simply failed to complete legal formalities.
I would suggest that the issue is whether there is actully a mortgage in the first place, rather than whether one can be enforced through estoppel in the absence of writing. “Cart and horse” and all that!
Technically yes, for an order for sale, but only by court order. I would imagine the court would take a great deal of persuading of the existence of an oral mortgage.
Is it better to describe the r ight to possession as a remedy as oppose to a right?
If you mean should it be considered as a remedy, not a right, then possibly – the law could be reformed in legislation to make that the case. However, the actual position is that it is a right, so in that sense to call it a remedy would be inaccurate. Hope the essay goes well.
thank you, i just don’t get the argument as to why it should be considered as a remedy and in what way? and what legislation needs to be reformed? thanks for your reply.
Then can I suggest you do some research?
I have a question the broker I used clearly substituted documentation the self certification certificate and the application form without our knowledge also obviously signing them. Later the original loan company transferred our loan and liquidated themselves then followed the broker now liquidated. It is well documented that I complained from the start about things and miss selling it never entered my head that fraud had taken place my wife was ill and we used her disability living allowance to pay the secured 2nd mortgage in the end I did a DSAR check similar to a FOI check with the companies administrators of the Mortgage that is when I found the fraudulently substituted documents My wife died and I got into arrears that is why I did this check as things were getting very serious as the company obviously did not check the signature’s on the application or self certification documents compared to the contracts I have raised this with the new company set up I found out due to the original company owing to much PPI. I have of course since finding this out done my own due diligence unlike the new company who obviously did not check all the documents before it being transferred. I believe if I make payments knowing what I do now I affirm the mortgage as due to the fraudulent negligence by the 1st mortgage company I believe I should be able to wind back the mortgage under the misrepresentation act 1967 for fraudulent negligence ? and the burden of proof is on the original mortgage company who no longer exists as surely a fraudulent mortgage cannot be bought or transferred ie like a stolen car ? cannot be kept even if innocently bought on top of this over the years before discovering the fraud I have paid more than the mortgage but even if I haven’t the 1st company is liquidated and the 2nd company has no right to any monies and if anything the 2nd company should return all monies paid to them as they were not legally entitled to them also when I discovered the fraud I immediately contacted the company remember I could not do this any earlier as I was not privy to the documents until my request so I acted as soon as humanly possible on my part I have researched this and researched it again and there is no similar cases I can find so I believe this could be setting a new presitent just for the information the broker or the first mortgage company also had two different amounts on the salaries/earnings per anum on the two substituted forms showing further negligence on behalf of the original mortgage company so if the 2nd mortgage company go for repossession do they have the legal right to ? is it criminal or civil ? or both what would a defence be against repossession or should I sue for my monies back against the 2nd mortgagee or is it to difficult all round ? This is very unique hence why I am asking as there is no information on this anywhere
We can’t advise on individual cases through the site. You should try to get advice from a solicitor or law centre.
Hi thank you for your reply I have tried all over the place hence my post on here as the case is unique I know that therefore I have to think out side the box and advice would be taken on a none contractual/libel basis I just wish to know the law and presitensts as there seems to be none so is there any presitents on this or is it totally unique ?
That is legal advice on your case. Which we don’t give, sorry.