Mortgage

Property law (University of London)

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In English law mortgagees have an unqualified right to possession when the mortgage
begins. Case law and statute have restricted this right. However English law has seemingly
overlooked the fact that a mortgagee can obtain de facto vacant possession of a property by
exercising contractual and/or statutory powers of sale or self-help that are not subject to
similar restrictions. When such powers are lawfully exercised the subsequent purchaser
takes free of the mortgagor's rights. The mortgagee gets its money, the second purchaser a
new property and the mortgagor loses their home without the matter coming before a court
as no court order is required to exercise these powers. 21st century case law has confirmed
this position and that the passing of the Human Rights Act 1998 (HRA) has not altered this.
This apparent neutering of the restrictions placed on the mortgagee's right to possession
gave rise to a series of reforms and proposals in the face of public concern at the potential
risk presented to mortgagors who could lose their home in the event of a minor default with
no opportunity to argue their case in court. Some reforms have had the practical effect of
improving mortgagors' protection while others have not. Radical law change aimed at
addressing this anomaly is likely to have negative economic impacts that will outweigh the
value of the extra protection afforded to mortgagors.

A mortgagee has an unqualified right to possession of a mortgaged property subject to any

express or implied contractual limitations 'before the ink is dry on the mortgage' [Four-Maids
Ltd v.Dudley Marshall[1957] F No26(HC) ; Birmingham Citizens Permanent Building Society
v.Caunt [1962]Ch 883(HC)]. The courts placed modest limits on this right, stating
mortgagees must give mortgagors 28 days to discharge the entire debt as long as there was
a reasonable prospect such payment could be made [Caunt]. Statute then placed greater
limits on this right through s36(1) and (2) of the Administration of Justice Act 1970 (as
amended by s8 of the Administration of Justice Act 1973) (AJA). These sections empower
the court to suspend, postpone or dismiss the execution of a possession order for such
period as the court thinks reasonable, if it is likely the mortgagor can repay within a
reasonable period, thereby giving mortgagors a certain degree of protection. However
English law contains a curious anomaly that mortgagors are given more protection when
mortgagees bring court proceedings to realise their security than where mortgagees by-pass
the system completely (Wood, 2009 p31). When a mortgagee exercises a contractual or an
implied statutory right to sell under s101(1) Law of Property Act 1925 (LPA), that mortgagee
is is under no obligation to obtain a court order when exercising that right [Ropaigealach
v.Barclays[2000]QB 23 (CA)] and the subsequent purchaser will overreach the interests of
the mortgagor[s2(1)(iii) LPA]. In strict legal terms the statutory intervention under s36 AJA
aimed at protecting mortgagors is thus rendered impotent.

There was some hope that the passing of the HRA would correct this anomaly but the case
of Horsham Properties v.Clark [2008]EWHC 2327(HC) dashed any such hopes. The
defendants had defaulted on their mortgage repayments and under the terms of the
mortgage the mortgagee had a contractual right to sell the mortgagor's property to realise
their security in addition to the mortgagee's implied statutory power of sale under
s101(1)LPA [Ropaigealach]. The mortgagors claimed that the mortgagee's sale of their
property to a third party and the subsequent claim for possession breached various
Convention Rights under the HRA. The main basis of their argument was that their right to
peaceful enjoyment of possessions under Article 1 First Protocol (A1FP) had been breached.
This would require them to show that their equity of redemption was a possession under
A1FP, that state intervention had deprived them of this right and that this deprivation was not

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in the public interest. However the court rejected this argument on every count. While the
court accepted that the mortgagor's equity of redemption was a possession within A1FP, it
rejected the idea that this Article had been engaged on the facts as the mortgagors had lost
their equity of redemption by operation of contract, rather than statute. Briggs J then
addressed the wider issue of whether s101 engaged A1FP. Legislation can constitute the
requisite 'state intervention' but only if it represents a deprivation of an applicant's
Convention rights rather than a mere delimitation of them [Wilson v.First County Trust Ltd(No
2) [2003] UKHL 40(HL); Pennycook v. Shaws Ltd[2004] EWCA Civ 100(CA)]. It was
concluded that s101 did not deprive an applicant of their rights under A1FP, as it had the
effect of helping to implement the private bargain of the parties rather than overriding the
bargain entirely and consequently the bar to the claimed right was neither rigid, arbitrary or
discriminatory [Wilson; Horsham]. Briggs J went on to state that even if the mortgagee's sale
out of court was construed as a deprivation of possessions it would still not amount to a
breach of A1FP. It could be justified in the public interest [A1FP] as it reflected the previous
200 years of mortgage dealings and that any adjustment to this balance of power may result
in a restriction of the availability of mortgages to the wider public at affordable rates of
interest. Also the Convention was intended to deal with arbitrary intrusion by the state into
citizen's lives [Harrow London Borough Council v Qazi [2003] UKHL 43(HL)]. It was certainly
not intended to tilt the balance of power struck by law in states between lenders and
borrowers, in favour of borrowers [Wood v UK (32540/96)(1997)24 EHRR CD69; Qazi].

Various proposals and reforms emerged in response. Some increased mortgagors'

protection, others did not.

The Pre-Action Mortgage Protocol and House Possession Court Duty Scheme are
considered to have improved mortgagors' protection. The Protocol was introduced in
November 2008 and it encourages lenders and borrowers to discuss the borrower's financial
situation and obliges them to explore ways in which the borrower's financial position can be
aided before possession is sought. At first glance, the protocol seems rather toothless,
supporting the view that it is a 'complete waste of time and paper' (McAuslan, 2009, p3). But
evidence has emerged that it is having a positive impact. The Protocol has been largely
embraced by all of those involved in domestic mortgage repossessions (Wood, 2009, p34).
The Ministry of Justice suggested it was 'highly likely' that the Protocol led to a marked
reduction in possession claims (Greer,2009, p522). In the first three quarters of 2008 the
number of claims were consistent at around 38,500 but after the Protocol was introduced in
the final quarter, this number fell to 26,008 (Greer,2009, p522). The Council of Mortgage
Lenders (CML) forecast in February 2009 that there would be 75,000 repossessions in that
year but this figure was revised downward in June 2009 and again in November 2009 to an
estimated 48,000 (Wood, 2000 p34). Wood also believes that the Court Scheme, which
provides free legal advice for mortgagors, was another 'significant step forward' in providing
protection (Wood, 2000 p34).

Two reforms introduced by the Government promised much but ultimately failed to deliver.
Firstly the Mortgage Rescue Scheme (MRS) was introduced in January 2009 offering the
potential facility to mortgagors in arrears to remain in their property by allowing a social
landlord to obtain a full or partial equity stake in their home. Secondly the Homeowners
Mortgage Support Scheme (SMI) was established in April 2009, permitting mortgagors in

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financial difficulties to suspend interest payments for up to two years. On paper these
reforms appear to increase mortgagors' protection but the low take up of these schemes
suggest they are having little impact. It was reported in July 2009 that only 16 borrowers had
been supported under SMI (Wood, 2009, p35) and in the three months prior to November
2009 only 92 borrowers had been helped under the MRS (Wood, 2009, p35). Given that
annual repossessions run into the tens of thousands, these figures support the argument
that overly rigid eligibility criteria prevent sufficient numbers of lenders from being helped to
have any meaningful impact in improving mortgagors' protection (Wood, 2009, p35).

Legislative change has also been advocated. The Citizen's Advice Bureau argued that
lenders of first charge mortgages should be prevented from exercising a power of sale or
self help over a residential dwelling without court order and Andrew Dismore MP has
attempted to introduce a private member's bill aimed at implementing this (Greer, 2009,
p520). But the CML has cautioned against any major changes to the law, stating that this
could have 'far-reaching effects for lenders, consumers and the economy' (Greer, 2009,
p520). While these proposals would increase protection for mortgagors, it may cause
lenders to become more careful about offering credit and a depressed lending market will
hardly help the prospects of economic recovery (Greer, 2009 p524). The cost of lending
would be increased with the result that access to credit for the wider population would be
reduced. Finally there is little evidence that mortgagees are using the Horsham possession
route on a wide scale (Greer, 2009, p521) and that in a depressed housing market it is
actually in the financial interests of the lender not to do so (Wood, 2009,p35).

In conclusion currently a mortgagee has the technical right to evict a mortgagor from his
home in the event of default without seeking a court order. This can be done by taking
advantage of contractual provisions contained in the mortgage deed or by using statutory
powers. The confirmation of this in Horsham prompted a series of reforms and proposals.
Some reforms are credited with affording mortgagors greater protection than existed
previously while other reforms have been criticised for having overly rigid eligibility criteria
which prevent them from having any meaningful impact. There has been some call for
legislative change in this area which would provide increased protection to existing
mortgagors. However this would be at the price of increasing borrowing costs which would
exclude more people from home ownership and damage the UK's prospects for economic
recovery. So in the absence of evidence of wide scale use of the Horsham possession route
by mortgagees such legislative change should be resisted.

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