Clements, 'Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973

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You are here: BAILII >> Databases >> United Kingdom Journals >> Clements, 'Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973 - A case for Reform.' URL: http://www.bailii.org/uk/other/journals/WebJCLI/1999/issue3/clements3.html Cite as: Clements, 'Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973 - A case for Reform'

Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973 - A case for Reform.

L.M. Clements, B.A, LL.M,

Copyright © 1999 L.M. Clements.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

This article examines the current problems with mortgage repossessions and the workings of the Administration of Justice Acts, 1970 and 1973, in practice. It is argued that reform is needed which will guarantee to mortgagors the protection of a court order in line with the protection afforded to residential leases, whilst at the same time giving increased powers to the court in possession proceedings similar to those granted to a court in cases of Time Orders under the Consumer Credit Act, 1974.

Introduction

It is widely recognized that mortgage finance is extremely important to our economy and that it should continue to be freely available to persons having a broad spectrum of incomes. In order to ensure that this continues to be the case, Banks, Building Societies and other secured lenders clearly need assurances that their security is relatively safe. Nevertheless, the trend towards owner-occupation and the economic misfortunes of the past raise the issue whether increased protection should be given to mortgagors of residential property. Mortgagors do need protection not only against lenders who use their commercial weight to advantage, but also against external factors such as the consequences of economic recession. This article examines the current problems with mortgage repossessions and argues that reform is needed which will guarantee to mortgagors the protection of a court order in line with the protection afforded to residential tenants, whilst at the same time giving increased powers to the court in possession proceedings.

Our housing system is now dominated by home-ownership, with over 68% of homes being owner-occupied. This position stands in stark contrast to the beginning of the Century, when only about 10% of homes were in owner-occupation. It also stands in contrast to the position in many European countries, where home-ownership is not seen as a priority and renting one's home is the norm. The trend towards owner-occupation has largely been due to changes in housing policy ( notably, the right to buy), fiscal incentives (Mortgage Interest Relief At Source) social mobility and the appearance of security and stability in the economy. In line with these changes, the increased availability of mortgage finance, with mortgagees able to lend on less stringent criteria, the deregulation of borrowing, and the ability of lenders other than the traditional Building Societies to enter the mortgage market, have all contributed towards enabling more people to buy their own homes. As K.Gray has stated (Gray 1993, p 936,):

If owner-occupation were a superior form of tenure, then it would be expected that mortgagors as a group would fare as well as tenants in possession actions. However, comparative studies carried out over an 18 month period between 1994 and 1995 indicate that this is not the case (see Nixon, Hunter, Smith and Wishart, 1996). These studies indicate that residential mortgagors are more likely to lose their home than residential tenants. They are also less protected by law than residential tenants, particularly after the Court of Appeal decision in Ropaigealach v Barclays Bank plc, The Times, January 6, 1999, CA. In that case, the Court of Appeal ruled that section 36 of the Administration of Justice Act, 1970, had no application to the situation where a mortgagee took possession without seeking a court order; and a court order for possession is not necessary unless the mortgage terms expressly or by implication require it.

The effect of home ownership and mortgage finance on both family life styles and incomes cannot be underestimated. However, when things go wrong, and the "safety net" of social security benefits also fails, there is the need for other forms of protection to take the strain. There is no doubt that the State has played an important role in encouraging home ownership; but, having been encouraged to enter into home ownership by the State, mortgagors are then reasonably entitled to expect some degree of legal protection from the State. This is particularly the case when outside factors over which individuals have no control lead to wide-spread hardship and homelessness. If home-ownership is superior as a form of tenure as compared to renting, then the bottom line ought to be legal protection for mortgagors on a par with that afforded to residential tenants, at least in the context of possession. Some might argue, however, that mortgagors, having entered into what is essentially a commercial transaction, are receiving, via the Administration Acts, 1970 and 1973, as much legal protection as is consistent with the economic interests at stake.

As is often the case, the essential problem for the law in this context is how to achieve a balance between these competing policy considerations, what K.Gray in Elements of Land Law has called the "commercial value" and "use value". Too much protection for mortgagors (representing the "use value") could lead to the decreased availability of mortgage finance (representing the "commercial value" of property), with consequent economic repercussions, whereas insufficient protection for mortgagors leads to hardship and often homelessness for the families and individuals concerned, with the State and tax payers usually having to "foot the bill."

This is the situation which arose in the 1980's when the "boom" in the economy turned into "bust": house prices fell dramatically, interest rates rose and many mortgagors found themselves in the position of having "negative equity" in their homes, whilst at the same time large numbers of borrowers were unable to keep up the payments on their mortgages. As a result, the number of mortgage repossessions increased. For the first time this century, home- owners in huge numbers felt the ravages of adverse economic circumstances for which they could not be held responsible. It is in such circumstances that the delicate balancing act mentioned above becomes problematic and where, as Lord Denning M R, in Davis v Johnson [1979] AC 264, HL, at page 274 once said, "social justice requires that personal rights (i.e. of mortgagors) ... be given priority over rights of property."

The Contextual Framework

In spite of improvements to the economy and a fall in interest rates since the recession of the 1980's, the number of mortgages in arrears and mortgage repossessions is still relatively high and is on the increase. By the early 1990's, the United Kingdom had a higher level of mortgage debt than any of its European counterparts. According to the Council of Mortgage Lenders, the number of mortgages in arrears in the first half of 1998 exceeded 718,000, representing 2.33% of all mortgages for which the Council has statistics. In the same year, the number of mortgage repossessions stood at 33,820, an increase of 3% on the 1997 figures. In the light of the generous options available to mortgage lenders under the Council's Statement of Practice on Handling Arrears and Possessions, the figures indicate that the problem of arrears and repossession remains a serious one. Though serious, the figures are still not as serious as they were in the early 1990's, when there were record levels of repossession, leading to political intervention by the then Prime Minister, John Major. A voluntary deal between lenders and the government followed, with the end result that the number of repossessions started to fall. In 1992, approximately 64,000 mortgaged properties were repossessed, but by 1993 this figure had fallen to approximately 58,000, before leveling off at 50,000 over the next two years.

There are a few alternatives for which the present Government could opt if sufficient political will is forthcoming. These include converting Mortgage Interest Relief At Source⁽¹⁾ (MIRAS), soon to be abolished, into compulsory mortgage payment protection insurance, removing restrictions on the payment of Income Support for Mortgage Interest (ISIM) to those who have become unemployed,⁽²⁾introducing new legislation to make it more difficult for lenders to get possession, promoting the paying back of arrears over a much longer period than at present or even allowing a court to rewrite the terms of the mortgage so as to extend the original date for repayment. Yet, in spite of the unwelcome repossession situation, with devastating social and economic consequences for those concerned, the surrounding legal framework for the protection of mortgagors has changed very little, ignoring completely the reform proposals of the Law Commission in its Report Transfer of Land-Land Mortgages, (Law Com. No.204, 1991), which, given the current political climate, seem unlikely to be implemented in the near future. If anything, the legal protection afforded to residential mortgagors now appears to be worse than was once thought to be the case. Since the Court of Appeal decision in Ropaigealach v Barclays Bank plc, it has become clear that a mortgagee may take possession of a dwelling without even obtaining a court order. The protection provided to the mortgagor by Section 36 of the Administration of Justice Act, 1970, therefore applies only if the lender has taken the trouble to bring a court order for possession. This leaves mortgagors in a worse legal position than tenants of residential property and runs counter to the thrust of the recommendations of the Payne Committee on the Enforcement of Judgment Debts, (Cmnd.3909, 1969), from whose Report the 1970 legislation stems. It is argued here that this unfortunate situation should be reversed and that legislation should be introduced which encapsulates the proposals of the Law Commission in its Report "Transfer of Land - Land Mortgages."(Law Com. No 204, 1991). Such reforms would place residential mortgagors more on a par with residential tenants, who at present fare considerably better in terms of legal protection than residential mortgagors.

Background to the present legal framework

It has become the conventional teaching of academic property lawyers to inform their students that the legal mortgagee may take possession of the mortgaged property "before the ink is dry on the mortgage unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right."⁽³⁾ This right, it is said, is an inherent right arising from the very nature of the legal mortgage (whether created by a deed expressed to be by way of legal mortgage or created for a term of years- Law of Property Act, 1925 ss 85 and 87) and is therefore not dependent on any default on the mortgagor's part. Occasional inroads into this "right" have been attempted, notably by Lord Denning M.R. in Quennell v Maltby and Another [1979] 1 All ER 568,CA, and, more recently, by the Court of Appeal in Albany Home Loans Ltd v Massey and Another [1997] 2 All ER 609, CA. However, these inroads, which treat possession more as a remedy than as a right, have been very limited in their application and have had little practical impact on mortgage repossessions. In Quennell v Maltby and Another, for example, Lord Denning MR, was prepared to refuse possession of mortgaged property where it was sought purely for the ulterior motive of getting rid of the mortgagor's tenants, an outcome that would have been entirely for the mortgagor's benefit (see Pearce 1979). And in Albany Home Loans Ltd v Massey and Another, the court saw no benefit to the mortgagee of ejecting the husband ( one of two joint mortgagors) from the property when the wife had a valid possible defence to possession under the principle in Barclays Bank plc v O'Brien [1994] 1 AC 180, HL.

After the decision of the Court of Appeal in Palk v Mortgage Services Funding plc [1993] Ch 330, CA,it would appear that a court may, in some limited circumstances, suspend a possession order if the mortgagor is seeking an order for sale of the property under section 91 of the Law of Property Act 1925. Palk's case established that the court has power under section 91(2) to allow a sale by the mortgagor even though the proceeds of sale may be insufficient to discharge the mortgage debt. In that case, the mortgagees had obtained an order for possession with the intention, not of selling the property, but of waiting to see if the housing market improved, so that, when eventually sold, the proceeds of sale would pay off more of the mortgage debt. The mortgagor, on the other hand, wanted to sell as soon as possible so that, on sale, the proceeds would reduce the mortgage debt, on which interest was accruing at a frightening rate. The Court of Appeal ruled that, in the interests of fairness, the property should be sold under section 91(1) of the 1925 Act. However, there remains some doubt concerning the extent of the court's discretion to order a sale at the mortgagor's request, following the decision in Cheltenham and Gloucester plc v Krausz [1997] 1 All ER 21, CA. In that case, the Court of Appeal ruled that if the proceeds of sale were likely to discharge the entire mortgage debt, then the court did have power under section 36 of the 1970 Act to suspend a warrant for possession in order to enable the mortgagor to make an application for sale under section 91 of the 1925 Act. However, where the mortgage debt would not be fully discharged on sale, then, in the absence of other resources available to the mortgagor to make up the shortfall, the court had no such power.

The preceeding limited judicial attempts at protection apart, the legal position has remained unchanged, subject to the effect of the Administration of Justice Act, 1970.⁽⁴⁾ This Act was introduced following the decision of Russell J. in Birmingham Citizens Permanent Building Society v Caunt [1962] 1 Ch 883 and its criticism by the Payne Committee on the Enforcement of Judgment Debts (Cmnd 3909, 1969). That decision had put an end to the practice developed by the Chancery Masters, under what was then Order 55 of the Rules of the Supreme Court, of adjourning possession hearings in order to give the mortgagor the chance to pay by instalments. The Payne Committee noted the trend towards owner-occupation and that successive governments had encouraged the purchase, instead of renting, of houses by persons of modest means. It therefore recommended, at page 364, that when possession was sought of a dwelling-house which was subject to a mortgage, the court should have the discretion to adjourn the application or suspend or stay the execution of a possession order in circumstances where "the defendant (mortgagor) ought to be given opportunity to pay off the arrears of instalments...or otherwise requires the protection of the court."

The wording of the Report of the Payne Committee is unfortunate in that it presupposes that the mortgagee will take the trouble to seek a court order for possession in the first place. Nevertheless, the spirit of what was intended is, it is suggested, fairly clear, namely, that mortgagors should have the protection of the court when the mortgagee seeks to take possession, whether by court action or otherwise. However, the wording of section 36 of the Administration of Justice Act, 1970 is insufficient to enable this "spirit" to be carried forward. Subsection (1) provides that the court may exercise its discretion in a residential mortgage case "where the mortgagee ... brings an action in which he claims possession of the mortgaged property..." In Ropaigealach v Barclays Bank plc, the Court of Appeal unfortunately, though rightly, concluded that there was nothing in the wording of section 36 which would support the contention that it had been intended to deal with the problem of entry without a court order. However, the Court of Appeal then added that the section had been enacted purely to deal with the problem that had arisen following the decision in Caunt and that there was nothing in the background leading up towards its enactment which would enable the court to apply the section to the situation where no court order was being sought. This ignores what has been referred to earlier as the "spirit" of the recommendations in the Payne Committee's Report. It was the intention of that Committee that mortgagors should be placed on a par with residential tenants in regard to possession. This, however, has not been achieved.

The rented residential sector

In mortgage possession cases, where the arrears are proved, there is a presumption in favour of an outright possession order unless the borrower can show that he/she is able to repay the arrears within a reasonable period of time. This is the only issue relevant to the court in exercising its jurisdiction under the Administration of Justice Acts, 1970 and 1973. Research on mortgages has therefore focused on the question of what is a reasonable period of time. The statutory provisions relating to the rented sector are less straightforward, depending on the commencement date of the tenancy and the identity of the landlord. The Housing Acts 1988, 1996 ( Private Sector) and 1985 (Public Sector) contain fairly complex provisions for obtaining possession in the case of either an assured tenancy or a secure tenancy. In some circumstances, the court has to consider not only the appropriateness of a notice served by the landlord, but also the issue of whether it is reasonable to make an order for possession. The broader powers of the court in such cases, as compared to the Administration of Justice Acts, enable it to consider a number of factors in determining the outcome; this is more likely to lead to a decision favourable to the tenant. Statistics available on both mortgage and rented sector possession actions bear this out. In a study of both residential mortgage and rented sector possession actions in 10 sample county courts, only 25% of tenants were found to be at long-term risk of eviction, compared to 48% of mortgage borrowers(Nixon, Hunter, Smith and Wishart 1996).

In addition to the Housing Acts mentioned above, Sections 2 and 3 of the Protection From Eviction Act, 1977, restricting re-entry and prohibiting eviction without due process of law, ensure on the whole that a court order is always sought by a landlord who wishes to regain possession, whilst section 27 of the Housing Act, 1988 ensures that damages are awarded where unlawful eviction does occur. Furthermore, section 1 of the Protection from Eviction Act, 1977 contains criminal penalties for landlords who unlawfully evict or harass tenants. Mortgagors of residential property, however, are now left without similar protection, subject to the application of section 6 of the Criminal Law Act, 1977, mentioned later.

The Administration of Justice Acts, 1970 and 1973 in practice

As Tromans points out(Tromans 1984), in recent years the main plank of the mortgagor's protection has been section 36 of the Administration of Justice Act, 1970, as amended by section 8 of the 1973 Act. Under section 36 of the 1970 Act, the court may adjourn the proceedings, stay or suspend execution of the judgment or order or postpone the date for delivery of possession of the property. This protection is conditional upon the court considering that the mortgagor will be able to pay any sums due within a reasonable period of time. The 1970 and 1973 Acts have had a chequered history, which will now be examined further.

It was in the decision in Halifax Building Society v Clark [1973] Ch 307, that the first "chinks" in section 36 of the 1970 Act appeared. In that case Pennycuick VC ruled that section 36 had no application to the common situation where the mortgage terms contained a default clause rendering the whole capital sum due on non-payment of a single instalment. This was swiftly to be remedied by section 8 of the 1973 Act, which interpreted "sums due" in section 36 as "only such amounts as the mortgagor would have expected to be required to pay if there had been no" default clause. Shortly before the 1973 Act came into force, however, the Court of Appeal accepted the argument put forward in Middlesborough Trading and Mortgage Co. Ltd v Cunningham (1974) 28 P&CR 69, CA, that a "reasonable period" under section 36 could be the entire remaining term of the mortgage and this has been followed more recently in Cheltenham & Gloucester B.S. v Norgan [1996] 1 WLR 343, CA.

Tromans has also pointed out that there are problems of interpretation with section 8 of the 1973 Act. It applies only if two conditions are satisfied, namely:

In the case of the standard instalment mortgage, for example, where monthly payments consist of part interest and part capital, condition (a) above appears to be satisfied.⁽⁵⁾ However, in the "classical mortgage", less common these days, where there is a clause making the principal sum payable after a short period of time (often only six months after the mortgage has been taken out), it is not obvious that the mortgagor is "entitled or permitted" to pay by instalments within section 8(see Smith 1979). Nor is the "deferral of payment" requirement clearly applicable to the Endowment Mortgage, where the capital sum is only payable at the end of the mortgage term, (for a different view, see Smith 1979) nor to a charge securing a bank overdraft which contains an "all moneys" clause, requiring repayment only on demand.⁽⁶⁾ Tromans has suggested that these problems require to be remedied by a re-enactment of section 8 in terms that will "clear up the anomalies and obscurities." It is suggested, however, that the whole area of the law of mortgage repossessions now requires urgent reform, not simply "tinkering" at the edges by a re-enactment of section 8 of the 1973 Act, and that the problems with section 8 can best be dealt with in the context of such wholesale reform.

As pointed out earlier, in order for the court to exercise its discretion under section 36 in favour of the mortgagor, it has to be satisfied, on a balance of probabilities, that he/she will be likely to be able to pay off any arrears "within a reasonable period."⁽⁷⁾ The court has no discretion to make an order in the mortgagor's favour if there is no realistic prospect of him/her being able to pay off the arrears within a reasonable period of time, quite apart from the question of the payment of future instalments.⁽⁸⁾Any order under section 36 must state the period within which the mortgagor is regarded as likely to be able to repay any arrears, unless, as in Western Bank Ltd v Schindler [1977] Ch 1, CA, there is no default on the mortgagor's part in the first place.⁽⁹⁾

The question of what is a "reasonable period" of time has taken up quite a lot of the Court of Appeal's time in recent years. As Madge points out (Madge 1997), this is not a phrase which is defined in section 36. In Western Bank v Schindler, the majority of the Court of Appeal held that section 36 could still apply to the situation where there was no default, although in the end result possession was given to the mortgagee as this was considered necessary to protect the mortgagee's security. Buckley LJ stated that what was a reasonable period of time would depend on the circumstances of the individual situation,⁽¹⁰⁾ but that, in a suitable case, this might extend to the end of the mortgage term. This point was followed by the Court of Appeal in Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343, CA, a case where the lender's security was not at risk in so far as the property did not fall into "negative equity" at the time of the hearing. This approach is in line with one of the options available to mortgagees in the Council of Mortgage Lenders' 1997 Statement of Practice on Handling Arrears and Possessions and it enables the borrower to pay off the arrears over a longer time span than had previously been generally allowed.⁽¹¹⁾

The principle in Norgan has since been reaffirmed by the Court of Appeal in Household Mortgage Corporation v Pringle (1998) 30 HLR 250,CA, but in cases where the sale of the property would yield insufficient to pay off accumulated arrears plus capital, or where the prospect of sale seemed "a mere expression of hope," the court has not been so generously inclined towards the mortgagor. One of the purposes for which the court may stay or suspend an order for possession is to allow the mortgagor to sell the property. It had been held in Target Home Loans Ltd v Clothier (1992) 25 HLR 48, CA that such a deferment should only be short. In National and Provincial Building Society v Lloyd [1996] 1 All ER 630, CA, however, the Court of Appeal considered that, in a suitable case, the court could exercise its discretion under section 36 so as to enable a sale of the mortgaged property to take place up to a year into the future. On the facts of that case, there was insufficient evidence before the judge on which he could have found that the mortgagor could repay the sums due within a "reasonable period" by a sale of the property. Nevertheless, the recognition of the principle of allowing a longer term deferment to enable the mortgagor to sell was important. In Cheltenham & Gloucester plc v Krausz [1997] 1 All ER 21, CA, the Court of Appeal reaffirmed this principle but added that such discretion could only be exercised where the proceeds of sale were likely to discharge the entire mortgage debt, unless other funds were available to the mortgagor to make up the shortfall. This decision indicates the fairly limited nature of the court's discretion under section 36.

The Court of Appeal in Bristol & West Building Society v Ellis (1997) 29 HLR 282, CA, has made it clear that the main consideration is the safety of the mortgagee's security. The court would therefore need to consider the extent to which the entire mortgage debt was covered by the value of the property and what effect a delay in sale would have on that value. Such an approach is entirely sensible. If the mortgagee's security is safely reflected in the value of the property, it does not matter that a sale will not take place for a while, unless, of course, economic circumstances are such that house prices are clearly falling rapidly. Where the security is weak, however, it would seem proper to grant an order that would enable a speedy sale to take place. If, for example, a sale by the mortgagor would not be forthcoming for a while (not necessarily within the next twelve months or so), or if the mortgage debt was above or almost equalled the value of the property on the open market, it may be seem perfectly acceptable in such circumstances to grant only a short period of suspension or to grant an order for immediate possession, thus allowing a speedy sale to take place. In these circumstances, the mortgagor is given the opportunity to recoup something from the terrible financial position into which he has fallen.

One of the adverse consequences for mortgagors of the more generous approach taken in Norgan is that borrowers are now expected to provide a detailed budget showing how they will be able to pay off the arrears whilst maintaining current instalments. As compared to the more easy-going approach of the courts to the borrower's financial circumstances, this will make it more difficult for a mortgagor, already in default, to convince the court that it should exercise discretion in his favour. So what Norgan has given to mortgagors in the one hand it has to some extent taken away with the other; but at least it gives mortgagors a longer time-schedule in which to balance finances and pay off the arrears. It's limitations, however, are apparent from Krausz; but it is precisely in such times of negative equity that the mortgagor needs the protection of the court the most.

It is instructive to note here that under the Consumer Credit Act 1974, a court may make a "time order" in the case of agreements regulated by the Act. This enables a loan to be rescheduled in such a way that the borrower will repay smaller amounts over a longer period of time than originally agreed; in effect, re-writing the agreement. As a result of a time order, the borrower may pay a lower rate of interest. The 1974 Act, however, is on the whole inapplicable to mortgages.⁽¹²⁾ One possibility for mortgage reform would therefore lie in making similar provision for mortgages. R.J. Smith (Smith 1998, p 570) argues that such a power would be useful for short-term mortgages, but that, since most mortgages are long-term anyway, the effect on annual payments in such cases would be very small. Nevertheless, as the court already has the power to alter contractually agreed interest rates in at least some mortgage cases (whether under the Consumer Credit Act 1974, s. 137 or under its inherent jurisdiction: see Cityland and Property (Holdings) Ltd v Dabrah [1968] Ch 166), a similar power to extend the original term of the mortgage would be a useful and sensible adjunct to the present statutory discretion under section 36 of the 1970 Act. Indeed, in Norgan Evans L J hinted at the possible use of section 36 to extend the original length of the mortgage term in this way. However, it is argued later that there is no power at present for the court to extend the contractual mortgage term under section 36.

Deterrence against mortgagees taking possession

According to the Court of Appeal in Ropaigealach v Barclays Bank plc, it is not necessary for a mortgagee who wishes to take possession of the mortgaged property to seek a court order. As Pearce (Pearce 1979, p 258) points out, a mortgagee will in fact rarely seek possession in the absence of any default on the mortgagor's part. Possession is almost invariably sought these days as an adjunct to the mortgagee's power of sale, exercisable under the Law of Property Act 1925, normally only on default. Most mortgagees would not want possession for themselves, since the appointment of a receiver is preferable and does not attract the same burden of accountability to the mortgagor (Law of Property Act 1925, s. 109(2)). Nor does it seem necessary in most situations that the mortgagee should need possession before default has occurred.⁽¹³⁾

Where the mortgagee does seek possession it is nearly always through a court order. The court then has various options available to it. These include implying a term that the mortgagee will not seek possession until there is default,⁽¹⁴⁾ utilizing the principle in Quennell v Maltby, discussed earlier, and using the statutory discretion afforded by the Administration of Justice Act 1970. However, apart from the mortgagee's strict duty to account to the mortgagor for rents and profits both actually received and which ought reasonably to have been received, there is little legal deterrence to a mortgagee taking possession without a court order. What deterrence there is lies in the criminal law in the form of the Criminal Law Act 1977, s. 6, under which it is in general an offence for a person to use or threaten to use violence in order to gain entry to premises in which it is known that there is someone present who is opposed to entry. Assuming that the mortgagor is prepared to go quietly, it is unlikely that this provision will cause any problem to any secured lender wishing to gain vacant possession without seeking a court order. In circumstances where the mortgagor is unwilling to go quietly, the mortgagor becomes a trespasser. A mortgagee entitled to possession may peacefully evict a trespasser without a court order, but it is likely to be rare that the mortgagee would wish to test the limits of peaceable entry. So, in practice it is probable that only in those cases where the mortgagor delivers the keys to the mortgagee or otherwise makes no protest that the mortgagee will be prepared to take possession without the safeguard of a court order.

Nevertheless, the question remains whether the mortgagee should be entitled to take possession without obtaining a court order. Clarke argued that section 36 should "be interpreted so as to remove the mortgagee's right to take possession peacefully." She pointed out that, in spite of arguments to the contrary, it would be "anomalous and undesirable" to protect mortgagors against eviction by court process but still leave them open to eviction by self-help, especially if, having been refused possession by the court under section 36, the mortgagee could still exercise this form of self-help. Indeed, in the context of the Increase of Rent and Mortgage Interest (Restrictions) Ac, 1920, s. 5, a provision similar to section 36 of the 1970 Act has been interpreted as removing a landlord's right to take possession by peaceful re-entry. In Remon v City of London Real Property Co. [1921] 1 KB 49, CA, the Court of Appeal rejected the landlord's argument that section 5 of the 1920 Act had no application to a landlord who had resumed peaceful entry. The decision in Remon gave effect to the clearly identifiable purpose of the legislation. In the context of section 36 of the 1970 Act, Western Bank Ltd v Schindler [1977] Ch 1, CA, has shown the court equally prepared to take a sensible view on statutory interpretation when faced with the problem that a literal construction of the words used would leave a lacuna in the law or give rise to an absurdity. As mentioned earlier, the issue in that case was whether section 36 applied to a situation where there was no default. Buckley L.J. stated that, whilst the mortgagee's right to possession should not be lightly abrogated or restricted, it was preferable to infer such restriction if the only alternative was to leave an obvious lacuna in the law or produce an absurd result. From this line of authorities, Clarke concluded (Clarke 1983, p 297) that:

Clarke also pointed out that there are difficulties in interpreting section 36 of the Administration of Justice Act, 1970 so as to confer a statutory right to possession on mortgagors of residential property. When, for example, would that right arise? From the beginning of the mortgage or only after the mortgagee has taken steps towards taking possession? And, if the latter, what precise "steps" would be required to have this effect? Would written notice from the mortgagee suffice? Or would it be necessary for the mortgagee to have commenced court proceedings for possession?

This line of inquiry now appears to be academic for the time being, after the Court of Appeal decision in Ropaigealach v Barclays Bank plc. Unless this decision is reversed by the House of Lords, section 36 of the 1970 Act can in future be by-passed by a mortgagee wishing to take possession of residential property. Residential mortgagors are now left vulnerable to possession without the benefits of a court action, on the basis of the mortgagee's inherent right to possession; and the possibility referred to by Clarke that an unsuccessful mortgagee might fall back on self-help remains alive. It is suggested, however, that if a disgruntled mortgagee were to attempt self-help after having been refused possession by the court, it would be possible for the mortgagor to obtain an injunction restraining that self-help on the grounds that the mortgagee's conduct was in breach of the court order, amounting to a contempt of court.⁽¹⁵⁾

The Decision in Ropaigealach v Barclays Bank plc

In Ropaigealach v Barclays Bank plc, the issue was relatively straightforward. The mortgagee, Barclays Bank, had sold the property at auction without first obtaining a court order for possession. Mr Ropaigealach then sought determination of the question whether the Bank was entitled by law to take possession of the property without having first obtained a court order.

The Court of Appeal considered that the question of law raised by this case was an important one. If the Bank did require a court order, then its failure to obtain one could lead to an award of damages to the mortgagor for trespass to land.

Chadwick LJ, having examined the wording of section 36, the Payne Committee Report , the Law Commission Working Paper No. 99 (1986) and the Article by Clarke referred to earlier, concluded that:

Clarke LJ agreed, but with some considerable reluctance, noting that there now exists a "curious anomaly" in the law. He expressed the view that if it were possible to construe section 36 in such a way as to protect residential mortgagors, whether or not the mortgagee sought a court order or exercised self-help, then he would have done so; but such a construction was not possible in the light of the wording of section 36.

It is in the short judgment of Henry LJ that there is the very strong hint that Parliament should now reform the law in line with the proposals of the Law Commission. Such reform has become necessary in order to remove the "curious anomaly" referred to by Clarke LJ and to place residential mortgage possessions on an equal footing to that of residential tenancies. At the very least, residential mortgagees should be required to seek a court order before obtaining possession. Otherwise, there is a real danger that the protection afforded by Section 36 of the 1970 Act will become eroded.

The way forward?

The decision in Ropaigealach has highlighted the weaknesses of the law in protecting residential mortgagors. Together with the decision in Krausz, the limitations of the present statutory discretion in cases of repossession have become apparent.

One question which arises is whether the mortgagor should now be given a statutory right to possession so as to either take away or suspend the mortgagee's inherent right to possession, transforming the latter into a "remedy" exercisable only with the court's permission. This would be a move which would bring the law relating to residential mortgage repossessions more in line with that relating to residential tenants, outlined earlier.

The proposals of the Law Commission, discussed below, do include the removal of the mortgagee's inherent right to possession. If these proposals were to become law, the mortgagor would be entitled to possession from the outset, since logically someone must be legally entitled to possession.

A slightly different approach towards partly solving the problems with the present law would be through the implication of a term, statutorily implied into all types of residential mortgage, that the mortgagee could not obtain possession unless and until there had been some default on the mortgagor's part. This would also recognise, as the court's have occasionally attempted to do, that possession in the modern residential context should be viewed as a remedy for breach of contract, not as a right arising from the nature of the mortgage relationship. To take the contractual approach a stage further, possession should then only be granted when the mortgagee's security was in some way at risk, so that the mortgagor could be said to be in breach of a covenant to maintain the mortgagee's security.

In the light of the problems that have been identified, it is suggested that legislation is now required that addresses two major issues:-

(i). The need for mortgagees to obtain a court order for possession in all cases, whether default has been made or not.

This requirement would avoid the problems encountered in Western Bank Ltd v Schindler; but it immediately raises the question of who should have the right to possession. It is argued here that the Law Commission's proposal to remove the mortgagee's inherent right to possession should now be given statutory effect, even though such a move would run counter to traditional property lawyers' thinking. Possession in the residential mortgage context should no longer be regarded as a right but as a remedy that should only be exercised to the extent necessary to protect the mortgagee's security. Once it is recognised that possession should be viewed as a remedy, not a right, it logically follows that the mortgagor would be entitled to possession unless and until a court order terminating that right had been granted. One possible way of achieving the Law Commission's objective on possession would be to amend the Protection from Eviction Act, 1977, s. 2, so as to extend its terms to cover mortgagors of residential property. However, since the 1977 Act is in substance about protecting residential tenants and licensees, this would seem an inappropriate place to include a provision relating to mortgage repossessions, despite the argument here that residential tenants and mortgagors should receive comparable treatment by the law in this context. The best solution, it is suggested, is to replace section 36 of the Administration of Justice Act, 1970 so as to make it applicable to all situations where the mortgagee wants possession.

(ii) The extent of the Court's discretion

One question which needs to be addressed is whether the court should have the power to re-write the mortgage contract so as to extend the term of the mortgage. As mentioned earlier, the court has such jurisdiction in the context of "time orders" under the Consumer Credit Act, 1974 and is also able to alter mortgage interest rates in some cases, either under that Act or under its inherent jurisdiction. In Southern and District Finance plc v Barnes and Another [1996] 1 FCR 679,CA, involving a homeowner's loan, the Court of Appeal pointed out that the making of a "time order" under the Consumer Credit Act, 1974, s. 129, did enable the court to amend the length of the loan and/or to alter the rate of interest, if to do so would be just to both parties. Section 136 of the Act, it was pointed out, did give the court such powers.

Why should a court not be given similar powers in the context of mortgage repossession applications? Does it already have such a power under section 36 of the 1970 Act?

As pointed out earlier, Evans L.J in Norgan hinted at the possible use of section 36 to extend the mortgage term. However, it is suggested that the court has no power at present under section 36 to increase the contractual period of repayment as part of its discretion. The issue clearly turns on what the limits of a "reasonable period" are in the context of section 36. Could this include the power to re-write the mortgage contract so as to extend the period of repayment, and therefore go beyond Norgan? It is submitted that it does not.

Under the jurisdiction to postpone possession claimed by the courts prior to the 1970 Act, the court was necessarily interfering with the terms of the mortgage contract by permitting any postponement of possession at all. Such a jurisdiction has, however, since been rejected in Caunt, mentioned earlier, so that there is no power outside of section 36 of the 1970 Act or the Consumer Credit Act, 1974 to re-write the length of the mortgage term. The issue of the extent of the court's jurisdiction nevertheless does require clarification. If, as is suggested here, there is no existing jurisdiction to extend the period of the mortgage under section 36, should the court in future be given such a power?

The Council of Mortgage Lenders' Statement of Practice includes this as one of the four options available on default and stresses that possession will be sought only as a last resort. Secured lenders can therefore hardly quibble about the court being entrusted with a power to do the same thing, except on the basis that external imposition would be involved. However, as the court already has jurisdiction in some mortgage cases to alter interest rates and to extend the term, increasing this jurisdiction through a reform of the Administration of Justice Act, 1970 would hardly be a novelty or encroach excessively into contractual principles. It is therefore argued that the court should be given such jurisdiction, and that this could be particularly useful in the case of shorter term mortgages where extending the term could make a significant difference to the monthly instalments. Indeed, the Law Commission has recommended that the court should have a more general jurisdiction to set aside or vary the terms of a mortgage so as to achieve justice between the parties. A power to extend the mortgage term in repossession cases on similar principles would therefore seem appropriate.

One further point which needs to be addressed is "What should be the guiding principles upon which the court's discretion in possession proceedings should be based?"

It is suggested that the principle recognised by the Law Commission of withholding possession unless the latter is necessary to protect the mortgagee's security should be the guiding principle of reform in this area. In the residential tenancy area, the need to protect the landlord's economic interests appears to be the main guiding principle behind decisions in those cases where warrants are actually executed, and this is no doubt partly reflected in the difference in outcomes between mortgage and tenancy possession actions (see Nixon, Hunter, Smith and Wishart, 1996). Similar guiding principles to those adopted in tenancy cases ought equally to apply to mortgage possession actions.

Proposals of the Law Commission relating to possession

In its Working Paper, Land Mortgages, (Number 99, 1986, paragraph 3.69), the Law Commission critically examined the existing law relating to mortgages in detail. It recognised that:

This was followed up in its 1991 Report, "Transfer of Land - Land Mortgages", published at a time when mortgage repossessions had reached an all-time high of 75,540. In the Report, the Law Commission proposed that there should be a formal land mortgage under which the mortgagee should not have an inherent right to possession. Instead, the mortgagee would only be given the right to take possession in so far as this might be necessary to enable it to protect or enforce its security. In the case of a "protected mortgage" of residential property, this would entail the mortgagee first serving an enforcement notice and then obtaining a court order for possession. In order to obtain the possession order, the mortgagee would have to satisfy the court that it was reasonably necessary for possession to be given to enable the property to be sold. If possession was granted, the mortgagee would then only be entitled to remain in possession for so long as was reasonable to preserve the value of the property or enforce its security.

The proposals also make suggestions for modernising and rationalising the court's jurisdiction, including a power to re-open a mortgage with a view to doing justice between the parties.

These proposals, if enacted, would go a long way towards alleviating the current problems which have been outlined earlier. However, none of the proposals have yet reached the statute book. The most important principles contained in these proposals is that the residential mortgagee would always require a court order for possession and would only be given such an order if it were necessary to protect the mortgagee's security. These principles, it is contended, provide an essential basis for reform of the law in this area if the competing interests of the "use value" and the "commercial value," mentioned earlier, are to be more evenly balanced.

The decision in Ropaigealach, together with the current limitations of the court's jurisdiction in possession proceedings, have, it is suggested, made enactment of these proposals an important matter.

Other possible reforms.

With the changes in ISMI in October, 1995, restricting mortgage interest payments, home owners have been expected to take out private Mortgage Protection Insurance cover. Since approximately seven in ten mortgage borrowers do not qualify for income support, it would be expected that a large number of borrowers would have taken out such insurance. This, however, has not been the case; the take up rate for MPPI is low, at around 25%. Private insurance in any event often benefits most those who need it least, leaving those with histories of unemployment or illness falling into the ISMI gap.

One possible reform, mentioned earlier, would therefore be for lenders to cover all their borrowers with compulsory mortgage payment protection insurance (MPPI) in the hope that this would, in the long-term, reduce the problem of arrears and repossessions. This, however, does not solve the problem of mortgage repossessions in the immediate future, nor does it address the issue of cost to the borrower of MPPI contributions. One possibility would have been to convert MIRAS into compulsory MPPI contributions, but this could still have left some borrowers paying more for their mortgages, with those less able to pay running the risk of facing arrears and repossession without the benefit of protection from the court. MIRAS, however, is instead to be abolished as from April, 2000, which will undoubtedly leave a number of mortgagors struggling to meet the higher payments. This will render possession more likely in an increasing number of cases. Part of the solution to the plight of residential mortgagors, it is contended, must lie in an overhaul of the Administration of Justice Acts, 1970 and 1973, so as to bring the law on mortgage repossessions more in line with that relating to residential tenants. Any such reform must, as a priority, ensure that a court order for possession is always necessary. In addition, the court should be given wider powers than it possesses at present so as to enable the re-scheduling of payments over a longer term than Norgan allows, as is the case at present with a "time order" under the Consumer Credit Act, 1974.

Conclusion

The present law of mortgages relating to repossession certainly needs reform in order to give more adequate protection to residential mortgagors. The Government, however, are not making things easier for borrowers. Whilst, on the one hand, interest rates are the lowest they have been for 30 years, the Government, on the other hand, proposes to extend the restrictions on ISMI by increasing the present nine month unemployment rule to twelve months, so that those in financial trouble through unemployment will not be entitled to state help for the first year. This proposal, together with the abolition of MIRAS by the 1999 Budget, makes it even more imperative that mortgagors of residential property receive as much legal protection as is consistent with protecting the mortgagee's security. At present, they do not always receive that degree of protection and are less well protected in cases of possession than residential tenants. What is needed is reform that includes an overhaul of the Administration of Justice Acts, 1970 and 1973, so as to redress the balance that has now, it is suggested, swung too far in the mortgagee's favour. Such reform, it is contended, should address the two main problems that have previously been outlined:-

It is argued here that the reforms suggested earlier are needed in order to alleviate some of the problems of the past and to give fuller recognition to the modern social and economic context in which the law of mortgages has to operate. Such reforms are also necessary if owner-occupation, on which there appears to be no going back, is ultimately to be a form of tenure superior to that available in the rented residential sector.

Bibliography

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Harpum, C (1977) "A Mortgagee's Right to Possession and the Mischief Rule", 40 Modern Law Review 356.
Gray, K (1993) Elements of Land Law, second edition (London: Butterworths).
Law Commission Working Paper, (1996) Land Mortgages, Number 99.
Law Commission Report, (1991) Transfer of Land-Land Mortgages, Law Com. No. 204, HMSO.
Madge, N (1997) "Mortgage Possession Proceedings" New Law Journal 459.
Nixon, J, Hunter, C, Smith, Y, and Wishart, B (1996) Housing cases in county courts (The Policy Press, University of Bristol, In association
with the Joseph Rowntree Foundation).
The Payne Committee on the Enforcement of Judgment Debts (1969) Cmnd. 3909.
Pearce, R A (1979)"Keeping a Mortgagee out of Possession" Cambridge Law Journal 257.
Rudden, B (1961) "Mortgagee's Right to Possession" The Conveyancer and Property Lawyer 278.
Smith, R J (1979) "The Mortgagee's Right To Possession - The Modern Law", The Conveyancer and Property Lawyer 266.
Smith, R J (1998) "Property Law", second edition, (London: Longman Law Series).
Tromans, S (1984) "Mortgages: Possession By Default" The Conveyancer and Property Lawyer, 91.

(1) This tax relief is currently available from the government at 10% on the first £30,000 of a mortgage and is worth about £25 per month. It is, however, to be abolished as from April 2000.
(2) These restrictions were introduced in October, 1995. From then on, new owners on income support or job seeker's allowance receive no help with mortgage interest payments for the first 39 weeks, after which only "eligible" interest payments are received. The Government is considering extending the period of 39 weeks to 12 months.
(3) See Harman J. in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch. 317 at p320 and Rudden, 1961. An express term may be included giving the mortgagor the right to possession, and this is often done by Building Societies, at least until default has occurred. However, in the absence of an attornment clause, such a term is unlikely to be construed as giving rise to a tenancy and thus leaves the mortgagor vulnerable to the uncertainties of contractual licenses. Legislation protecting tenants has in any event been held not to apply to mortgages: See Peckham Mutual BS v Registe (1980) 42 P & CR 186. Implied terms in the mortgagor's favour are relatively rare: See Esso Petroleum Co. Ltd v Alstonbridge Properties Ltd. [1975] 1 WLR 1474 and Western Bank Ltd v Schindler [1977] Ch 1.
(4) The court's power under section 36 ceases after a warrant has been executed. See Cheltenham and Gloucester Building Society v Obi (1996) 28 H.L.R. 22, CA and Mortgage Agency Services v Ball (1998), as yet unreported.
(5) See Goulding J in Centrax Trustees Ltd v Ross [1979] 2 All ER 952 at 955.
(6) See Habib Bank Ltd v Tailor [1982] 3 All ER 561, CA, distinguishing the decision of Goulding J. in Centrax Trustees Ltd v Ross [1979] 2 All ER 952. See, however, Bank of Scotland v Grimes [1985] QB 1179; CA, distinguishing Habib Bank Ltd v Tailor.
(7) See Abbey National Mortgages v Bernard (1995) 71 P&CR p 57, CA.
(8) See First National Bank plc v Syed [1991] 2 All ER 250, CA, and Bristol & West plc v Dace (1998), not yet reported.
(9) See Royal Trust Co. of Canada v Markham [1975] 11 WLR 1416, CA.
(10) A point confirmed in Bristol and West Building Society v Ellis (1997) 29 HLR 282, CA.
(11) There is the danger that Norgan will be seen as an encouragement to borrowers to default, but the Court of Appeal did make it clear that any further failure to make payments would not be lightly tolerated.
(12) The 1974 Act in general applies to loans to individuals for less than £25,000: See S.I. 98/996. With some exceptions, the Act does not apply to mortgages of residential property. See, however, the extortionate credit bargain provisions contained in sections 137 and 138. Loans from Banks and Building Societies are in general excluded, apart from the extortionate credit bargain provisions.
(13) For arguments on which, see Smith, 1979, p 267. If the mortgagor is failing to maintain the property to the detriment of the mortgagee's security, then this is one situation where the mortgagee might justifiably want possession where no other default has occurred: See Western Bank Ltd v Schindler [1977] Ch 1.
(14) On the difficulties of which, see Western Bank Ltd v Schindler [1977] Ch 1, [1976] 3 WLR 341, and Harpum, 1977.
(15) On which see Harrow London Borough Council v Johnstone (1995) 93 LGR 435, CA, reversed by the House of Lords at [1997] 1 All ER 929, HL.

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