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Mortgage default: possession, relief and judicial discretion

Published online by Cambridge University Press:  02 January 2018

Michael Haley
Michael Haley*
Affiliation:
Keele University
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Extract

At common law, and whether or not there is default on the part of the debtor, the legal mortgagee enjoys the proprietary right to take actual possession of mortgaged property for any purpose: ‘… before the ink is dry on the mortgage.’ Although technically this is an absolute right, in practice possession will be sought only if the borrower is in breach of the mortgage agreement. The danger remains, however, that such an unqualified right may be arbitrarily used by a capricious mortgagee. Any minor and temporary default might be seized upon by the lender as justification for taking possession and, subsequently, selling the property. This would deprive the mortgagor of any opportunity to remedy the default. The lender could, thereby, render the borrower homeless simply to rid itself of the inconvenience of a problem debtor.

Type
Research Article
Information
Legal Studies , Volume 17 , Issue 3 , November 1997 , pp. 483 - 497
Copyright
Copyright © Society of Legal Scholars 1997

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References

1 Per Harman, J in Four-Maids Ltd v Dudley Marshall [1957] 1 Ch 317 at 320Google Scholar. Possession requires an interference with the mortgaged property so as to amount to control and management: Noyes v Pollock (1886) 32 Ch D 53. The right to possession can, however, be postponed or excluded expressly in the mortgage contract or, in limited circumstances, impliedly surrendered by the mortgagee: see Esso Petroleum Co Ltd v Alstonbridge Properties Ltd [1975] 3 All ER 358.

2 Although a mortgagee can obtain possession without a court order, to do so (unless the mortgagor consents or the premises are vacant) could constitute a criminal offence under s 6 of the Criminal Law Act 1977.

3 Davis v Johnson [1979] AC 264 at 274.

4 Section 36 of the Administration of Justice Act 1970, s 8 of the Administration of Justice Act 1973. Unlike relief against the forfeiture of leases, this statutory modification of the mortgagee's strict legal rights is limited only to residential mortgages and remains purely at the discretion of the court. Note that the wider discretion given by the Consumer Credit Act 1974 in relation to regulated agreements, due to a low financial ceiling (£15,000), does not affect many land mortgages.

5 ‘the court is bound to be even-handed in its approach to the claims of each side, matching a concern on the one hand that the mortgagor should be allowed a proper opportunity of making good his default, with a concern that a mortgagee who has contracted for a steady flow of interest punctually paid by instalments as they fall due should be compelled to wait for payment through an enforced capitalisation of interest’ (per Waite LJ in Cheltenham & Gloucester Building Society v Norgan [1996] 1 All ER 449 at 458).

6 That is ‘… exceeding the generous ambit within which reasonable disagreement is possible’ (per J, Wall in Cheltenharn & Gloucester Building Society v Grant (1994) 26 HLR 703Google Scholar).

7 See, for example, Nourse LJ, Ibid.

8 Working Paper No 99 (1986) ‘Land Mortgages’ at 3. The Commission later accepted that the existing system of enforcement ‘… displays the artificiality and complexity that characterise the rest of mortgage law, and this has affected the way it has been able to respond to the problems raised by the increase in the rate of default… it does not always provide adequate protection for the mortgagors’ (Report No 204 (1991) ‘Transfer of Land: Land Mortgages’ at 4).

9 See Marquis of Cholmonderly v Lord Clinton (1820) 2 J & W 1, 181. The exception was when the mortgagor sought to redeem immediately: Bovill v Endle [1896] 1 Ch 648.

10 Western Bunk Ltd v Schindler [1976] 2 All ER 393.

11 See White v City of London Brewery Co (1889) 42 Ch D 237. As the Law Commission concluded in its Working Paper, however, the existing duty to account is inadequate and open to abuse (op cit at 207). If rents and profits are sought, the better course for the mortgagee is to appoint a receiver who acts as the mortgagor's agent and removes liability from the lender.

12 See Hughes v White [1957] 1 WLR 713; Ex p Wickins [1898] 1 QB 543. The exercise of the power of sale, moreover, does require default on the part of the mortgagor: see Law of Property Act 1925, s 103.

13 See Rudden [1961] Conv 278.

14 ‘Mortgagees are interested in their money; they are not interested in turning people out of their homes unless they think it is the only way of getting their money’ (per Glidewell LJ Mortgage Corporation Ltd v Drinkwater (20 January 1994, unreported)). The law applies equally whether the mortgagee is a bank or an individual lender: Citibank Trust Ltd v Ayivor [1987] 3 All ER 241.

15 ‘… it complicated mortgage law by replacing one inappropriate legal structure with a different but equally inappropriate one’ (Law Commission Working Paper No 99 op cit at 13). See also Law Commission Report No 204 op cit at 8.

16 Working Paper No 99 Ibid at 24–26.

17 See the Report of the Committee on the Enforcement of Judgment Debts (1969) Cmnd 3909 at paras 1365–1368 (the Payne Committee).

18 Ibid at para 1368.

19 The Report was published on 14 March 1935.

20 ‘[I]n proper cases the wind was tempered to the shorn lamb’ (per Clauson LJ Redditch Benefit Building Society v Roberts [1940] Ch 415 at 420. See also the views of Master Ball (1961) 77 LQR 331 and Rudden op cit at 288.

21 See the Payne Report op cit at para 1369. As the Committee concluded at para 1372: ‘… whilst the reputable building societies had to suffer rather more trouble and delay… this objection was more than offset by the benefit to mortgagors and the public interest derived from the supervision which the Chancery Masters were able to give … and the consequent protection from the abuses practised by the less scrupulous mortgagees.’.

22 [1941] Ch 32. The ratio of the decision is, however, somewhat unclear: see Rudden op cit at 288, 289.

23 [1962] Ch 883.

24 Braithwaite v Winwood [1960] 1 WLR 1257; Robertson v Cilia [1956] 1 WLR 1257. See REM (1957) 73 LQR 17 at 18: ‘Any protection greater than that must be conferred by Parliament.’.

25 As the Payne Report op cit at para 1386(a) recognised, Chancery masters had: ‘… virtually been placed in a position of having to ask favours of the building societies instead of being free to exercise their own discretion.’.

26 Per Scarman, LJ in First Middlesborough Trading & Mortgage Co Ltd v Cunningham (1974) 28 P&CR 69Google Scholar.

27 See Denning MR in Quennell v Maltby [1979] 1 All ER 568; cf his earlier views as expressed in McPhail v Persons Unknown [1973] 3 All ER 393 at 399. This inherent power of court, in addition to the statutory jurisdiction, was recognised also by Ralph Gibson LJ in Douglas Systems Ltd v Hawkey (16 December 1987, unreported).

28 See Pearce [1979] CLJ 257. Its relevance (if any) would be localised to those cases which fall outside the statutory framework (for example, mortgages of commercial premises).

29 Op cit at para 1378.

30 Other views canvassed by the Payne Committee emanated from county court judges, the Law Society, the Bar and the TUC. While not of one voice, these bodies advocated an intermediate stance: Ibid at para. 1385.

31 We cannot avoid the conclusion that the final decision as to the enforcement of an order made by the court should rest with the court itself (Ibid at para 1386(b)).

32 Ibid at para 1388.

33 Cf Pennycuick V-C in Halifax Building Society v Clark [1973] 2 All ER 33 who (primarily due to his restricted interpretation of s 36) expressed the view that the provisions ‘… go a very little way beyond the principles laid down in the Birmingham case’ (at 38). The dwelling house does not have to be occupied: Shirlstar Container Transport Ltd v Re-Enforce Trading Co (24 October 1990, unreported); see also Smith [1979] Conv 266.

34 Royal Trust Co of Canada v Markham [1975] 3 All ER 433 at 438 (per Sir John Pennycuick). In Western Bank v Schindler however, Buckley LJ did not share this objection to an indefinite period as regards non-default cases.

35 See Bristol & West Building Society v Ellis (1996) 73 P&CR 158.

36 See Habib Bank Ltd v Tailor [1982] 3 All ER 561 at 564.

37 See Cheltenham & Gloucester Building Society v Johnson (1996) 73 P&CR 293; Cheltenhum & Gloucester Building Society v Grattige (1993) 25 HLR 454.

38 For example, it entails that if the breach is irremediable the mortgagor will not be able to claim relief: Britannia Building Society v Earl [1990] 2 All ER 469 (leasing in breach of mortgage term).

39 See above. Albeit obiter, Pennycuick V-C concluded that any other meaning would amount to ‘… an impossible construction of the section’ (at 38). The mortgagor in Clark was unable to pay arrears and agreed instalments. In First Middlesborough Trading, op cit, however, Scarman LJ did not share this interpretation of ‘any sums due’. Adopting a purposive approach, he commented: ‘Sense would be made of the section and its legislative purpose fulfilled, if those words were confined to any sums in respect of which the mortgagor is in default.’ As there the mortgagor was able to discharge the arrears and future payments within a reasonable period, Scarman LJ felt able to distinguish Clark. This containment of Clark, being one day before the 1973 Act came into force, was too late to be of any general assistance.

40 See Oliver LJ in Habib Bank v Tailor at 564; Baker (1973) LQR 117; Jackson [1973] 86 MLR 550.

41 As Scarman LJ recognised in First Middlesborough Trading, its effect was that ‘… the section wholly fails to meet the mischief in the law which it was intended to eradicate’. See also Tromans [1984] Conv 91 at 92–93.

42 Per Goulding J in Centax Trustees Ltd v Ross [1979] 2 All ER 952 at 955. See Tromans, Ibid.

43 Target Home Loans Ltd v Clothier [1994] 1 All ER 439. Cf Bank of Scotland v Grimes [1985] 2 All ER 254.

44 Royal Trust Co of Canada v Markham, above.

45 See Citibank Trust Ltd v Ayivor, above; Cheltenham & Gloucester Building Society v Grant, above.

46 Per Buckley LJ in Western Bank v Schindler, above at 398, 399. Goff LJ did not agree and felt that mortgagees would not seek possession as they would not, in non-default cases, be able to exercise the power of sale (Ibid at 410).

47 Ibid at 398. Scarman LJ agreed: ‘Parliament cannot have intended such a foolish result’ (Ibid at 403).

48 Ibid at 409. ‘It may be that the legislature overlooked the fact that the mortgagee's right is not dependent on default, or more probably I think, it was concerned only to give a defaulting mortgagor a chance to make good his default, leaving … the case where there has been no default to the protection of the equitable doctrine of accountability which has sufficed well in the past’ (at 410). See Harpum [1977] 40 MLR 356.

49 See Smith op cit at 276–278.

50 It is not enough that the mortgagor can merely start repayments within the reasonable period: Cheltenham & Gloucester Building Society v Grant, above.

51 Mortgage corporation Ltd v Drinkwater, above. The existence of a counterclaim (say, in negligence) against the mortgagee or a third party is not a relevant factor to be taken into account: Cheltenham & Gloucester Building Society v Turnbull (30 January 1996, unreported). There is no certainty of outcome and, moreover, any funds which may arise from the litigation are not sufficiently imminent: Citibank Trust Ltd v Ayivor supra. Cf Douglas Systems Ltd v Hawkey, above where it was suggested that, if the counterclaim was sufficiently strong in justice, a stay would be appropriate.

52 Nor is it strictly necessary that the judge give reasons for the grant or refusal of a suspension order: Cheltenham & Gloucester Building Society v Turnbull, Ibid.

53 Cheltenham & Gloucester Building Society v Grant, above.

54 Ibid. Nourse LJ expressed the view that it was, however, prudent for the mortgagor to lodge an affidavit prior to the hearing.

55 For example, in National Guardian Mortgage Corporation Ltd v Markham (14 August 1996, unreported), there were 14 hearings and, within 17 months, seven warrants for possession issued. Lloyd LJ in Cheltenham & Gloucester Building Society v Grattige, however, claimed that the statutory machinery ‘… seems to work satisfactorily and in practice is well understood’.

56 Above.

57 Above. A similar approach was also advocated in Western Bank v Schindler, above.

58 Above at 458. Evans LJ agreed and felt it impossible to categorise any period as being ‘reasonable’ without first taking into account the length of the original mortgage term: ‘I am unable myself to see why two years rather than one, or four rather than five, should be regarded as the correct starting point’ (at 461).

59 See Bristol & West Building Society v Ellis, above.

60 Above at 463.

61 Where the amount outstanding is in dispute, previous practice had been to order the mortgagor to pay the lower amount put forward and to grant a stay pending further inquiry: Shirlstar Container Transport Ltd v Re-Enforce Trading Co, above.

62 Above at 460.

63 (10 April 1996, unreported).

64 Royal Trust Co of Canada v Markham, above.

65 Mortgage Service Funding plc v Steele (above, note 63) where Ward LJ described the evidence relating to the prospect of sale as ‘utterly flimsy’.

66 For example, in Target Home Loan Ltd v Clothier, Nolan LJ concluded that estate agents ‘… would win by a distance any competition between members of different professions for optimism’ (at 445).

67 Above.

68 National & Provincial Building Society v Lloyd [1996] 1 All ER 630.

69 Above.

70 Ibid. See, for example, Target Home Loans Ltd v Clothier, above (three months).

71 Above at 638.

72 See Law Commission Report No 204 op cit at 38.