6 October 2011
All solicitors who act for lenders and borrowers in mortgage possession claims brought in relation to residential property.
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This practice note provides advice to solicitors who are asked to advise borrowers whose mortgages are in arrears and are facing mortgage possession proceedings and the loss of their homes.
The Pre-action Protocol for Possession Claims based on Mortgage Arrears in Respect of Residential Properties came into force on 19 November 2008. The protocol aims to make proceedings for residential possession claims a last resort.
Two major issues arise for solicitors from the introduction of the protocol:
This practice note gives advice on:
Major lenders agreed with the government on 24 November 2008 that they would not start mortgage possession proceedings in relation to residential property unless the borrower had accrued three months' arrears. This should give parties sufficient time to comply with the protocol and should give borrowers an opportunity to seek advice before mortgage possession proceedings have been issued.
The following sections of the SRA Code are relevant to this issue:
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
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Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
2007 Code - Solicitors' Code of Conduct 2007
OFR - Outcomes-focused regulation
SRA - Solicitors Regulation Authority
outcome - outcome
IB - indicative behaviour
There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.
When thinking about how to meet the outcomes in chapter 2 in the Code, you must consider the principles which apply across the Handbook including the Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.
Paragraph 2 of the protocol describes its aims as to encourage:
Paragraph 2.2 of the protocol states that where it requires borrowers or lenders to communicate and provide information to each other, they should take reasonable steps to do so in a way that is clear, fair and not misleading.
Lenders bear the principal burden to provide information, since the greater obligations to provide information are imposed on them. Also, if lenders are aware that a borrower may have difficulties in reading or understanding the information provided, they should take reasonable steps to communicate that information in a way that the borrower can understand.
The protocol does not alter the substantive law, and it does not alter the parties' rights or obligations. It describes the behaviour the court will normally expect of the parties before the start of a mortgage possession claim.
The court may take into account whether a party to proceedings has complied with a protocol when it gives directions for the management of the case and when it makes orders for costs.
The court may impose a sanction on a party that fails to comply with a protocol where that failure either:
If a party does not comply with the protocol but there are no court proceedings, no sanction will arise.
Paragraph 9.1 of the protocol states that lenders and borrowers should be able to explain the actions they took to comply with the protocol, if requested by the court to do so.
The protocol does not apply to mortgage possession claims issued before 19 November 2008.
The protocol applies to arrears which arise on:
Paragraph 4.1(2) of the protocol defines a home purchase plan as a method of purchasing a property by way of a sale and lease arrangement that does not require the payment of interest.
The protocol only governs the behaviour of parties where the lender is enforcing its rights through possession proceedings. Lenders may use other means to enforce their security, such as appointing a receiver or exercising their contractual power of sale.
Where a potential claim includes a money claim and a claim for possession, the protocol applies to both.
Paragraph 5 of the protocol obliges lenders to provide borrowers with the following information when the mortgage falls into arrears:
It is sensible for lenders to give borrowers a copy of the protocol when they supply this information, since the protocol sets out how the court expects borrowers to behave once they have received this information. However, the protocol does not require lenders to do so .
After borrowers have been supplied with this information, lenders and borrowers should take reasonable steps to discuss with each other, or their representatives, the following matters:
Paragraph 5.2 of the protocol states that these discussions will include consideration of whether:
Paragraph 7.1 of the protocol states that any discussion between lenders and borrowers may include the possibility of:
The purpose of these discussions is for lenders and borrowers to agree a plan for the borrower to pay the mortgage arrears without it becoming necessary for lenders to take court proceedings.
To make these discussions meaningful, borrowers should inform lenders of their financial circumstances and put forward proposals for repayment of the arrears.
If they intend to sell the property, borrowers should:
Paragraph 5.6 of the protocol states that if a lender submits a proposal for payment, it should give the borrower a reasonable period of time in which to consider the proposal. The lender should provide in sufficient detail in the proposal to enable the borrower to understand the implications of the proposal.
Paragraph 5.5 of the protocol states that if a borrower submits a proposal for payment, the lender should respond promptly to it. If the lender does not agree to the proposal it should give reasons in writing to the borrower within 10 business days of the proposal.
The protocol does not state what a reasonable period for payment of mortgage arrears is. Some lenders might not view as reasonable a request by a borrower to spread the payment of arrears over a long period of time, as lenders generally require borrowers to pay their arrears over a short period.
Although it is in the borrower's interests to discharge the mortgage arrears as soon as possible to minimise the amount of interest the lender can charge on the arrears, borrowers will want to offer repayment plans which they can afford to comply with, and should not be pressurised by lenders into agreeing repayment plan they cannot afford.
To determine whether a borrower's offer to pay arrears is reasonable and would be acceptable to the court, you should refer to the guidance set out in:
In Cheltenham and Gloucester Building Society v Norgan, the court held that the starting point for assessing what was a reasonable period in which a borrower should pay the mortgage arrears was the remainder of the term of the mortgage. In Southern and District Finance v Barnes , the court held that the total indebtedness secured by the charge on the property could be subject to an order to allow more time to pay a loan agreement.
Paragraph 5.4 of the protocol states that lenders should consider reasonable requests from borrowers to change the date of regular payment or the method by which the payment is made. If lenders refuse such requests, they should give borrowers written explanations of their reasons for the refusal within a reasonable period of time.
Paragraph 5.3 of the protocol states that lenders should advise borrowers to contact their local authority's housing department and, where necessary, refer borrowers to agencies that provide debt advice.
Paragraph 5.7 of the protocol states what a lenders should do if borrowers fails to comply with an agreement. Lenders should warn s borrowers by giving them 15 business days notice in writing of their intention to start a possession claim unless the borrower remedies the breach.
Lenders can start possession claims if it has not been possible to reach agreement with borrowers about the payment of mortgage arrears. However, paragraph 7.1 of the protocol states that lenders should not normally start possession claims while the parties are still discussing ways of addressing the arrears.
Lenders should consider not starting possession claims in certain circumstances including:
If a lender agrees to delay taking possession proceedings because a borrower is marketing the property, the borrower:
Paragraph 6.4 of the protocol states that where lenders decide not to delay taking possession proceedings they should inform borrowers of the reasons for this decision at least five business days before starting proceedings.
The Civil Procedure Rules (CPR) enable the court to take into account a party's compliance or non-compliance with a pre-action protocol when:
CPR 44.3(5)(a) states that such conduct includes conduct before as well as during the proceedings.
Courts expect all parties to have complied with a relevant pre-action protocol and may ask the parties to explain what steps they took to comply with the protocol before the claim was started. If a party has failed to comply with the protocol, the court may ask that party to provide an explanation - see CPR Practice Direction - Pre-Action Conduct paragraph 4.2. The court will look at the effect of non-compliance on the other party when deciding to impose sanctions. This has implications for both lenders and borrowers.
If proceedings are commenced and the court finds that a party has not complied with the protocol, the court may order both that:
See CPR Practice Direction - Pre-action Conduct paragraph 4.6.
The court can vary the level of interest payable on specified sums, depending on the compliance of either the borrower or the lender.
If a borrower is found to have failed to comply with the protocol and an order is made for him/her to pay the lender a specified sum, such as the mortgage arrears, the court may award the lender interest on that sum for a period specified by the court at a higher rate than that which would otherwise have been awarded. This will not be more than 10 per cent above the base rate - PD Pre-Action Conduct paragraph 4.6(5) .
If a lender is found to have failed to comply with the protocol and an order is made for the borrower to pay it a specified sum, such as mortgage arrears, the court may make an order depriving the lender of interest on that sum and for such a period as the court may specify and/or awarding the lender interest at a lower rate than that at which interest would otherwise have been awarded (PD Pre-Action Conduct paragraph 4.6(4).
Lenders do not normally seek orders for costs against borrowers in mortgage possession claims. This is because most mortgage deeds contain a clause stating that the borrower will indemnify the lender against all costs incurred in enforcing the security. It is advantageous for lenders to rely on this contractual provision because courts usually award costs on the standard basis, either by adding them to the security or making no order for costs. The standard provision that there should be a summary assessment of costs after a hearing lasting less than a day does not apply to mortgage possession cases, according to PD 44, paragraph 13.3.
Contractual liability to pay lenders' costs affects borrowers in two ways:
A court may disallow all or part of the costs payable under a contract such as a mortgage if it is satisfied that those costs were unreasonably incurred or are unreasonable in amount (PD 48 paragraph 50.1). However, the presumption is that such costs will be allowed, and court orders should normally reflect the contractual right to costs under PD 48 paragraph 50.3(2).
The court's discretion when considering costs arises from PD 48 paragraph 50.3(1). CPR 44.5 states that in deciding the amount of costs, courts must consider the parties' conduct and the skill, effort, specialised knowledge and responsibility involved.
If a lender has not complied with the protocol or unreasonably refused a borrower's offer, you should ask the court to order that:
Neither borrowers nor the court usually knows the amount of costs a lender has incurred and will add to the security, because the normal summary assessment of costs does not take place after a mortgage possession hearing.
Borrowers can apply to the court for a direction that an account of a lender's costs be taken, if the mortgage deed either:
The borrower may then challenge items incurred by the lender under PD 48 paragraph 50.4 on the basis that they have been unreasonably incurred or are unreasonable in amount. The court may then order that the disputed costs are assessed under CPR 48.3.
Instead of seeking a court order for possession, lenders may exercise a contractual right to enforce their security by selling the property. This may appeal to lenders because the mortgage arrears protocol will not apply and the borrower will forfeit their equity of redemption.
Lenders can formally demand payment of the sum due under the mortgage. If a borrower fails to comply with the demand, the lender can appoint receivers and/or sell the property as an alternative to seeking a court order for possession. For more information, see Ropaigealach v Barclays Bank [1999] 4 All ER 235.
The court has no discretion under the Administration of Justice Acts 1970 and 1973 to protect borrowers in a possession claim that has been brought by the new owner of the property. In Horsham Properties Group v Clark and Beech [2008] EWHC 2327 (Ch), the lender enforced its security by exercising its contractual right to appoint a receiver who sold the property using the lender's contractual right to sell. In these circumstances, a borrower will lose their equity of redemption and if they remain in occupation will become a trespasser.
You should note that there is a clause in almost every mortgage allowing lenders to demand that a mortgage is repaid at short notice. However the Council of Mortgage Lenders states that this is only meant to cover exceptional circumstances. It is unclear whether exceptional circumstances include the financial circumstances of a lender in a recession, regardless of whether the borrower is in arrears or not.
The protocol has not changed the law relating to mortgages. The position of any tenants of borrowers who are defending mortgage possession claims is therefore unchanged.
As a matter of procedure, lenders are required by CPR 55.10(2) to send a notice to the property, addressed to ?the occupiers', within five days of being notified by the court of the hearing date. This is to notify those occupiers (who may be members of the borrower's family, or tenants in the case of a buy-to-let mortgage) to be notified of the mortgage possession claim and enable them to take legal advice or find somewhere else to live.
The court will normally include the date of the hearing when it issues the claim. CPR 55.5(3) states that the hearing date will be not less than 28 days from the date the claim form is issued so the occupiers should have at least three weeks notice of the hearing.
The rights of a borrower's tenant against the lender depend on whether the tenancy started before or after the lender and borrower entered into the mortgage.
Generally speaking, if the tenancy started before the mortgage, the lender's rights are subject to the tenancy. Lenders enquire about the occupiers of the property before the loan is advanced and the security is given.
In the case of registered land, the occupier's rights do not override those of the lender if their occupation has not been disclosed. In order to overcome this difficulty, lenders normally require both borrowers and any adults who are or will be living in the mortgaged property to postpone their rights of occupation behind the lenders' rights.
Most residential mortgages exclude borrowers' rights to let the mortgaged property without the lender's permission.
When acting for a borrower you may use the procedure set out in CPR Part 36 to persuade lenders to agree payment terms without obtaining a court order.
Under CPR 36.3(2), a Part 36 offer can be made at any time, including before the commencement of proceedings. CPR 44.3(4)(c) states that a court must have regard to all the circumstances, including a borrower's offer to settle, whether or not that offer complies with Part 36, when deciding what costs order to make.
The advantages of making a Part 36 offer are as follows:
If the lender accepts the Part 36 offer within the relevant period, they will be entitled to the costs of enforcing the mortgage, but they are entitled to this as a matter of contract anyway.
The Mortgage Rescue Scheme was introduced in England on 16 January 2009 to help homeowners in financial difficulty and at risk of repossession and threatened with homelessness. The scheme enables social landlords to acquire the homes of eligible people, and rent them back to them. The scheme ran for two years. A similar scheme has been in place in Wales since June of 2008.
Householders at risk should apply for assistance to their local housing authority. The authority will assess their eligibility for the scheme.
In England, eligibility is determined in the same way as for homelessness assistance, using the criteria for homelessness set out in the Housing Act 1996 and the Homelessness (Priority Need for Accommodation) (England) Order 2002. These stipulate that the household must include at least one person in priority need, as follows:
Further criteria for the scheme include:
The scheme also assists those with second charges on their homes.
In Wales, an applicant is eligible if:
Priority is given to applicants with families and those who live in specially adapted housing.
Once a household's eligibility is determined by the local authority, the lender will be alerted and money advisers engaged. The money adviser will assess the household's realistic affordable housing costs and draw up a debt management plan or other financial solution.
Following this, a registered social landlord (RSL) will be engaged. They will assess the property to ensure it is structurally sound. The RSL will then decide the suitability of either:
From 21 April 2009, major high street lenders have been able to offer Homeowners Mortgage Support (HMS) to eligible borrowers who suffer a temporary loss of income. The scheme enables borrowers to cut their mortgage interest payments for up to two years. Lenders offering HMS have the security of a government guarantee if the borrower defaults.
To qualify for HMS the borrower must:
Additional assistance is now available to those out of work as a result of temporary amendments to the rules for claiming assistance with mortgage payments through income support.
The Social Security (Housing Costs Special Arrangements) (Amendment and Modification) Regulations 2008 amend and modify the:
The following changes were introduced:
These changes are temporary and will be reviewed when housing market conditions are more favourable.
The Financial Services Authority (FSA) is the statutory regulator of the mortgage industry. The FSA's Handbook contains the Mortgages: Conduct of Business (MCOB) rules, which govern the way that residential mortgages are sold and administered in the UK. The MCOB replaced the Mortgage Code on 31 October 2004.
Section 13.5 of the MCOB outlines the way in which mortgage lenders should deal with a customer in arrears. Where a borrower is in arrears, the lender must provide the borrower with a regular written statement at least once a quarter, containing:
Lenders must not put pressure on borrowers who are in arrears through excessive telephone calls or correspondence, or by contact at an unreasonable hour. Putting pressure on borrowers includes sending them letters that resemble a court summons or other official document.
The Mortgage Code applies to mortgages sold prior to 31 October 2004. It states that lenders should cooperate and develop a plan with borrowers to deal with financial difficulties and that possession of a property will only be sought as a last resort.
The Financial Ombudsman Service deals with consumer complaints relating to the sale of mortgages under the provisions set out in MCOB. It also deals with consumer complaints relating to mortgages sold prior to the introduction of MCOB, under the Mortgage Code.
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