Contents
1 Introduction
1.1 Who should read this practice note?
All solicitors who act for lenders and borrowers in mortgage possession claims brought in relation to residential property.
1.2 What is the issue?
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:
- It does not apply to all the ways lenders seek to realise their security, so it does not protect all borrowers whose mortgage accounts are in arrears.
- Borrowers may not be aware of the relevant Court of Appeal decisions concerning what is a reasonable period for borrowers to pay mortgage arrears. This may leave many borrowers unnecessarily vulnerable to losing their homes.
This practice note gives advice on:
- what to look for if advising a borrower whose lender has started to seek payment of mortgage arrears, to satisfy yourself that the lender is complying with the protocol and
- how to advise a borrower whose lender has appointed a receiver.
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.
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2 The protocol
2.1 Aims of the protocol
Paragraph 2 of the protocol describes its aims as to encourage:
- lenders and borrowers to act fairly and reasonably with each other and resolve disputes over any matter concerning mortgage or home purchase plan arrears
- more pre-action contact between lenders and borrowers to seek agreement so that if court proceedings become necessary, the court's time and resources may be used efficiently.
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.
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2.2 Status of the protocol
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:
- caused proceedings to be commenced which would otherwise have been unnecessary or
- led to costs being incurred in proceedings which might not otherwise have been incurred.
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.
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2.3 Scope of the protocol
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.
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3 Requirements of the protocol
3.1 Information lenders must give borrowers
Paragraph 5 of the protocol obliges lenders to provide borrowers with the following information when the mortgage falls into arrears:
- the total amount of arrears the borrower owes
- the total outstanding amount owed under the mortgage
- whether interest or charges will be added and
- where appropriate, the required regulatory information sheet or the National Homelessness Advice Service booklet on mortgage 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 .
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3.2 Discussion between lenders and borrowers
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:
- the cause of the borrower's arrears
- the borrower's financial circumstances and
- the borrower's proposals for repayment of the arrears.
Paragraph 5.2 of the protocol states that these discussions will include consideration of whether:
- the causes of the arrears are temporary or long term
- the borrower may be able to pay the arrears in a reasonable time.
Paragraph 7.1 of the protocol states that any discussion between lenders and borrowers may include the possibility of:
- extending the term of the mortgage
- changing the type of mortgage
- deferring payment of interest due under the mortgage and
- capitalising the arrears.
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:
- demonstrate they are taking steps to market the property and
- provide the lender with:
- a copy of the particulars of sale
- the home information pack
- any details of purchase offers and
- details of the estate agent and conveyancer instructed.
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.
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3.2.1 Lenders considering borrowers' offers to pay the arrears
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.
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3.2.2 Requests for changes to payments
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.
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3.3 Referral to other agencies
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.
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4 When can the lender start a possession claim?
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.
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4.1 Postponing the start of a possession claim
Lenders should consider not starting possession claims in certain circumstances including:
- where borrowers can demonstrate to lenders that they have submitted a claim to an insurer under a mortgage payment protection policy and:
- have provided all the evidence required to process a claim
- have a reasonable prospect of eligibility of payment from the insurer
- are able to pay a mortgage instalment which is not covered by the insurance
- where borrowers can demonstrate that they have taken reasonable steps to market the property at an appropriate price in accordance with reasonable professional advice.
If a lender agrees to delay taking possession proceedings because a borrower is marketing the property, the borrower:
- must continue to take all reasonable steps actively to market the property and
- should provide the lender with:
- a copy of the particulars of sale
- the home information pack
- where relevant, details of purchase offers received within a reasonable period of time specified by the lender and
- details of the estate agent and the conveyancer instructed to deal with the sale and
- should authorise the estate agent and the conveyancer to communicate with the lender about the progress of the sale and the borrower's conduct during the process.
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.
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5 Enforcement of the protocol
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.
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5.1 Possible consequences of non-compliance
If proceedings are commenced and the court finds that a party has not complied with the protocol, the court may order both that:
- the party pays the full amount or part of the costs of the proceedings of the other party or parties
- the party pays those costs on an indemnity basis.
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).
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5.2 Costs
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:
- they are liable even if they successfully defend mortgage possession proceedings and
- they are liable even if the lender unreasonably incurs costs. For example, if the parties negotiate before proceedings are begun and the lender refuses to allow the borrower the remaining period of the mortgage to pay the arrears claimed when full disclosure of the borrower's finances has been made and the lender's security is amply safeguarded, thus satisfying the test in Cheltenham and Gloucester Building Society v Norgan .
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5.2.1 Court assessment
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:
- the lender pays the borrower's costs and
- the lender be forbidden from adding the costs it has incurred in the proceedings, including its liability to pay the borrower's costs, to the security
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5.2.2 Knowing the lender's costs and disputing them
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:
- allows the lender to add the costs of the litigation to the sum secured by the mortgage or
- requires the borrower to pay those costs.
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 .
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6 Contractual right to enforce security
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.
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7 The borrower's tenants
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.
7.1 Providing notice
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.
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7.2 The rights of the tenant against the lender
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.
7.2.1 Tenancies created before the mortgage is executed
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.
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7.2.2 Tenancies created after the mortgage is executed
Most residential mortgages exclude borrowers' rights to let the mortgaged property without the lender's permission.
- If a borrower lets the property to tenants without the lender's permission, the tenancy does not bind the lender and, as far as the lender is concerned, the occupier is a trespasser.
- If a borrower lets the property with the lenders permission, the tenancy binds the lender.
- If the tenancy is an assured tenancy, the lender will be able to recover possession of the mortgaged property by taking possession proceedings against the tenant relying on HA 1988 Schedule 2 Ground 2 (which is a mandatory ground for possession) or, if the tenancy is an assured shorthold tenancy, by seeking possession pursuant to HA 1988 section 21.
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8 Use of Part 36 offers
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 offer before proceedings are started, there will be no court action unless the borrower fails to comply with the agreement.
- If the lender accepts the offer after proceedings have begun, the claim for possession will be stayed and there will be no order for possession unless the stay is lifted because the borrower has failed to comply with the agreement.
- If the lender refuses the offer, and fails to obtain a more advantageous judgment, unless it is unjust to do so the court will order that the borrower is entitled to their costs, with interest on those costs, from the date on which the relevant period expired ? see CPR 36.14(2) .
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.
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9 The Mortgage Rescue Scheme
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 will run for two years in England. 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.
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9.1 Eligibility for assistance
9.1.1 England
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:
- a pregnant woman or a person with whom she resides or might reasonably be expected to reside
- a person with whom dependent children reside or might reasonably be expected to reside
- a person who is vulnerable as a result of old age, mental illness or a handicap or physical disability or other special reason, or with whom such a person resides or might reasonably be expected to reside.
Further criteria for the scheme include:
- The owners of the property agree to be considered for the scheme.
- There must be sufficient equity in the scheme to cover priority debts.
- Living in the property must be sustainable after mortgage rescue.
- The household must demonstrate a clear need to stay in the area.
- The property must be suitable for the needs of the household, for example not overcrowded.
- The household income must be less than £60,000 per annum.
- Applicants must not have a second home, including abroad.
- Owners must have sought debt counselling and advice, agreed to debt rescheduling, and discussed alternative options with mortgage lenders before admission to the scheme.
- Caps will be set on the value of the property at regional level and on the household's income level.
The scheme also assists those with second charges on their homes.
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9.1.2 Wales
In Wales, an applicant is eligible if:
- the lender has started a possession claim
- s/he will be made homeless if a possession order is made
- the property is the applicant's only or principal home
- there are no legal impediments to the applicant selling the property and the applicant is unable to sell it and buy a cheaper home in the locality.
Priority is given to applicants with families and those who live in specially adapted housing.
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9.2 How the scheme works
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:
- a shared equity option where the mortgage is reduced to a sustainable level
- a mortgage to rent scheme where the debt is cleared entirely.
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10 Homeowners Mortgage Support
From 21 April 2009, major high street lenders will be 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:
- have bought their home before 1 December 2008
- be an owner?occupier ? the scheme is not open to buy-to-let or investment properties
- have an outstanding mortgage of less than £400,000 and savings of less than £16,000
- have a regular household income
- be able to make a minimum contribution of 30 per cent of the total interest payment
- have been making regular payments for at least five months and talked through other options with their lender
- have sought independent money advice.
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11 Changes to income support rules
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:
- reduction of the waiting period before mortgage interest can be paid, from 39 to 13 weeks
- increase of the capital limit up to which mortgage interest can be paid to £200,000
- introduction of a two-year limit on payment of mortgage interest for Jobseeker's Allowance only
- modification of the State Pension Credit Regulations so that in some cases the increased capital limit can apply to pensioners
- a change to the standard interest rate payable for claims to 6.08 per cent.
These changes are temporary and will be reviewed when housing market conditions are more favourable.
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12 Regulation of the mortgage industry
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.
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12.1 Dealing with customers in arrears
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:
- the payments due
- the actual payment shortfall
- the charges incurred
- the debt.
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.
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12.2 The Mortgage Code ? mortgages sold before 31 October 2004
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.
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12.3 The Financial Ombudsman Service
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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13 More information
13.1 Professional conduct
The following sections of the Solicitors' Code of Conduct 2007 are relevant to this issue:
- Rule 1 Core Duties
- Rule 2 Client Relations
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13.2 Legal and other requirements
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13.3 Status of this practice note
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. Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them. For queries or comments on this practice note contact the Law Society's Practice Advice Service.
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13.4 Terminology in this practice note
Must ? a specific requirement in the Solicitors' Code of Conduct or legislation. You must comply, unless there specific exemptions or defences provided for in the code of conduct or relevant legislation. Should ? good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer. Courts will take into account compliance or non-compliance with a protocol when giving directions for the management of the case and making costs orders. May ? a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies. You ? a solicitor
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13.5 Further products and support
13.5.1 Practice Advice Service
The Law Society provides support to solicitors on a wide range of areas of legal practice. The service is staffed by solicitors and can be contacted on 0870 606 2522 from 09.00 to 17.00 on weekdays.
Vist the Practice Advice Service website.
13.5.2 Publications
Visit the Law Society Bookshop
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