Contents
1. Introduction
1.1 Who should read this practice note?
All solicitors involved in proceedings for residential possession claims.
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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 Civil Justice Council has issued the Pre-action Protocol for Possession Claims Based on Mortgage Arrears in Respect of Residential Properties. It came into force on 17 November 2008. It aims to make proceedings for residential possession claims a last resort.
The protocol does not provide coverage to all borrowers against whom lenders are seeking to realise their security. It does not remind lenders or inform borrowers of Court of Appeal decisions over what is a reasonable period for borrowers to pay mortgage arrears. This leaves many borrowers unnecessarily vulnerable to losing their homes.
Also, this 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. As a result, the protocol does not provide sufficient safeguards to protect all borrowers whose mortgage accounts are in arrears.
This practice note gives advice on:
- what you should look for when a residential possession claim has already been submitted by a lender, to know if the lender is complying with the protocol
- how you should advise your clients when a lender has already appointed a receiver and bypassed the bringing of possession proceedings against the borrower
Major lenders agreed with the government in late 2008 to allow three or six months before beginning possession proceedings against homeowners who have fallen into arrears with mortgage payments. This gives parties time to comply with the protocol and for borrowers to seek advice from a practitioner at the first hint of financial trouble.
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2. The protocol
2.1 Purpose of the protocol
The purpose of the protocol is to encourage parties to resolve disputes over arrears payments without resorting to a claim for repossession. It aims to encourage parties to communicate with each other and come to an agreement on a way forward without resorting to court proceedings.
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2.2 Status of the protocol
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.
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2.3 Scope of the protocol
The protocol applies to all of the following:
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3. Protocol requirements for lenders
3.1 Provision of information
The protocol is designed to encourage borrowers and lenders to communicate with each other at an early stage when a borrower falls into arrears.
It requires the lender to provide the borrower with information about all of the following:
- the total amount of arrears the borrower owes
- the total outstanding amount owed under the mortgage
- whether interest or charges will be added.
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3.2 Consideration of changes to terms
Following this exchange of information, parties should take reasonable steps to discuss with each other, or their representative, all of the following:
- the cause of the borrower's arrears
- the borrower's financial circumstances
- the borrower's proposals for repayment of the arrears
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3.2.1 Requests for change in length of mortgage
The protocol states that:
- the borrower should consider changing the length of the term of the mortgage and the date of regular payment
- the lender should consider a reasonable request from the borrower to change the date of regular payment and must respond promptly to any such proposal
The protocol does not outline what is reasonable in these circumstances. 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.
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 the 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 change in payments
The protocol states that the lender should consider a reasonable request from a borrower to change the date of regular payment or the method by which the payment is made. However, lenders do not have to explain why they reject borrowers' offers of payment. One reason why lenders may refuse borrowers' offers of payment is that the instalments are too low and it will take too long before the mortgage arrears are discharged. Lenders do not have to state what they consider to be a reasonable period for the borrower to pay the arrears when they reject their offers.
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3.3 Referral to other agencies
The protocol states that lenders should contact their Local Authority's housing department and refer borrowers to agencies that provide debt advice.
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3.4 Postponing the start of a possession claim
Lenders should consider not starting a possession claim in certain circumstances such as:
- where borrowers can demonstrate to lenders that they have submitted a claim to an insurer under a mortgage payment protection policy
- where borrowers can demonstrate that they have taken reasonable steps to market the property at an appropriate price in accordance with reasonable professional advice.
Lenders should not start a possession claim while the parties are still discussing ways of addressing the arrears.
If the borrower fails to comply with an agreement, the lender should give the borrower 15 business days notice in writing of its intention to start a possession claim.
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4. Protocol requirements for borrowers
The borrower should:
- communicate to the lender their financial circumstances and proposals for repayment of the arrears
- demonstrate that they are taking steps to market the property
- 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.
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5. Enforcement of the protocol
The Civil Procedure Rules (CPR) enable the court to take into account compliance or non-compliance when:
Such conduct includes conduct before as well as during the proceedings, under CPR 44.3(5)(a).
The court will expect all parties to be able to explain the actions that they have taken to comply if requested to do so (see CPR Practice Direction - Protocols paragraph 2.2). The court will look at the effect of non-compliance on the other party when deciding to impose sanctions. This has implications for both the lender and the borrower.
If proceedings are commenced and the court finds that a party has not complied with the protocol, the court may order that the party pays the full or part costs of the proceedings of the other party or parties and pay those costs on an indemnity basis (see CPR Practice Direction - Protocols paragraph 2.3).
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5.1 Possible consequences of non-compliance
The court can vary the level of interest payable on specified sums, depending on the compliance of either the borrower or the lender.
If the borrower is found to have not complied with the protocol and an order is made for the payment to the lender of a sum such as the mortgage arrears, interest may be awarded at a higher rate, but not more than 10 per cent above the base rate. This is under CPR Practice Direction paragraph 2.3.
If the lender is found to have not complied with the protocol and an order is made for the payment to them of a sum such as mortgage interest, interest may be set at a lower rate, depriving them of interest. This is under CPR Practice Direction paragraph 2.3.3.
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5.2 Costs
Lenders do not normally seek an order 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 Part 44, paragraph 13.3.
Contractual liability to pay the lender's costs affects borrowers in two ways:
- They are liable even if they successfully defend mortgage possession proceedings.
- 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. This is stated in 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, the courts must consider the parties' conduct and the skill, effort, specialised knowledge and responsibility involved.
If the lender has not complied with the protocol or unreasonably refused a borrower's offer, you should ask the court to order either:
- that the lender pays the borrower's costs
- that the lender be forbidden from adding the costs it has incurred in the proceedings to the security
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5.2.2 Knowing the lender's costs and disputing them
Neither the borrower nor the court usually knows the amount of costs a lender has incurred and will be added to the security, because the normal summary assessment of costs does not take place after a mortgage possession hearing.
The borrower can apply to the court for a direction that an account of the 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
- 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, a lender may exercise a contractual right to enforce its security by selling the property. This may appeal to lenders because the mortgage arrears protocol does not apply to exercising such a right, and the borrower may forfeit their equity.
The lender would formally demand payment of the sum due under the mortgage. If the borrower fails to comply, 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 the borrower 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 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 state that this is only meant to cover exceptional circumstances. It is unclear whether exceptional circumstances may include the financial circumstances of the lender in a recession, regardless of whether the borrower is in arrears or not.
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7. Use of Part 36 offers
When acting for a borrower you may use the procedure set out in CPR Part 36 to persuade lenders into agreeing payment terms without obtaining a court order.
Under CPR 36.3(2), a Part 36 offer can be made either:
- at any time before commencement of proceedings
- within 21 days of a hearing
Under CPR 44.3(4)(c) a court can take a borrower's offer to settle into account when deciding what costs order to make, whether or not that offer complies with Part 36.
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 then fails to obtain a more advantageous judgment, the court will order that the borrower is entitled to their costs, unless it is unjust to do so. It will order costs with interest 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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8. 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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8.1 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 a borrower in arrears through excessive telephone calls or correspondence, or by contact at an unreasonable hour. Putting pressure on a borrower includes sending them letters that resemble a court summons or other official document.
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8.2 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 co-operate 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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8.3 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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9. More information
9.1 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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9.2 Legal and other requirements
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9.3 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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9.4 Status of 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
Lender - the lender under a mortgage deed
Borrower - the borrower under a mortgage deed
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9.5 Further products and support
9.5.1 Practice Advice Service
The Law Society provides support for solicitors on a wide range of areas of practice. The Practice Advice Service can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
Visit the Practice Advice Service website.
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9.5.2 Publications
Burn, S. (Ed.) (2007), Civil Litigation Handbook, 2nd edition, Law Society Publishing, London .
Madge, N., McConnell, D., Gallagher, J. & Luba, J., Defending Possession Proceedings ( 6th Ed.), LAG Books, London , 2006.
Sime, S. & French, D. (2008), Blackstone's Civil Practice 2009, 2009 Edition, Oxford University Press.
Visit the Law Society Bookshop.
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