The Ropaigealach Decision and Absolute Right of the Mortgagee - Essay Example

The Ropaigealach decision..... intervention of Parliament to protect mortgagors of dwelling houses.” The Ropaigealach decision1 marks the departure from the traditional interpretation of taking possession of the property from a defaulting mortgagor. The judgement states that the protection available to a mortgagor under s 36 (1) of The Administration of Justice Act 19702 can be invoked only when a mortgagee seeks an order of possession from the court. If the mortgagee manages to secure possession of the property without court’s intervention, then court gets no opportunity to exercise its discretion under s 36, and mortgagor cannot question the mortgagee’s action.3 S 36 (2) of the said Act states that a court may adjourn the proceedings, or suspend execution of judgement, postpone delivery of possession for a period it thinks fit, if the mortgagor approaches it as a result of mortgagees’ proceeding to take possession of the mortgaged property. The court can do so if it is convinced that the mortgagor will pay the sum due within a reasonable time.4 Absolute Right of the mortgagee The reality is, or literally speaking, a mortgagee has the right take possession of the mortgaged property even the next day of mortgage unless the agreement stipulates otherwise as held in Four Maids Ltd v Dudley Marshall (Properties) Ltd. 5. The decision states that mortgagee enjoys an absolute right to repossess a mortgaged property as conferred s.95 (4) of the Law of Property Act 1925,6 unless the mortgagee has contracted himself out of repossession. This decision was applied in Owen v Cornell [1967] 7where in a question arose whether the principal mortgagee could take possession when he had already assigned the debt to Sub-mortgagee. The court held that because the principal mortgagee had reserved to himself the right of reversion by one day, he could exercise his right under s 95(4) of Law of Property Act 1925. Position would have been different if he had not reserved the right under the sub-mortgage agreement and the sub-mortgagee would have prevailed. Sub-mortgagee’s right Thus, in Credit & Mercantile Plc v Marks8, sub-mortgagee was held to have the right of possession as it was involved a registered land wherein the principal mortgagee had relinquished his right of repossession on assignment of debt to the sub-mortgagee. The court observed that since the principal mortgagee had transferred his right to collect his debt, he had no right to complain of default. Thus, the mortgagor need not have defaulted in mortgage repayments as commented by Clarke LJ (at 253) of Ropaigealach decision for the mortgagee to take to take possession of the property the mortgagor lives in although it would be an offense under Criminal Law Act 1977, s 6(1) for violent take over or take over under threat asking the mortgagor to leave the premises mortgaged. If the property is not occupied at the time taking possession, mortgagee does not commit this offense. It is precisely for this reason that Ropaigealach decision has been so decided as the couple who had defaulted in mortgage repayments had not replied to the mortgagee bank’s several letters informing them of proposed takeover of the property and they had been away when the property was taken over, The couple’s contention of statutory protection under the said s 36 against possession without a court order was not accepted by the court. 9 It therefore follows that in the event of court not granting order to mortgagee to take possession, he can still take possession of the property by self-help without contravening the provisions of the Criminal Law Act 1977.10,11. Human Rights In a recent case Horsham Properties Group Ltd v Clark and Beech12, the mortgagors fell in arrears of mortgage repayments for their mortgaged residential properties in 2004 and no payment was forthcoming since October 2005 with the result the mortgagee sold the property in September 2006 at an auction while the mortgagors were still in occupation. The new buyer at auction sought to evict the mortgagees who had by then moved into an investment property in violations of “express terms of buy-to-let mortgage contract.” One of the mortgagors Mrs Beech claimed violations of her rights under Human Rights Act 1998 alleging that she was unlawfully deprived of her possession that infringed article 1 of the First Protocol. It was found that mortgagee had the right of sale without the prior permission of the Court under section 101 of Law of Property Act 1925 and also by the terms of the mortgage deed. The court rejected mortgagor’s contention stating that their human rights had not been violated for the reason of the qualified nature their rights over a mortgaged property and therefore they were evicted as trespassers in 2008. Mortgagees’ possessory rights Possessory rights as remedies available to a mortgagee/lender are 1) Possession. 2) Power of sale. 3) Appointment of Receivers on behalf of the mortgagor 4) Foreclosure. 5) Action on the mortgagor’s personal covenant to repay. Possession The lender/mortgagee can take possession of the property due to default in payment by the mortgagor. Possession shall mean active ownership without actually being in physical possession. The mortgagee has right of possession from the moment mortgaged agreement is made whether there is default or not. Court order is not required even if the property is a residential one and court has granted some relief to mortgagor. But usually the terms of the mortgage deed would contain the provision that right of possession will be available only on default in payments. The mortgagee is expected to act in good faith only for the purpose of enforcement of security and not for any other purpose. If the mortgagee has secured possession, he is accountable to the mortgagor for all monies collected and he should have collected them with due diligence i.e what he ought to have collected. As this duty of accountability is onerous, a mortgagee will usually appoint a receiver if the property is to be managed. If the possession is for immediate sale, then the burden is not as much to the mortgagee. As already discussed, mortgagee can take possession of residential property by a court order after due application in which case the mortgagor should hand over the property within 28 days of the court order. Alternatively, the mortgagee can take possession in a peaceful manner without a court order by having the mortgagor hand over the keys without any force or threat of violence by the mortgagee.13 Even before the Ropaigealach decision, Clarke had pointed out it was anomalous to consider that a mortgagee had the right to take possession in a peaceful manner by way of self-help even after court’s refusal to grant order for possession. The so called inherent right of the mortgagee can however be questioned by the mortgagor under the contempt of court proceedings 14 Terming the dual right of the mortgagee construed under section 36 as “a curious anomaly” Clarke LJ, states that the wordings of section 36 cannot be taken to mean that its purpose was to protect the mortgagors of residential property. Henry LJ has insisted on reforms to remove the “curious anomaly” pointed out by Clarke LJ so as to put residential mortgage possessions and residential tenancies on par. Henry LJ emphasizes that mortgagees must be required to seek court’s order prior to taking possession without self help as otherwise protection under section 36 will be meaningless. It has been observed by Chadwick LJ that Parliament in constructing section 36 only thought of addressing the problem that arose from the decision in Birmingham Citizens Permanent Building Society v Caunt of 1962. 15 Earlier the situation was governed by the principle laid down in this decision i.e court could adjourn the possession proceedings for a short period to enable mortgagor to effect his/her mortgage redemption16 This decision relates to pre 1970 Act of Criminal Justice which enables statute intervention for the first time. It must have never occurred to Parliament’s mind that mortgagee should only be entitled to the common law right of possession through the assistance of court alone. Clements adds as early as in 1999 that law relating to repossession needs reform so as to give protection to residential mortgagors17. Kevin J et al however comment that the paramount right of mortgagee to repossess is only available on mortgagor’s default as it is quite unattractive for the mortgagee to take possession under any other circumstances. Even that right under the only circumstance of default cannot be sustained for long. It is argued that the mortgagee’s right of possession of residential properties violates the mortgagor’s “right to respect for his private and family life and his home “conferred by Art 8 of ECHR.18 Besides, The Financial Services and Markets Act 2000 19makes it a duty of the mortgagee to issue statement of policy and procedures for repossession rendering it as the last resort in cases of default. Absence of such a policy statement will be assumed as not having dealt with the mortgagor fairly. It must be remembered that right to possess by the mortgagee is merely technical since large institutional lenders have no attraction for physically occupying the mortgaged properties. The only expectation is that mortgagors “should occupy the premises personally” and faithfully discharge their financial obligations to the mortgage lenders. A mortgagee is under strict control of equity as he cannot just keep the property empty but ensure that it is let out at the prevailing fair rent in the market as held in Palk v Mortgage Services Funding Plc (1993) per Nicholls V.C. 20 The mortgagee also becomes responsible for preservation of the physical state of the property and will be held liable for wilful default.21 Other remedies as stated above under legal mortgages can be resorted to by the mortgagee directly against the mortgagor or the property mortgaged either concurrently or successively and it is not an abuse of process when the mortgagee is confronted with a defence under one remedy and he can have recourse to different remedy as held in Alliance and Leicester plc v Slayford 22 This case concerned the inability of the lender to enforce mortgage as the mortgagor’s wife had equitable interest. Therefore the mortgagee/lender “could sue on personal covenant and make the borrower bankrupt”23 Action on the mortgagor’s personal covenant to repay: Before resorting to repossession, mortgagee is entitled by contract to recover mortgage loan and interest on the mortgagor’s personal covenant. Mortgagor’s personal liability is not extinguished by the surrender of the mortgaged property voluntarily to the mortgagee. Mortgagee can sue mortgagor for any shortfall after recovering through the remedy of power of sale as held in Bristol and West Plc v Bartlett (2003) 24, 25. It should be noted that the recovery of arrears of interest is barred by limitation of six years after becoming due. And for the principal, the period of limitation is 12 years from the date the right to receive the money accrued. Appointment of a receiver As already stated elsewhere, the mortgagee has the statutory power to have a receiver appointed to handle income from the mortgaged property. This will be useful if the mortgagee does not wish to sell the mortgaged property for the time being and the receiver is not liable for wilful default unlike mortgagee who can be sued for his strict liability in case of his entering into possession himself as held in Refuge Assurance Co ltd v Peralberg (1938)26 Power of Sale: The mortgagee’s right of possession is for the purpose of selling the property in vacant possession and adjusting the proceeds against dues under mortgage.27 The power of sale is available under express of terms of contract or implied by the Act under s 101 of the Law of Property Act.28 Foreclosure: It can be invoked only by an order of the court which in effect would transfer full ownership to the mortgagee although foreclosure is very rarely exercised. The mortgagor’s right to redeem is extinguished by an order of foreclosure. It can be resorted to when payment becomes due and late payments previously made and accepted do not affect the right of foreclosure. But the court can reopen the foreclosure order which means there is no finality of a court order 29 In order to avoid situations such as in the case of Horsham Properties Group Ltd Administration of Justice Act 1970 was sought to be amended along with related provisions of Housing Act 1989 in the draft Banking Bill 2008 but they were withdrawn presumably due to lobbying of Council of Mortgage Lenders. Soon after The Home Repossession (Protection) Bill as a Private Members Bill only to be withdrawn later. Ministry of Justice is planning to legislate “The Secured Lending Reform Bill 2011” which proposes to insert a new section restraining a receiver from exercising his power of sale or right of peaceable entry without an of the court authorizing possession. It is being commented that the passage of the bill existing substantive and established practice will undergo considerable changes.30 Conclusion From the foregoing, it would be clear that rights of the mortgagor are in no way undermined by the mortgagee’s predominant and inherent right of possession that could be invoked only in the event of default by the mortgagor. Martin Dixon’s observation that the possessory rights of the mortgagee is high-handed and the need of Parliament’s intervention to amend the Administration of Justice Act in so far it affects the rights of mortgagor that would interfere with mortgagees rights is misplaced given the fact the mortgages are funded through public money which would get locked or become nonperforming assets by virtue of perpetual rights to mortgagors to possess properties in spite of chronic defaults. The Administration of Justice Act’s section 36 does not appear to be a new invention of the Parliament since the statute has only codified the then existed common law rights of mortgagee and mortgagor. The Ropaigealach decision has reinforced the mortgagees’ rights without diluting mortgagors’ human rights. The judiciary’s responsibility is to balance the economic rights of the mortgagees ( in turn the economy) vis- a-vis mortgagors rights. The legislations stated above including the ECHR safeguard the rights of the mortgagor in respect of dwelling houses in so far as they do not unduly affect the financial institutions’ liquidity that would affect the economy as a whole. Any proposed amendments are likely to involve only procedural law and therefore a mortgagee’s right possession cannot be altogether extinguished. It is all the more good for the mortgagee as he must have exhausted all sorts of hurdles from the defendants before exercising his right of possession and his steps would be fool-proof. Mortgagor on other hand will feel vindicated after exhausting additional statutory remedies likely to be available pursuant to long pending reforms. Bibliography Cases Alliance and Leicester plc v Slayford [2001]1 All ER 1 at [20]-[28] per Peter Gibson LJ, 15.18) Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883, ChD...15, 20. Bristol and West Plc v Bartlett [2003] 07 EG Credit & Mercantile Plc v Marks [2004] All ER (D) Four Maids Ltd v Dudley Marshall (Properties) Ltd [1957] 2 All ER 35, Ch 317, 320. Horsham Properties Group Ltd v Clark and Beech [2008] EWHC 2327 (Ch) Owen v Cornell (1967) 203 EG 29 Palk v Mortgage Services Funding plc [1993] 2 All E.R. 481 at 487 488 Refuge Assurance Co ltd v Peralberg (1938) in Kevin J. Gray, Susan Francis Gray, Land Law (Oxford University Press, 2007) 525 Ropaigealach v Barclays Bank Plc [1998] EWCA Civ 1960 (18 December 1998) [2000] QB 263, [1999] 3 WLR 17, [1998] EG 189, (2000) 32 HLR 234, [1998] EWCA Civ 1960, [1999] 4 All ER 235 accessed 12 March 2013. Statutes UK Administration of Justice Act 1970, CHAPTER 65 8 and 9 Eliz 2 accessed 12 March 2013 Criminal Law Act 1977, CHAPTER 45 < http://www.legislation.gov.uk/ukpga/1977/45> accessed 13 March 2013 Financial Services and Markets Act 2000, Chapter 8 < http://www.legislation.gov.uk/ukpga/2000/8 > accessed 12 March 2013 Law of Property Act 1925 CHAPTER 20 15 and 16 Geo 5< http://www.legislation.gov.uk/ukpga/Geo5/15-16/20 > accessed 12 March 2013 European Union Law European Convention on Human Rights < http://www.echr.coe.int/NR/rdonlyres/D5CC24A7-DC13-4318-B457-5C9014916D7A/0/Convention_ENG.pdf > accessed 13 March 2013 Books Clarke Sandra, Greer Sarah. Land Law Directions (Oxford University Press, London, 2012) 396 Gray K Kevin, Gray Francis Susan, Land Law (Oxford University Press, 2007) 522,523 Websites A Clarke ,Further Implications of Section 36 of the Administration of Justice Act, 1970 (The Conveyancer and Property Lawyer, 1983) 293 in L.M. Clements , Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973 - A case for Reform. < http://webjcli.ncl.ac.uk/1999/issue3/clements3.html > accessed 13 March 2013 Clements L.M., Residential Mortgage Repossessions and The Administration of Justice Acts, 1970 and 1973 - A case for Reform. < http://webjcli.ncl.ac.uk/1999/issue3/clements3.html > accessed 13 March 2013 Legal Mortgage Co.UK, Orders for sale after Horsham < http://www.legalmortgage.co.uk/#/orders-for-sale-after-horsham/4538803765 > accessed 13 March 2013. Practical Law Company Legal update: archive accessed 13 March 2013 The Law Society, Wrongly dispossessed? (The Law Society Gazette, 1992) < http: //www.lawgazette.co.uk/news/wrongly-dispossessed.> accessed 12 March 2013 Consultation Papers Ministry of Justice, Mortgages: Power of Sale and Residential Property (Consultation Paper CP55/09 2009) 11, 17. Read More