The UK Mortgage Law - Assignment Example

UK Mortgage Law I The Mortgagee Power of Sale a) Advise David and Anne on the bank’s duties in relation to a sale of the property. Ans. When the mortgage was executed under a mortgage deed, the applicable law therefore is The Law of Property Act of 1925 (as amended). Under this law, the mortgagee can exercise the power of sale, when the mortgagor has defaulted in the payment of the mortgage money, of the property or part of it, either subject to prior changes or not, alone or in conjunction with others (s 101). However, the mortgagee’s power to sell is subject to certain conditions - that is the power becomes only exercisable if either one of the following conditions have been met: the mortgagee has furnished the mortgagor a notice of default of the mortgage money and the three months have passed and the mortgagor has not paid the same; mortgage interest repayment have not been paid for at least two months, and; the mortgagor has violated any of the terms, other than payment, of the mortgage (s 103). Applying the same to the case at hand, it would seem that the right of Luton Bank has not ripen into an exercisable one due to the fact that it has failed to serve David and Anne the required notice of default. “Where a default has occurred, the mortgagee must provide the mortgagor with a full and accurate description of the nature of default, the manner in which the default may be remedied, and the time frame for doing so. Where the default relates to the non-payment of a mortgage installment, the notice should indicate whether the terms of the mortgage require the default to be remedied through the payment of the single installment or whether the entire balance of the mortgage becomes payable” (Hepburn p 356). Moreover, the fact that there is a property downturn implies that if the property subject of mortgage is to be sold under the present circumstances, its sale would not be able to get the best price for its value. In decided cases, the courts have emphasized that the mortgagee in exercising the power of sale over the mortgaged property owes the mortgagor certain duties. In the case of Cuckmere Brick v. Mutual Finance, the mortgagee took possession over the mortgaged property when the mortgagor was unable to commence plans of building flats on a site subject of the mortgage. Exercising its power of sale, the mortgagee placed the property in the hands of estate agents who revalued the site much lower than its fair market value. The sale of the property at the undervalued price went on with the objection of the mortgagor. The mortgagor brought a suit against the mortgagee and the Court held that although the mortgagor is not the trustee of the mortgagee when exercising his power of sale which allows him to choose his own judgment and preference over that of the mortgagor; however, he still required, in selling the mortgaged property, to observe not only the duty to act in good faith, which implies that he cannot act heedlessly to impair the interest of the mortgagee, but that he is also required to take reasonable care that the true and reasonable value of the property at stake shall be obtained during the sale (Ch 949 [1971]). Going back to the present case and applying the above legal doctrines, it is premature for the bank to exercise its power of sale because the required notice to the mortgagor has not been served. In addition, it would be reckless for the mortgagor to sell the property at this point when there is a marked downturn of property and buyers are scarce implying that if ever the property is successfully sold it would be at a much lower than its fair market value. Although it is the prerogative of the mortgagee to sell at any time he wants to, the present condition evidently suggests that it would be close to impossible to sell the area at a reasonable price. b) If David and Ann want the property to be sold but the bank is refusing permission because the couple are in negative equity, can the couple force a sale? Ans. Negative equity, in this case, means that the potential worth of the property of David and Anne if sold at this time when there is a downturn of property value will be less than all its liabilities including the mortgage money they owe the bank. The bank has a right in this case to refuse a sale because it is evident that they cannot be paid the precise amount owed them, principal and interest, in the event of a sale since the net worth of the property at present, when there is a downturn of property value, will be less than the amount owed them. The only way therefore by which the couple can pursue a forced sale is to go to court and seek its approval (Mortgage Arrears 2006 p. 16). Section 91, subsection 2 of the Land Property Act of 1925 provides, in effect, that “in any action, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money,” the mortgagee or any person with interest in the mortgage money, and therefore by implication the mortgagor, can file an action in court to petition for the sale of the property to be initiated by the deposit in court of the money to cover the expenses of the sale. And this can be done even if there are persons who object to it or the mortgagee or other interested parties do not appear in court relative to the action (s 91, § 2). In the case of National & Provincial Building Society v Lloyd, for example, the court allowed the mortgagor time to sell his property and pay what he owed the mortgagee. In that case, and under the present cases, the court will usually require that the mortgagor furnished it with clear proof that a sale is not only intended but that moreover, it will materialize. Although the case involved a petition for the court to grant the mortgagor enough time to pay his arrears to the mortgagee. By parallelism however, the implication is that the court may grant as well a force sale of the mortgaged property, not by the mortgagee but by the mortgagor with the ultimate aim of being able to pay all arrears and other costs owing to the mortgagee. Also under Section 261 of the Enterprise Act 2002, an individual can file for bankruptcy in court and all of his property should come under the management of a trustee who will be appointed by the court. In this way, the trustee will file for leave of court, or the court will motu proprio order the sale of a person’s assets to cover all his debts up to the extent that they can be paid. Once David and Anne can take this option, if they are ready to withstand the negative consequences and stigma of bankruptcy, their problems with regard to the mortgage payment will be solved and their desire to force a sale of the property will prevail. II The Rights of Mortgagor a) Does the Consumer Credit Act 2006 provide real additional protection for the mortgagor? Ans. No, the Consumer Credit Act 2006 does not provide real additional protection for the mortgagor, although it contains provisions that are beneficial even to the mortgagor in general but these are very limited benefits. The Consumer Credit Act 2006 is an amendment of the 1974 Consumer Credit Act, which oversees the licensing of, as well as control of, traders who supply goods on credit. The Act also regulates all these credit-based transactions and the amendment of the law has the following aims: regulate all consumer credit and consumer hire agreements; provides for the licensing of traders and providers of consumer credits; gives opportunities for the establishment of fair relationships between creditors and debtors, and; provides for an Ombudsman-like arrangement to hear complaints relative to licensed businesses under the 1974 Act (Stationery Office Book 2006). As can be seen from the provisions of the Act, there are none which specifically applies to mortgagors but tackles debtors and creditors in general terms with the exemption of high net worth debtors (s 3) and a consumer credit agreement where the credit in questions exceeds £25, 000.00 and where the debtor is expected to pay more than £25, 000.00 (s 4). Since most mortgage credits relative to real property involve large amounts greater than £25,000, the implication is that most mortgage situations involving real property will not fall within the ambit of the most recent Consumer Credit Act. It would therefore be futile to look more deeply into the provisions of the Act although a provision thereof, sections 9 to 14, reiterates the notice requirement of the Law of Property Act. In addition, potential confusion may ensue with some of the provisions of the new Consumer act, which would bar transparency of transactions. One aspect of the Act that may pose perplexity to other consumers is the requirement for the service of the Notice of Sums in Arrears (Review of implementation timetable for Consumer Credit Act 2008). This is parallel to the notice of default required in the case of mortgages earlier discussed. Prior to the action of the mortgagee either to sell or foreclose the property in the event of non-payment, he is required to serve a notice of default, stating completely the nature of the default and how it must be remedied. In the current consumer act, this document, called Notice of Sum in Arrears, has no requirement for harmonization with debt management procedures. The implication is that there is no reference to previous agreements or contracts on the matter between the parties but as in the mortgage case, this is a sine qua non to further actions. With respect to the mortgagor, this is just a mere confirmation of the mortgage law although it would be better if the law would state that in the event of an agreement more favorable to the consumer than the Notice of Sum in Arrears, that agreement should prevail. There are also terms and information requirements that a customer, like the mortgagor, are unfamiliar with and necessarily needs guidance from another source simply because these terms could be well understood only by those with financial backgrounds. A case in point is “index tracking interest rates, and payment holidays on loan agreements” (Review of implementation timetable for Consumer Credit Act 2008). b) Critically examine the case of Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343. This case is now 12 years old – how, if at all, has the law moved on? Ans. The case of Cheltenham concerns a term mortgage or a mortgage payment which becomes due only once at the end of the term and in the meantime interests become payable periodically. The mortgagor in this case defaulted in the payment of such interests making the entire mortgage debt and interests due and demandable. The mortgagee applied to the court for an order for possession of the property. The application was granted but subsequently suspended upon the application of the mortgagor to allow her time to seek refinancing and pay the interests in arrears. She was not successful however and over the span of two years made payments only a few times. The mortgagee moved for the execution of the possession order which was granted rejecting the mortgagee’s contention under the Administration of Justice Act of 1973 that repayments should be allowed within reasonable periods of time – to mean two to four years. The Court of Appeal reversed taking into account the provisions of the Justice Act and ruled that the repayments of interests could be allowed up to the remainder of the term of the payment of the principal debt (Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343). The Norgan case was considered controversial and revolutionary because the Court stepped into the mortgage agreement between the mortgagor and the mortgagee and came out clearly favoring the mortgagor. Evidently, the Court had, in an overarching gesture, blurred the distinction between the term meant for the payment of the principal and the term of the interest payment, supposed to be two distinct periods. This was seen as having undermined the object of the mortgage which was to give the mortgagor the term to allow him to pay off the principal and to the mortgagee the interest payable periodically in exchange for the capital lent being held out from him for a considerable period of time. Although the Norgan case is still considered a hallmark case and even providing judges an excuse to give lengthier repayment periods, subsequent cases have however approached periods of repayment in a stricter manner. In the case of National & Provincial Building Society v Lloyd, the court emphasized that the mortgagor can only be given a longer period for repayment of arrears if he or she is able to come up with real proof that the repayment can really be made within the time to be granted and was not merely expressing out loud some hope ([1996] 1 All ER 630 (CA). To a certain extent, the Lloyd case had amended the sweeping ruling in the Norgan case restoring in the process the delicate balance between the mortgagee’ and the mortgagor’s rights. In another case, Bristol & West Building Society v Ellis, the Court following the precedent set by the Lloyd case, declared that the applicant mortgagor should show proof that a sale of the property would indeed take place, that the proceeds of the sale would be sufficient to cover all the arrears and the mortgage price, and that all these would be realized during the period being applied for ([1996] EG CS 74 (CA). Still, in the case of National & Provincial Building Society v Lynd, the Court although concurring with the doctrine held in the doctrine case, qualified the granting of a longer period with sufficient proof from the mortgagor, the absence of which entitles the mortgagee to immediate relief ([1996] NI 47 CHD (NI). It is apparent therefore, that from the evolution of the case law on granting longer periods of repayment of interest arrears to mortgagor, the Norgan case evidently favored the mortgagor by unqualifiedly granting the latter a period equal to the term of payment of the principal debt putting the mortgagee at a disadvantage, the practice of the court now is to qualify the Norgan case by requiring the mortgagor applying for a longer period palpable proof of ability to pay within that time. References 2006. Consumer Credit Act 2006: Chapter 14; Explanatory Notes. The Stationery Office. 2006. Mortgage Arrears. Shelter.Org.uk. https://www.islington.gov.uk/DownloadableDocuments/Housing/Pdf/shelter_guide_mortgage_arrears.pdf Bristol & West Building Society v Ellis [1996] EG CS 74 (CA) Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343) Consumer Credit Act 2006. Opsi. http://www.opsi.gov.uk/acts/acts2006/ukpga_20060014_en_1 Cuckmere Brick Co Ltd and another v Mutual Finance Ltd; Mutual Finance Ltd v Cuckmere Brick Co Ltd and others. [1971] Ch 949 Enterprise Act 2002. Opsi. http://www.opsi.gov.uk/Acts/acts2002/ukpga_20020040_en_23#pt10-pb2-l1g261 Hepburn, Samantha J. 2001, Principles of Property Law: Property Law. Routledge National & Provincial Building Society v Lloyd [1996] 1 All ER 630 (CA) National & Provincial Building Society v Lynd [1996] NI 47 CHD (NI) Review of implementation timetable for Consumer Credit Act. Dti. 2006 http://www.berr.gov.uk/files/file38292.pdf The Law of Property Act 1925. Opsi. http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1925/cukpga_19250020_en_8#pt3-pb1-l1g99 Read More