Important changes to mortgage possession law are alarmingly easy to miss in the post-LASPO landscape, where housing practitioners no longer deal with this work on a regular basis. Daniel Clarke, Derek McConnell and Simon Mullings highlight some crucial developments.
The upshot of these changes is that the vast majority of residential mortgages will now be regulated mortgage contracts under the FSMA 2000 and, on any claim for possession, the court will have the broader powers set out in CCA 1974 Part 9.
The first major legal aid tender round since the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) has solicitors reviewing and updating their supervisor forms. Housing practitioners will find that they must demonstrate experience of mortgage possession work or outline the steps taken to maintain ability in this work. Many will be struck by the irony that, following LASPO, legal help for mortgage possession work was placed in the ‘debt’ contract, subject to the mandatory telephone gateway, such that – although certificated work is not subject to the gateway – mortgage work has all but dried up for many housing practitioners.
Mortgage work is still encountered by those acting as duty advisers on housing possession court duty schemes. However, one consequence of the reduction in day-to-day mortgage work appears to be that knowledge in this area of law is also dropping off. Important developments in the law since LASPO appear, anecdotally, to have been missed by practitioners, perhaps because they are no longer doing this work on a regular basis (see box below). This article therefore seeks to highlight those changes and provide, we hope, a useful addition to the duty adviser’s toolkit in bringing these powers to the attention of the court.
The landscape prior to 2014
Before 2014, residential mortgages fell within one of three groups as regards their regulation and the court’s powers to grant relief to a mortgagor in a possession claim:
•‘Regulated mortgage contracts’ (broadly, first legal charges granted after 31 October 2004), regulated by the Financial Conduct Authority (FCA) under the Financial Services and Markets Act (FSMA) 2000
1See Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI No 544 (FSMA(RA)O) article 61.and subject to the FCA’s
mortgage conduct of business rules (MCOB). In relation to these mortgages, the court had the powers under Administration of Justice Act (AJA) 1970 s36 (as qualified by AJA 1973 s8) to adjourn, stay, suspend or postpone a possession order, only where it ‘appear[ed] to the court that in the event of its exercising the power the mortgagor [was] likely to be able within a reasonable period to pay any sums due under the mortgage’ (in accordance with the guidance set out in
Cheltenham & Gloucester Building Society v Norgan [1996] 1 WLR 343).
•‘Regulated credit agreements’, regulated under the Consumer Credit Act (CCA) 1974. In relation to these mortgages, the court had the much broader powers under CCA 1974 Part 9, including to make ‘time orders’ (s129), to suspend any possession order (s135) and even to make consequential amendments to the mortgage agreement itself (s136) (in accordance with the guidance set out in Southern and District Finance plc v Barnes (1995) 27 HLR 691);
•Mortgages not subject to statutory regulation where, again, the court only had the powers under AJA 1970 s36.
In the majority of cases, which fell under the AJA, absent any technical defences, the key to preventing eviction was whether the borrower could match or do better than Norgan, ie, clear the arrears by the end of the mortgage term. Less common were CCA 1974 cases where the court could be asked to make a time order and, at the same time, effectively open up the credit agreement.
The developments
Subsequently, two important developments significantly changed that landscape. First, from 1 April 2014, the powers under CCA 1974 Part 9 were applied to regulated mortgage contracts under the FSMA 2000.
2CCA 1974 s126, as amended by Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 SI No 366 article 3(3); save that CCA 1974 s140A(5) provides that the powers under ss140A–140D relating to unfair relationships do not apply to regulated mortgage contracts.As set out in the FCA’s
Perimeter guidance manual (release 27, April 2018) at PERG 4.17.2: ‘It therefore follows that, for example, the CCA provisions relating to time orders apply to regulated mortgage contracts.’
Second, from 21 March 2016, the majority of residential mortgages were brought within the scope of regulation under the FSMA 2000,
3FSMA(RA)O article 61, as amended by Mortgage Credit Directive Order 2015 SI No 910 Sch 1 para 4(21), implementing EU Directive 2014/17/EU (known as the Mortgage Credit Directive).regardless of when they were granted. As set out at PERG 4.4A.1B:
… the legislative intention was to provide a single regulatory regime for mortgage contracts under MCOB from 21 March 2016, subject to a six-month transitional period for first charge mortgages entered into before 31 October 2004. Mortgage contracts that were regulated mortgage contracts before that date did not cease to be regulated mortgage contracts. But many mortgage contracts that were not regulated mortgage contracts immediately before 21 March 2016 became regulated mortgage contracts on that date provided that they met the [conditions for being a regulated mortgage contract], even though these conditions did not apply in that form at the time the contract was entered into.
The conditions for being a regulated mortgage contract are set out in PERG 4.4.1 (with further guidance and certain exceptions set out in the remainder of PERG 4.4), namely that:
(1) the contract is one where a lender provides credit to an individual or trustees (the ‘borrower’);
(2) the contract provides for the obligation of the borrower to repay to be secured by a mortgage on land in the EEA; and
(3) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling.
The current landscape
The upshot of these changes is that the vast majority of residential mortgages will now be regulated mortgage contracts under the FSMA 2000 and, on any claim for possession, the court will have the broader powers set out in CCA 1974 Part 9: to make a time order, as well as to suspend any possession order on terms and, where appropriate, to vary the terms of the mortgage agreement. Accordingly, the court should be directed, not to the familiar Norgan principles, but rather to the guidance set out in Barnes (see box below).
The significance of this should not be underestimated. In Barnes, for example, the court held that it would have been a proper exercise of discretion under CCA 1974 s136, in order to mitigate the impact of the interest charged on the unpaid instalments under the mortgage, to reduce the monthly rate of interest by almost half (from 1.952% to 1%) during the period of suspension.
However, there is also scope for further development in the case law. In particular, advisers should be ready to point out to the court that some of the judicial comments in relation to time orders – that they should ‘normally be made for a stipulated period on account of temporary financial difficulty’ (see
Barnes) or that ‘time orders extending over very long periods of time are usually better avoided’ (see
Director General of Fair Trading v First National Bank plc [2001] UKHL 52 at para 28) – were made in relation to regulated credit agreements before the extension of CCA 1974 Part 9 to mainstream residential mortgages. The justification for such observations may not apply equally in respect of mortgages taken out for the purchase of a home.
Concluding thoughts
The need for this article highlights a predictable consequence of legal aid reforms. If developments in the law are to have their intended effect then they must be properly understood and applied by courts and practitioners. Put barriers in the way of practitioners providing advice and representation and the pool of knowledge and experience diminishes, such that important developments in the law can be missed.
This article seeks to mitigate that problem and we hope readers will share their experiences of mortgage possession cases in the new landscape, in order to maintain and develop the collective expertise of advisers in this area. But we also call on the government to consider the risk of loss of skills and knowledge, and the consequent impact on the courts’ ability to apply important developments in the law, as part of its post-implementation review of LASPO.
Simon Mullings writes: ‘I suggested this article after recently attending a training course on mortgage possession work, jointly presented by Daniel Clarke. As a caseworker with 20 years’ experience specialising in housing law, I was alarmed that these developments in the law had passed me by. I spoke to colleagues and found that I was not alone in missing the importance of these changes. An admittedly unscientific survey of three or four judges revealed that they too were not fully up to date. To those colleagues in the same position as me who might feel a little abashed, I would say: (i) don’t - you are in no way alone; (ii) there are specific causes of this phenomenon, which we have tried to elucidate; and (iii) given the lack of case law illustrating the application of the CCA 1974 provisions in this new context, please consider sending in reports of any experiences you have for Derek McConnell’s annual review of the law on owner-occupiers in Legal Action.’
The Court of Appeal’s guidance in Barnes
In Southern and District Finance plc v Barnes (1995) 27 HLR 691, the Court of Appeal held:
(1) When a time order is applied for, or a possession order sought of land to which a regulated agreement applied, the court must first consider whether it is just to make a time order; that will involve consideration of all the circumstances of the case, and of the position of the creditor as well as the debtor;
(2) When a time order is made, it should normally be made for a stipulated period on account of temporary financial difficulty; if, despite the giving of time, the debtor is unlikely to be able to resume payment of the total indebtedness by at least the amount of the contractual instalments, no time order should be made; in such circumstances it will be more equitable to allow the regulated agreement to be enforced;
(3) When a time order is made relating to the non-payment of money:
(a) The ‘sum owed’ means every sum which is due and owing under the agreement, but where possession proceedings have been brought by the creditor that will normally comprise the total indebtedness; and
(b) The court must consider what instalments would be reasonable both as to amount and timing, having regard to the debtor’s means;
(4) The court may include in a time order any amendment of the agreement which it considers just to both parties, and which is a consequence of a term of the order; if the rate of interest is amended, it is relevant that smaller instalments will result both in a liability to pay interest on accumulated arrears and, on the other hand, in an extended period of repayment; but to some extent the high rate of interest usually payable under regulated agreements already takes account of the risk that difficulties in repayment may occur;
(5) If a time order is made when the sum owed is the whole of the outstanding balance due under the loan, there will inevitably be consequences for the term of the loan or the rate of interest or both;
(6) If justice requires the making of a time order, the court should suspend any possession order that it also makes, so long as the terms of the time order are complied with.