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‘It’s a Trap!’: Do Mortgage-lenders Have Too Much Power?

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About The Author

Anirudh Mandagere (Former Law and Social Policy Editor)

Anirudh is the judicial assistant to Lord Justice Jackson. Previously he studied History at St. Catherine’s College, University of Oxford and undertook the Graduate Diploma in Law and the Bar Professional Training Course at City University. Outside of the law, Anirudh enjoys running, badminton and watching the cult Netflix series, ‘Bojack Horseman’.

Image © "Images Money" on Flickr

The Sub-Prime Menace

The ‘credit crunch’ of 2009 saw a number of households facing mortgage arrears and the threat of repossession. The preceding decade saw a massive expansion in household debt as a result of relaxed lending of mortgage-backed securities with favourable rates of interest. As house prices declined, and interest rates rose it became difficult for borrowers to pay off their loans. Subsequently, many families defaulted on their loans and faced repossession of their property. At its height in 2009, 46,000 people lost their homes as banks readily used their rights of possession and sale to pay off the mortgage arrears.

A startling impact of the impact of the 2008 crash on borrowers was vividly demonstrated in the notorious case of Horsham Properties v Clarke and Beech. As a result of the borrowers defaulting on their mortgage, the bank exercised its power of sale by selling it to ‘Horsham Properties’ notwithstanding the fact that the borrowers remained in their own home. In effect, this meant that the borrowers became trespassers in their own home. In light of the furore caused by Horsham Properties, the Ministry of Justice published a Consultation Paper which suggested mortgage reform. However, as of 2016 nothing has happened to prevent a repeat of Horsham. This case highlights the immense control that mortgage-lenders have over peoples’ lives, it is necessary to question whether the courts have given too much power to such lenders in the name of ‘certainty’.

Attack of the Home-Loans: Understanding Mortgages

A mortgage is ultimately a security device which has been described as a work of fiction. In the early twentieth century a mortgage operated with the lender as owner of the property and the borrower holding a right on the re-conveyance on the debt. Now, under S. 27 of the Land Registration Act 2002 (LRA), a legal mortgage is created by registering a ‘charge’ against the title of the registered owner (homeowner). The powers granted to lenders are vast. As a legal charge, the mortgage-lender has the right to possession of charged property. This point was made infamously in Mr. Justice Harman’s judgment in Four-Maids v Dudley Marshall [1957] 1 Ch 317:

The [mortgage-lender] may go into possession before the ink is dry on the mortgage…He has that right because he has a legal term of years in the property or its statutory equivalent.

In theory, any property which has a mortgage can be repossessed by a bank, even if the homeowner has not gone into default. Even equity, which is aimed at ameliorating the harshness of the common law, will not intervene to stop this happening, as evidenced in Birmingham Citizens Permanent Building Society v Caunt [1962] 1 Ch 883. Allied to this power is s. 101 of Law of Property Act 1925 (LPA) which implies into every mortgage a power to sell the mortgaged property.

The policy of English land law is ultimately market protection. By protecting the rights of mortgage-lenders and their security over land, the English courts essentially aim to keep the price of mortgages down so that individuals can afford to buy a house. Banks undertake risk by lending money to individual borrowers, and the remedies of possession and sale help underwrite the risk. Without the security provided to lenders, the market would be unsafe and costs of taking out a mortgage would be much higher. This lies at the heart of the court’s insistence on prioritising the rights of mortgage-lenders to possess and sell property over those of borrowers. It is worth remembering this aim when discussing whether lenders have too much power.

The Revenge of Equity?: The Protections Given to the Borrower

In spite of this, it is important to recognise that the law does provide a level of protection to a borrower. The general guidance given by pre-action protocol for possession claims ensures that lenders follow a uniform and structured approach to dealing with mortgage arrears. In doing so, it seeks to minimise the number of possessions by ensuring that borrowers have as much opportunity as possible to deal with their arrears. Indeed, it states that:

If a borrower can demonstrate that reasonable steps have been or will be taken to market the property at an appropriate price in accordance with reasonable professional advice, the lender must consider postponing starting a possession claim to allow the borrower a realistic period of time to sell the property. The borrower must continue to take all reasonable steps actively to market the property where the lender has agreed to postpone starting a possession claim.

Further to this, equity is prepared to strike down unconscionable collateral advantages which seek to bind borrowers to the mortgage-lender even after the mortgage is paid off’. This is rooted in the principle of ‘the Equity of Redemption’: that once a borrower has paid off the mortgage, they are free from all the conditions of the mortgage. Historically, equity’s power was absolute: it viewed collateral advantage as an illegal means of avoiding usury laws on interest rates, and so would strike down any collateral advantage. The relaxation of usury laws means that the courts take a more holistic approach to collateral advantages, and assess on their own merits whether it would be ‘unconscionable’ and ‘repressive’ to let them continue, as reflected in Kreglinger v New Patagonia Meat and Cold Storage.

A prime example of an ‘unconscionable collateral advantage’ is reflected in the case of Cityland v Dabrah [1967] 2 All ER 639. Here, the unconscionable advantage lay in the fact that the mortgage asked for the repayment of a ‘premium’ equivalent to an interest rate of 57%. This was held to be an unreasonable advantage and so that Court struck it out, and replaced it with a reasonable rate of 7%.

A New Hope

In 1980, a House of Lords case arose which caused panic among mortgage-lenders. It concerned the following facts about a married couple, Mr. and Mrs. Boland:

  • Boland borrowed money from ‘Williams and Glyn’s Bank’ for his building company.
  • After he failed to pay the mortgage, the bank sought possession.
  • Boland argued that she should be able to stay because she had contributed to the purchase price of the home.

In effect, Mrs. Boland was claiming that her financial contributions towards the purchase price had generated an ‘equitable interest’ in the property. Combined with the fact that she was in ‘actual occupation’ of the property (Schedule 3, Paragraph 2 of the Land Registration Act 2002), she asserted that she had the right to remain in the property.

The House of Lords agreed with her, and in the seminal case of Williams and Glyn’s Bank v Boland defeated the bank’s claim for possession. This was the high point for the rights of borrowers against banks. The Law Commission made a special report to Parliament, advocating that those in Mrs. Boland’s position should be given more power to assert their interest against banks. While the report was never implemented, conveyancing practices altered to take account of the new decision. Banks became aware that they should never accept a conveyance from a sole married owner, without the consent of their spouse. For a brief period however, borrowers had a potent weapon against mortgage-lenders who sought to take possession.

The (Mortgage) Empire Strikes Back

The situation in Boland did not last very long. A similar case arose in the case of City of London Building Society v Flegg. However, this time the House of Lords found in favour of the lender. The reason for this was a reinterpretation of the S. 2(ii) of the LPA. If there is more than one legal owner then the ‘equitable’ interest will be said to have been ‘overreached’. This means that the equitable interests are deprioritised and the lender can take possession of the property.

This did not pass without controversy. It seems particularly arbitrary that determining whether an interest is ‘overreached’ is dependent on whether there are one or more legal owners of the property. Indeed, in the Court of Appeal this argument was advanced and rejected on the basis that it was contrary to the ‘whole scheme of the Land Registration Act 1925’.

Nevertheless, the decision taken by the House of Lords triggered a trend in which the Court turned against borrowers, and consistently upheld decisions in lenders’ favours.

  1. Abbey National v Cann: If an individual uses money to buy property with the help of a mortgage, then automatically the mortgage interest would be prioritised above their own.
  2. Equity and Law Home Loans v Prestridge [1992] 1 WLR 137: Re-mortgaging property, even with a different lender, means that the mortgage interest will be prioritised over the owner’s interest.
  3. Bristol and Western Building Society v Henning: In a two-person household, a person who does not pay the mortgage, but is merely ‘aware’ that a mortgage can be said to have ‘consented’ to the mortgage prioritising over their interest.

Such decisions have had the effect of minimising the application of Boland. It seems unnecessary to do this, considering that conveyancing practices had taken already taken account of Boland and had adjusted their practices accordingly. Moreover, the principle in Equity v Prestridge deserves further scrutiny. For policy reasons one can understand why it is important to protect the rights of a secondary lender and so provide a high level of security to mortgage-lenders. However, it has the unfortunate result of meaning that a compromised secondary lender can enjoy exactly the same rights as the previous earlier lender. This severely curtails the property rights of all borrowers, even if they have taken out and repaid a previous mortgage.

The Return of Inequity?

The remedies available for the borrower are now rare. In the event of a possession the only real way in which a borrower can avoid possession is under S. 36 of the Administration of Justice Act. As demonstrated in Cheltenham and Gloucester BS v Morgan, this gives the Court discretion to postpone possession if there is a reasonable prospect of them paying off their arrears. The opportunities for this are strict, in Ropaigelach v Barclays Bank the borrower attempted to plead for s. 36 on the basis that he had not received any the request for payments. The Court rejected this submission, arguing that where the borrower had not explicitly asked for a s. 36 order during the request for payment, they could not grant it.

The Force Awakens

While Equity has proved singularly unhelpful in dealing with mortgages, a giant is slowly awakening which has the potential to disrupt the current system of mortgage law; that giant is human rights.

Currently human rights do not have a great impact in land law. In Horsham Properties, it was held by Mr. Justice Briggs that it did not violate the borrower’s rights under the European Convention on Human Rights. However, there is potential for change. In Barca v Mears [2004] EWHC 2170 (Ch), it was tentatively suggested that Article 8 of the European Convention on Human Rights (ECHR) could be used in the future to delay orders of sale for families in relation to Article 335 of the Insolvency Act. Such ‘exceptional circumstances’ have not arisen yet, but subsequent cases have reaffirmed that ‘exceptional’ does not mean ‘never’ (Manchester City Council v Pinnock [2011] UKSC 6). It may be impossible to return to using the Boland­-style loophole because of its impact on reducing the security of lending. However, the potential of human rights in land is potentially wide-ranging, and offers borrowers a means of retrieving some power from lenders. The next chapter in land law has only just begun.

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Tagged: Equity, Property Law

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