Arrears in the UK
Richard Waller, partner and head of financial services at national law firm TLT, outlines the differences between the three UK legal jurisdictions when dealing with mortgage arrears and how these impact lenders.
Mortgage regulation applies consistently throughout England and Wales, Scotland and Northern Ireland. However, interestingly, each geographic area operates a different legal system, which has a significant impact on how lenders are able to enforce their security in each of these legal jurisdictions.
For those handling mortgage arrears across the UK it is well known that timescales and processes can differ dramatically depending upon in which jurisdiction the loan was made. These are some of the major differences that lenders should be aware of.
Before September 2010, enforcing security was a purely administrative process unless the claim for possession was contested. It is now a requirement that a court hearing takes place with proceedings commencing in a sheriff's court located closest to the secured property. However, electronic issuing of proceedings by Possession Claims Online has not been introduced and there are no current plans to do so.
Since the 2010 decision in the RBS v Wilson case when lenders have been obliged to serve calling up notices together with pre-action requirements, broadly similar to the pre-action protocol in England and Wales, enforcing security has become a much more prolonged process. The situation has been further complicated by disagreement between sheriffs (equivalent to district judges in England and Wales) as to whether the pre-action requirements must be complied before or after the service of the calling up notice.
The court does not have the power to make suspended possession orders. Therefore whenever borrowers demonstrate a willingness to address their indebtedness, the court is most likely to simply place proceedings on hold. Scotland does not have the legal concept of 'receiver' which limits the options available to lenders particularly with buy-to-let portfolios.
Extracting value through rental income without taking on the responsibility of a landlord is a challenge facing lenders in Scotland. However, there is a government scheme to assist borrowers known as 'mortgage to rent' although take up has been limited.
Just one court, and traditionally only one judge, deal with all mortgage claims by lenders. The High Court in Belfast dealt with 3,588 claims in 2011 and in the first quarter of 2012 a total of 846 claims have commenced. Many lenders operating in Northern Ireland will be familiar with lengthy delays in obtaining an order and its subsequent enforcement which can add an additional six to 10 months or more to the process.
Where a suspended possession order is obtained and subsequently broken by the borrower it is necessary to go back to court for another hearing, which can add up to a further three months to the process, rather than as in England and Wales simply applying to enforce the order. It is not infrequent for the order to be further suspended and the whole process repeated a number of times before the order can be enforced.
The electronic issue of proceedings known as Possession Claims Online used in England and Wales has not been introduced and with no plans to do so the process is firmly rooted in extensive paperwork. While there is a pre-action protocol there is no requirement for evidence of compliance and the trend is that the court will only enquire whether the protocol has been followed if an issue is raised, usually by a borrower.
All possession orders are enforced by The Enforcement of Judgments Office (EJO). Once a lender seeks to enforce, the borrower has ten days to object which can result in a hearing in front of the EJO master. If the enforcement can proceed the EJO will visit the property and engage with the borrower to see whether possession can be given up voluntarily and if not explain the eviction process.
Once the EJO issues an order for delivery of the property to the lender, an eviction date is scheduled but is not disclosed to the borrower. If it is disclosed then the eviction can be cancelled and a fresh application has to be made by the lender to the EJO. Obtaining physical possession after an order for possession has been obtained can often take six to eight months or even longer.
Part of the problem is that the EJO is under resourced and not equipped to deal with evictions which have increased seven-fold over the last five years.
Northern Ireland does have receivers who are known as fixed charge rather than Law of Property Act 1925 (LPA). As average house prices have fallen from £234,000 in 2007 to £110,000 in 2012 resulting in high levels of negative equity, lenders are appointing receivers within increasing frequency.
Unlike the rest of the UK, there are no government-backed mortgage rescue schemes. Instead the focus has been on funding support agencies such as the Mortgage Debt Advice Service and Housing Rights Service. To conclude, in managing their business, lenders will want to be aware of the different legal processes across the three different jurisdictions.
TLT is one of only a handful of law firms with the capability to deliver seamless legal advice across all three jurisdictions of England and Wales, Scotland and Northern Ireland.