The court’s powers, MPAP and interest only mortgages

Peter Jordan of Tucker Turner Kingsley Wood LLP, explains why the mortgage pre-action protocol won’t apply to end of term interest only mortgage non repayment cases

Over the next 10 years there will be a substantial number of borrowers who have no ability to pay off in full the capital sum of their mortgage when their mortgage term comes to an end. Some figures suggest the value of the problem is as high as £130 billion.

The Financial Services Authority is in the process of a thematic review of this; and its findings, when published later this year, will be interesting.

Lenders are taking different approaches to this problem. Some are tackling it head on and some are not. I believe some do not realise the size of the problem. Of course a lot depends on the make-up of their mortgage book and the appetite of a particular lender for dealing with the problem now rather than putting it off.

What is clear is that the FSA will expect lenders to have procedures and policies in place to deal with this.

There are many issues raised including risk management, regulatory, treating customers fairly, advice and liquidity. There is no silver bullet to solve this problem but there are steps which can be taken to deal with all those issues in a controlled and strategic manner.

Clear strategies are needed which balance risk management against the individual needs of the borrowers. I do not propose to deal with how I think that can be done in this article but instead focus on a couple of legal issues which are relevant when deciding what strategies and policies to adopt. These are:

(a) the applicability of mortgage pre-action protocol (MPAP) in this situation; and

(b) the court’s powers when dealing with a claim for possession based on the failure to repay the capital sum at the end of the term.

Mortgage pre-action protocol

MPAP has been around for some time and it appears that lenders, on the whole, are complying with it, but I believe it will have little relevance to interest only mortgages (IOM) end of term cases.

In order to explain this, there needs to be some knowledge of the reason for protocols and specifically why the MPAP came into existence. The purpose of protocols is to make sure the court’s overriding objective of “dealing with a case justly” is met. This is achieved by ensuring the following principles are met:

a)         the parties are on an equal footing;

b)         saving expense;

c)         dealing with cases in ways which are proportionate;

d)         ensuring that cases are dealt with expeditiously and fairly.

The White Book

The White Book (C1A-001) further describes the purposes of protocols as:

1.         to focus the attention of litigants on the desirability of resolving disputes without litigation;

2.         to enable them to obtain information they reasonably need in order to enter an appropriate settlement;

3.         to make an appropriate offer (of a kind which can have costs consequences if litigation ensues);

4.         if pre-action settlement is not achievable, to lay the ground for expeditious conduct of proceedings.

Origins of MPAP

The White Book (C12A-001) goes on to record the origins of MPAP as “… the Protocol does not give guidance to the courts to halt possession claims. What it does do is encourage mortgage lenders to regard a possession claim as a last resort, and to work with borrowers in financial difficulties to try to reach agreement without the need for proceedings. The Protocol … describes the behaviours that the court will normally expect of the parties prior to the start of the possession claim.”

Following consultation, the housing committee of the Civil Justice Council produced an original draft of MPAP. An amended version of this was approved subsequently by the Civil Justice Council and the Civil Procedure Rules Committee.

During this process it was felt MPAP should follow MCOB 13 (Mortgage Conduct of Business rules) as that was something lenders were already meant to be doing and it sat well with the above purposes. When MCOB 13 became mandatory, MPAP was amended accordingly.

However, it was clearly stated at the time by the courts that MPAP was not intended to amend or alter the existing legal position. Existing law and statutory discretions were to remain unaffected. This is reflected by clause 1.2 of the MPAP which states:

“1.2     This protocol does not alter the parties' rights and obligations.”

As can be seen from the title to the protocol it covers “arrears” situations. This is not defined in the protocol (no doubt because it was not felt to be necessary) but I believe it is reflective of MCOB 13 and the normal usage of the word arrears in the context of consumer mortgages. Such meaning is consistent with how the word “arrears” is used throughout the protocol, for example at 5.1, 5.2, 6.1, and 7.1 (4).

The court’s powers in mortgage possession actions are, in fact, fairly limited. The two main ones are statutory and are set out in S8 Administration of Justice Act 1973 and S36 Administration of Justice Act 1970. I do not propose to set those out in this article as they are well known and the bread and butter of every mortgage possession action.

In Cheltenham and Gloucester BS v Norgan [1996] 1 All ER 449, the Court of Appeal stated what was a reasonable period under section 36. A judge could take account of the whole of the remainder of the original term of the mortgage over which to make good the borrower’s default.

Some obiter dicta in the judgment did state that this period could be extended post expiry of the original term but it would be exceptional and for a very limited time to facilitate payment of the debt.

Conclusion

So what does this all mean? As is clear from how it developed, I do not believe MPAP will apply when an IOM term has expired. MPAP only covers arrears situations. An end of term IOM non repayment is not an arrears problem, it is a breach of contract and, assuming a lender has the correct terms and conditions, relatively straightforward.

On the N5 claim form the reason the lender will give for wanting possession will be the “other breach of the mortgage” tick box, not the “mortgage arrears” tick box. Lenders are likely to rely on this ground even if there are arrears, as the arrears are likely to be incidental to the breach. This is an extremely important point as, other than extending a possession order from 28 to 56 days, there is little a judge can do in those circumstances.

Even if a party was successful in arguing that an end of term IOM was an “arrears” situation, so that a judge should exercise discretion under s.36 and look at compliance with MPAP by a lender, a judge can only do so if S36 has been engaged.

If a judge is looking at an IOM expired term case, all they can do is spread the arrears over the remainder of the term and, as the term has expired, there is nothing to extend it to. As such, save potentially in exceptional cases as referred to in the Norgan case, s.36 would not be engaged and therefore MPAP compliance will be irrelevant.

In this respect the White Book (C12A-001) states:

“If the lender has not complied with the Protocol the court will have to decide first whether s.36 is engaged. If it is definitely not because, for instance, the borrower clearly cannot pay the monthly instalment and a reasonable amount off the arrears now, or there is no sale on the horizon, and, from the evidence, this position is unlikely to change in the near future, the court must make a possession order.

“But where the Protocol has not been complied with and there is doubt about the borrower’s prospects of payment, or a sale, for lack of information, or it seems likely that s.36 might be engaged in the foreseeable future, the court seemingly has the power, under the Protocol, the Pt 3 case management powers and/or para.2.3 of the Pre-action Practice Direction to [apply sanctions].”

So in short there would be no sanction for non-compliance in any event.

The above may seem discrete points but an understanding of them is fundamental when lenders are developing a strategy to deal with the looming problem. If a lender wants to take possession for non-payment of the capital sum in breach of the mortgage terms there is little the court can do to stop the lender. Whether a lender would wish to do that or not, is, however, another issue.

Peter Jordan is a partner and head of lender services at Tucker Turner Kingsley Wood LLP