Orders for sale after Horsham

Horsham Properties Group Ltd v Clark [2009] 1 WLR 1255

This case has been reported principally as a case involving Human Rights. However, the issues are fairly far-reaching and involve the exercise of the power of sale without recourse to the courts, thereby avoiding the court's statutory powers under s 36 Administration of Justice Act 1970 - something that the Justice Secretary described as "a legal loophole" (Financial Times, November 9 2008; The Times, November 11 2008), and which has brought repeated attempts at closure.

Facts:

B and C mortgaged their property to a lender, L. B and C fell into arrears and L appointed LPA receivers pursuant to a contractual power in the mortgage deed (as well as s 101(1)(iii) LPA 1925). The receivers contracted to sell the property to Company X following a sale by auction. The purchase price was sufficient to pay off the mortgage debt. Upon completion Company X transferred the property to Company Y (Horsham Properties Group Ltd) and they were registered as proprietors. They subsequently issued proceedings for possession against B and C claiming that they were trespassing on the property, and asserting that their rights as borrowers had been overreached by the receivers’ sale to Company X.

It was common ground that the effect of a contract for sale entered into by a mortgagee, or a receiver appointed by a mortgagee, is such as to destroy the mortgagor’s equity of redemption – the right to discharge the mortgage and take back the property free of the charge.

It was also common ground that applying the law prior to the Human Rights Act, a lender could exercise the statutory power of sale under s 101 LPA 1925 and thereby obtain possession without engaging s 36 Administration of Justice Act 1970: Ropaigealach v Barclays Bank Plc [2000] QB 263, but it was argued that this is no longer compatible with the Convention rights of residential mortgagors. It was argued that it would only become compatible if either (1) s 101 was construed as requiring a mortgagee first to obtain a court order for possession or to make an application for an order permitting sale, and giving the court on such application a discretion similar to that conferred by s 36; or (2) s 36 was construed so as to confer upon the court the discretionary powers to adjourn or suspend the making of a possession order where the application was made, not by the mortgagee, but by the mortgagee’s purchaser. Otherwise, the borrowers sought a declaration of incompatibility in relation to s 101, on the basis that the section amounted to State intervention by legislation which deprived the borrower of his equity of redemption and which in turn amounted to a deprivation of the peaceful enjoyment of his possessions in accordance with Article 1 of the First Protocol, and that this applies irrespective of any separate contractual power of sale in the mortgage.

Findings:

According to Briggs J, the correct analysis is as follows:

(1) The borrowers lost their equity of redemption by virtue of the contract of sale entered into by the receivers. S 101 did not confer on the receivers a statutory power of sale free of the mortgage. Their powers were purely contractual and did not involve any State intervention.

(2) However, even if the lender had sold purely in exercise of its statutory powers, there would still have been no relevant deprivation of possessions within the meaning of Article 1 FP. S 101 serves merely to implement rather than to override the parties’ private bargain. It is far removed from the concept of State intervention into private rights through overriding legislation. In any event, the continued occupation of the mortgaged property by the mortgagor after the ink is dry on the mortgage is subject only to statutory intervention or contractual restraint. The liability of the mortgagor to lose possession through default is fully spelt out in the mortgage conditions.

(3) Furthermore, any deprivation of possessions as a result of a sale out of court, without first obtaining a court order, is justified in the public interest, and did not require a case-by-case exercise of a proportionality discretion by the court.

(4) Ultimately, the question of whether any wider public policy ought to be implemented wherever steps taken by a mortgagee to realise its security are likely to lead to the obtaining of possession is a matter for Parliament.

(5) Accordingly the effect of the sale in the present case was to discharge the equity of redemption and discharge the mortgage. By the time Company Y applied for possession, there was no subsisting mortgage and nothing upon which the court could exercise a discretion to stay or suspend under s 36.

(6) Company Y was therefore entitled to possession.

Comment:

As a matter of strict law, this is all correct. The consequences however are significant. When the case hit the headlines in the Times on 11th November 2008, a spokeswoman for the lender, GMAC-RFC Ltd is reported to have said “if it was a residential home loan it would not have called in receivers…in the case of buy-to-let loans there was a long precedent of calling in receivers when borrowers fell into arrears.”

The fact that this may have been a buy-to-let case does not actually appear in the transcript, although if it was, it appears that at some stage the borrowers went into possession.

The real significance of the case is the risk that other lenders might opt to appoint receivers with a view to selling standard residential home-loan mortgaged property on the basis that the contract for sale destroys the equity of redemption and deprives the borrowers of any statutory protection.

The Times went on to say that Jack Straw “has asked for advice on the implications of this judgment and will consider with colleagues across Government whether further action is needed”

In fact, the response was initially swift. The Government moved amendments to the Administration of Justice Act 1970 and related statutory provisions (s 89 Housing Act 1980) in the draft Banking Bill 2008.

The amendments were subsequently withdrawn, possibly after sustained pressure from the Council of Mortgage Lenders, but were followed by the introduction of a Private Members Bill : The Home Repossession (Protection) Bill. This proposed amendments to s 101 Law of Property Act 1925 by requiring a mortgagee to obtain the court's permission to sellk, and by giving the court similar powers to those in s 36 Administration of Justice Act 1970. However, the Bill was withdrawn by its sponsor Andrew Dismore MP before its Second Reading in the Commons on 22nd October 2009.

The Ministry of Justice is currently pursuing a separate Consultation concerning the exercise of the power of sale, and there is a further Private Member's Bill currently before Parliament - The Secured Lending Reform Bill 2011