When a borrower falls into arrears, the mortgage lender has a number of enforcement options available. Usually it will make formal demand for repayment of the whole sum secured then, if the arrears are not paid, bring possession proceedings in its own name against the mortgagor. Particularly, in the buy-to-let market, however, many mortgagees now opt to appoint an LPA Receiver to enforce the loan rather than bring the possession proceedings itself. By so doing, many of the protections afforded to borrowers under the Administration of Justice Acts and the Consumer Credit Act 1974 are bypassed. Can this be fair?
Possession proceedings by a Mortgagee
A mortgagee has a right to possession of the secured property “before the ink is dry on the mortgage”, however, mortgages usually restrict the mortgagee’s right until the mortgagor defaults on his mortgage. At that point the power of sale will arise and the whole debt – both capital and arrears – fall due. The mortgagee can bring a claim for possession and repayment of the debt against the mortgagor. The Court has the power, however, under Section 36 of the Administration of Justice Act 1970 and s. 8 of the Administration of Justice Act 1973 to adjourn proceedings or suspend any order for possession where the arrears can be paid off in a reasonable time.
The Administration of Justice Acts do not apply to mortgages securing regulated agreements under the Consumer Credit Act 1974 but that Act prescribes its own enforcement regime under which the County Court has powers to extend the time for payment of the arrears and postpone possession.
What are an LPA Receiver’s powers?
Once the power of sale has arisen, the Law of Property Act 1925 gives a mortgagee the alternative remedy of appointing a Receiver to manage the property. Although the Receiver is appointed by the mortgagee, section 109 of that Act provides that the Receiver is deemed to be the agent of the borrower. It is, therefore, the borrower rather than the lender who is liable for the acts and defaults of the Receiver. Under section 109, the Receiver can demand and recover all the income deriving from the mortgaged property in the name of the borrower and apply it to the outstanding mortgage debt. So where the borrower has let the property, the Receiver steps into his shoes, manages the property and collects the rent.
However, this is not the end of the matter. Most mortgage deeds go much further than the statutory powers and confer all sorts of other powers on the Receiver. These include the power to bring possession proceedings against the occupiers of the property and even to sell the property in the name of the borrower. But what happens if the borrower doesn’t want to sell the property and so pays off the arrears?
If the claim for possession had been brought by the mortgagee, the Court would adjourn or dismiss the claim if the arrears are paid in full or suspend any order for possession on terms if the arrears are to be paid by instalments. The Receiver is not, however, the mortgagee. He is deemed to be the agent of the mortgagor and the statutory protections referred to above only apply to proceedings brought by a mortgagee. The Court has no power under those provisions to adjourn or suspend the possession proceedings brought by a Receiver. The Receiver can therefore take possession of the property and sell it in the borrower’s name even if the arrears have been paid in full. Although the Receiver owes the mortgagor a fiduciary duty of care on sale to obtain the best price reasonably obtainable, this may be of little comfort to the borrower who wishes to keep his property.
Can the Receiver be prevented from selling the Property?
There is no direct statutory power to stop the Receiver from selling the Property in order to pay off the outstanding debt. However, where such action would be “unfair” there are a number of restrictions. The Council of Mortgage Lender’s guidance on how to deal with buy-to-let arrears and possessions provides that lenders are expected to “act fairly” towards borrowers. Except where there is immediate prejudice to either the property or to any occupant at the property, the lender should not seek to realise the security (including the appointment of a receiver) until all other reasonable attempts to resolve the position have failed.
Similarly, disputes between lenders and borrowers are within the remit of the Financial Ombudsman Service which again is required to ensure that customers are treated fairly.
Since 6th April 2007 any agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount is a “credit agreement” regulated by the Consumer Credit Act 1974. The “unfair relationship” provisions contained in s. 140A to 140C of that Act apply irrespective of whether the agreement is a regulated agreement. These provisions give the Court a wide discretion to order a creditor to do (or not do) anything specified in the order in connection with the agreement or alter the terms of the agreement where “the way in which the creditor has enforced its rights under the agreement” is unfair to the debtor. This could potentially include refusing to discharge the Receivers where the arrears have been cleared.
A claim based on these provisions was made in the recent case of Graves v Capital Home Loans Ltd  EWCA Civ 1297. Mr Graves had a long history of arrears and LPA Receivers were appointed while he lacked capacity due to mental health issues. The Receivers were subsequently discharged and the lender sold as mortgagee in possession. Mr Graves’ claim that Capital had acted unfairly was unsuccessful but there was no dispute that the provisions applied.
It seems to me that if a lender chooses to allow a Receiver to proceed with the sale of a mortgaged property where the arrears have been repaid, it risks a challenge to its action under s. 140B of the Consumer Credit Act 1974. It remains to be seen whether the Courts would consider that the lender had acted “unfairly” in those circumstances.