The banking crash in 2008 and the subsequent fallout brought with it a new wave of enforcement action by financial institutions involving the borrower’s residence. Institutions continue to show a reluctance to sell the property without first obtaining an order for possession.
However, in the case of Horsham Properties Group Ltd v Clark , the Court considered whether the Law of Property Act 1925 (the “Act”) infringed the rights of mortgagors under the European Convention on Human Rights 1950 (“ECHR”) (as enshrined by the Human Rights Act 1998) by enabling mortgagees to sell properties without first obtaining a court order for possession.
In the aforementioned case, two borrowers fell into arrears on their mortgage repayments for their home and receivers were appointed to sell the property. The property was sold at auction with the borrowers still in occupation. The purchaser, Horsham issued possession proceedings against the borrowers for trespass and it was held that that their rights had been overreached by the receivers exercising the power of sale granted to them in the mortgage.
The court considered whether permitting a receiver/mortgagee to sell the property without a court order infringed the rights of borrowers under the ECHR. The High Court found that the power of sale being enforced by the receivers was contractual in nature (note that a receiver does not have a power of sale under the Act) and as such, the power of sale arose from the contractual bargain between the parties and therefore the ECHR was not relevant. In any event, the court also found had the mortgagee relied upon the power of sale contained in the Act, the mortgagee was entitled to sell the property without an order for possession as again, the power of sale in the Act merely served to implement the private bargain between the parties (as the power of sale is deemed to be incorporated into each mortgage). The Act could not be construed as requiring a court order for sale because the main purpose of the Act was to give a mortgagee the ability to realise its security without the need to go to court.
This case led to Parliamentary outcry and in response, Andrew Dismore MP introduced a Private Members Bill in May 2009 – the Home Repossession (Protection) Bill 2008-2009 (“Bill”). The Bill was intended to amend the Act to require a mortgagee to obtain the court’s permission before exercising the power of sale in relation to a dwelling house. The intention of the Bill was to give home-owners additional protection by forcing the court to give consideration to the likelihood of a borrower to pay sums due within a reasonable period or remedy a default of a breach of any other obligation. Mr Dismore argued that the Bill was attempting to protect social and economic rights and was needed to stop the courts affording mortgagees greater protection over the rights of ordinary people to a fair hearing. The Bill was opposed when presented for its second reading then later dropped by its sponsor
More recently, in October 2010, George Eustice MP introduced ‘The Secured Lending Reform Bill 2010-12 (“SLR Bill”)’. This SLR Bill was intended to curtail the role of receivers with a view to encouraging financial institutions to work with their customers to find solutions when repayment difficulties arose. It would remove the power of sale from receivers and limit their role to receiving income from assets (in line with the Act). In early 2012, the Bill failed to complete its passage through Parliament before the end of the parliamentary session and will now make no further progress. However, that is not to say that no other bill will not seek to limit the powers of receivers and certainly for the foreseeable future most financial institutions will seek an order for possession.
If you have any questions or would like more information please contact Richard Holmes, Associate, Corporate Recovery, or Gavin Jones, Head of Corporate Recovery.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.