Judgment reverses thinking on second charge lending

Carmel Ferguson, Solicitor with Housing Rights, analyses a recent decision from the Chancery Master which deals with a second charge lender’s rights to pursue possession proceedings in respect of a secured loan.

In this case, the Chancery Master moves away from the view held by the previous Chancery Master on the exercise of judicial discretion in two important areas.

1. He held that the fact that there is apparently total negative equity in the property is not a reason to refuse to grant an order for enforcement of a possession order
2. He held that there is no  additional power for the court to exercise its discretion not to grant a possession order in a case where the property is registered land as opposed to unregistered land

In Swift Advances PLC v Cully (David) Chancery Master Hardstaff decided that the court did have discretion to issue a Possession Order on foot of action taken by a second-charge lender when the property was in complete negative equity.  This decision is contrary to the position taken by the courts previously and, particularly, in Swift Advances Plc v Justin Heaney [2013] NIMaster 18, wherein the previous Chancery Master had stated 

“I do not think a court should be asked to make an order for possession of a person's property let alone her home in favour of a plaintiff lender not for the purpose of releasing or protecting its security but apparently to hold as a threat eviction over her so as to coerce her into payment or punish her for her default”.

Background to the case

Following a number of failed payment arrangements, the court issued an Order for Possession with a stay in January 2010.  The lender sought permission to enforce this order in 2012, but the Master granted a stay, adjourning the matter until 2013 and allowing the defendant an opportunity to explore issues which may have arisen for consideration by virtue of the provisions of the Consumer Credit Act 1974. 

After a number of further adjournments, agreement was reached between the parties and a Tomlin Order was made, which did not refer specifically to delivery up of possession and set out a money settlement allowing the defendant a significant discount on what was properly due to the plaintiff and indicating an instalment payment method by which the settlement was to be effected.  The terms of the Order make clear that the charge in favour of the plaintiff would only be released upon payment of the settlement.  The defendant accepted that the terms of the settlement brought to an end any potential claims, causes of action and complaints, which he may have had against the plaintiff. As only one payment was made, the plaintiff applied to enforce the possession order. The borrower again applied for a Stay.

Mr Cully made two arguments in support of his application.  These were:

1. that the Tomlin Order provided simply for a money judgment and did not envisage possession.
2. that the property was in total negative equity as it’s achievable sale value was less than the sum owed on the client’s first charge mortgage, meaning that a sale would not result in the satisfaction of any of the debt owed to the second charge lender.

Did the Tomlin Order disallow possession?

The master dismissed the first argument stating that it was simply wrong. The plaintiff had a possession order since January 2010.The Tomlin order made no reference to possession because enforcement in breach of the Tomlin Order would simply involve enforcement of an already existing possession order. The Tomlin Order did not need to refer specifically to the possession order

The second part of the argument was the subject of more lengthy and detailed reasoning by the court. The Master referred to previous decisions from Master Ellison, which the borrower had relied on in his submissions. These decisions, in the case of GE Money Secured Loans v Morgan & Morgan 2013 and Swift Advances Plc v Justin Heaney established a practice in the Northern Ireland Chancery Court, whereby an order for possession would not be made in respect of a second charge loan, if the property in question was fully in negative equity.  In these cases, Master Ellison had considered that granting a possession order to a second-charge lender in cases of total negative equity was not considered proper in accordance with Schedule 7 of the Land Registration Act (NI) 1970.

In considering his decision, Master Hardstaff looked at the case law and legislation, which established the discretion of the court in possession proceedings, stating:

“In particular, Section 36 of the Administration of Justice Act 1970 and Section 8 of the Administration of Justice Act 1973 provided a novel and significantly different form of discretion to the court.  For the first time the court was permitted to stay or adjourn proceedings if a defendant borrower made proposals to deal with the arrears in payment of the periodic payments in a reasonable period of time and doing so in circumstances where normally not only the contractual monthly repayment would be made but a monthly additional payment would be made to address the arrears.  All practitioners in this area of law in Northern Ireland are now familiar with how that discretion has been applied by this court over many years.  The manner in which such discretion is exercised takes account of a range of matters. (…) Suffice to say that the discretion exists to provide a breathing space for a defendant borrower to make a proposal to deal with the arrears.  The discretion does not exist to allow the court to interfere with the mortgagee’s legitimate entitlement to possession.”

Master Hardstaff concluded that rather than refuse to grant a possession order in a negative equity case, a court’s rationale should be to grant possession “all the quicker” so as not to further weaken the position of the plaintiff mortgagee.

Overturning the Heaney judgment

Master Hardstaff went on to consider the judgment of Master Ellison in Swift v Heaney, which had been relied on by the borrower. In that case, Master Ellison had looked at Schedule 7 Part 1 paragraph 5(2) of the 1970 Land Registration Act (Northern Ireland) (the 1970 Act) which states:-

 “The registered owner of a charge may apply to the court for possession of the registered land the subject of the charge or any part of that land and (a) on such an application the court may subject to sub-paragraph 3 order possession of the land or that part thereof to be delivered to him and (b) upon so obtaining possession of the land or as the case may be that part thereof he shall be deemed to be a mortgagee in possession.

Paragraph 5(3) then states the power conferred on the court by sub-paragraph 2 shall not be exercised:

a)    except where payment of the principal sum of money secured by the deed of charge has become due and the court thinks it is “proper” to exercise the power or

b)    unless the court is satisfied that, although payment of the principal sum has not become due, there are urgent and special reasons for exercising the power”. 

Master Hardstaff disagreed with Master Ellison’s conclusion that the courts powers to refuse possession under paragraph 5(2) and its duty to do so under paragraph 5 (3) were clearly more favourable to chargors than the jurisdiction conferred by the Administration of Justice Acts 1970 and 1973.

Redefining the court’s discretion in possession proceedings

Master Hardstaff felt that the apparent discretion under Schedule 7 was similar to the discretion generally available under section 86(3) of the Judicature Act which reads as follows:

“Without prejudice to any other powers exercisable by it a court acting on equitable grounds may stay any proceedings or the execution of any of its process subject to such conditions as it thinks fit”. 

Judge Deeny had considered the scope of that discretion in Woolwich v Boyd and held that it should only be exercised in “rare and compelling circumstances” for example,

“where the mortgagor had a clear and strong case against either the mortgagee or perhaps a third party which made it likely that the mortgagor would recover compensation greater in extent than the sums due to the mortgagee and that compensation would be forthcoming in a reasonable period of time to address the arrears.  In saying that one ends up being very close to the statutory power given under Section 36 of the Administration of Justice Act 1972 to adjourn proceedings or to stay or suspend any judgment execution or postpone the date for delivery if it appears to the court that in the event of its exercising the power to do so the mortgagor is likely to be within a reasonable period to pay any sums due under the mortgage”.

Master Hardstaff concluded :

“Therefore the discretions available to the court under the 1970 and 1973 Administration of Justice Acts are limited to staying or adjourning possession proceedings in defined circumstances where there is a reasonable prospect of the defaulting arrears being discharged within a reasonable period of time”

Master Hardstaff also referred in his judgment to the case of McDonald v McDonald & Ors (2016) UKSC 28. That judgment, he said:

“adds further weight in my view to the argument already made by Mr Gibson that the court in exercise of its discretion must not stray into the realms of interfering with the normal contractual rights of parties in a private transaction so as to deprive one of the parties of an outcome to that transaction which was provided for when it was first entered into.”

As regards the position of the apparent negative equity in the property, the Master had this to say:

“whilst there might be some evidence to suggest the premises are wholly in negative equity, it is not hard to envisage circumstances which might improve the plaintiff’s prospect. I need not rehearse again what was said by Lord Justice Auld.  Suffice to say markets can change and indeed circumstances and relationships between a first charge holder and a second charge holder can change by way of commercially pragmatic arrangements.  “

He pointed out that no application had been made to set aside or appeal the possession order. In his view:

“It is clear from the extensive rehearsal of the law above that historically and to date the courts have taken the view that equity should not interfere with the plaintiff’s right to possession, to deprive the plaintiff of possession in circumstances where the default has not been dealt with.

The exercise of any discretion available to the court under the Administration of Justice Acts within the United Kingdom as a whole must simply relate to the staying or adjourning of proceedings where there is a reasonable expectation that within a reasonable period of time through reasonable and realistic proposals the defaulting arrears or the debt as a whole will be discharged.

To the extent that the discretion exists in the manner envisaged by Master Ellison in Swift v Heaney it must be applied in a way  consistent with the courts general equitable discretion under Section 86(3) of the Judicature Act.  It is no more than that.”

The master categorically stated in his judgment that:

“This court does not intend in the future to apply Schedule 7 to the Land Registration Act (Northern Ireland) 1970 in a way which appears more liberally or generously disposed towards a borrower who happens by dint of accident to have the benefit of a registered title as opposed to a non-registered title.  The application of the law must be consistent and easily understood by all potential defendants.  It would in my view be intolerable for an unregistered owner to be in some way at a disadvantage to a registered owner all other things being equal.  It is my clear view that the Administration of Justice Acts provide the appropriate discretion in such matters and this discretion is equally applicable to all owner borrowers in Northern Ireland in domestic mortgage situations whether registered or unregistered title holders.”

Learning points for advisers

The case suggests that the court will be more reluctant in future to interfere with the lender’s right to possession when the loan account is in default and the borrower can offer no prospect of clearing the arrears within a reasonable period of time. This ruling indicates that the court will no longer allow an extra discretionary power when land is registered as opposed to unregistered. 

Advisers can no longer rely on the fact that a property is in total negative equity as the sole reason to request an adjournment or for the court to refuse a possession order.  Any adviser or legal professional who regularly provides advice in the area of possession proceedings should familiarise themselves with the discretionary powers under the Administration of Justice Acts and the subsequent case-law.