With mortgage repossessions increasing, the government is stepping in with advice to mortgage lenders. As sources of mortgage finance dry up, families can find themselves facing higher mortgage costs, as well as other budgetary pressures.

Their predicament has been exacerbated by the tough attitude of some mortgage lenders when householders ask for time to pay their arrears and offer a payment plan. In such situations, what should be the approach of the courts?

Section 36 of the Administration of Justice Act 1970 gives power to adjourn, stay, suspend, or postpone the date for possession in any instalment mortgage of a dwelling house (see Royal Bank of Scotland plc v Miller [2001] EWCA Civ 344, [2002] QB 255) if default can be made good within a reasonable period of time. A time-order regime operates for regulated agreements under the Consumer Credit Act 1974.

A reasonable periodIn Cheltenham and Gloucester BS v Norgan [1996] 1 All ER 449, the Court of Appeal held that it was reasonable under section 36 to take account of the whole of the remainder of the original term of the mortgage over which to make good the borrower’s default.

After identifying the level of arrears, factors to consider include the amount the mortgagor could reasonably afford to pay, now and in the future, and the duration of any temporary financial crisis and reasons for the accumulation of arrears.

The court should also take account of the nature of the security, the length of the remaining term, the type of mortgage and relevant contractual provisions, and over what period it is reasonable to expect the mortgagee to recoup arrears of interest. After all, financial institutions make their profits out of money being out on loan. In every case, the balance between these factors differs. With little equity in the property, a shorter repayment period may be appropriate. Present financial constraints may leave little alternative to arrears payments being structured over 20 years, even if that gives no margin for future default.

Many mortgagors are blighted by their poor track record. Past non-payment history requires explanation. An imminent improvement to family finances might enable the court to make a stepped order, increasing the instalments off arrears at fixed future dates, or bring the case back for review.

EvidenceThe Court of Appeal in Cheltenham and Gloucester BS v Grant (1994) 26 HLR 703 refused to lay down rigid rules for judges dealing with cases in busy housing lists. Part 32-compliant evidence is unnecessary. A borrower present at the hearing could be put on oath if required. But information about future income and expenses may be difficult to rebut.

Suppose there is equity and a planned sale will discharge the arrears. ‘Time to sell’ is often a last desperate plea of borrowers. And who should sell, lender or borrower, has been the subject of various cases. Target Home Loans v Clothier [1994] 1 All ER 439, CA suggested that if the prospects of an early sale for both parties are best served by deferring possession, then that is a solid reason for giving a short postponement (three months in that case). Although in National and Provincial BS v Lloyd [1996] 1 All ER 630, CA clear evidence of completion of the sale ‘in six or nine months, or even a year’, would be a reasonable period, this was rejected as a general proposition in Bristol and West BS v Ellis (1997) 29 HLR 282, CA. However, in current market conditions it is more logical for a longer period of time being allowed. A combination of temporary payments of current instalments and something off the arrears (achieved by the deferral of less pressing creditors), coupled with a less formulated plan to sell, offers the potential for a suspended order with review.

Citing casesBullish mortgage lenders cite cases such as Mortgage Service Funding plc v Steele (1996) 72 P&CR D40 as supporting the proposition that without firm evidence of completion of a particular sale, the lender should not be kept out of possession. The Practice Note (Citation of Authorities), [2001] 2 All ER 510, provides that applications for leave to appeal (such as in Steele) should not be cited ‘unless they establish a new principle or extend the law’, and the professional duty of advocates is to bring to the attention of the court all cases potentially relevant, and not merely those that are convenient or favourable. Nor should unrepresented borrowers be ‘bounced’ with inadequate extracts or case summaries. This practice invites an adjournment to a future date with a longer time estimate for a properly reasoned decision, thereby gaining the borrower what he seeks most – time.

A new protocolThe forceful approach of some lenders belies their membership of the Council of Mortgage Lenders, whose advice remains that possession should be a last resort.

This official CML line was extended in the Mortgage Arrears Protocol (see www.civiljusticecouncil.gov.uk), which was approved and is effective from 19 November 2008. Even prior thereto, and for existing cases, it cannot be ignored. Paragraph 4 of the Practice Direction Protocols provides that in non-approved protocol cases, the court will expect parties, in accordance with the overriding objective, to act reasonably in exchanging relevant information and generally in trying to avoid starting proceedings. A published draft protocol helps identify what is reasonable behaviour.

The protocol addresses pre-action conduct. This includes taking reasonable steps to discuss with the borrower the cause of the arrears; considering the borrower’s financial situation, including available benefits; and considering extending the term of the mortgage and a reasonable change to payment dates (so they fall after the monthly salary has come in). All these matters apply equally after issue. The protocol also provides that where borrowers can demonstrate they have taken all reasonable steps to market the property in accordance with professional advice as to price, proceedings should not be started if borrowers agree to keep lenders advised as to the sale progress. The protocol requires lenders to postpone court proceedings, so long as borrowers maintain current instalments and pay a reasonable amount regularly towards the arrears.

Advocates with uncompromising instructions from mortgage lender clients may be invited to consider their position with their client in the light of the CML advice and protocol, with the attendant adjournment. In cases of clear unreasonableness, a lender may not be allowed to add costs to the security (Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588, CA).

District Judge Peter Jolly sits at Portsmouth Combined Court