Lime Legal

High court decrees properties can be sold after two months’ arrears

Published 01 January 2024

By Patrick McAuslan

A loophole in the law allows mortgage lenders to bypass possession proceedings and sell properties after borrowers have missed only two payments. The government wants lenders to defer action when borrowers are behind with their mortgage – but a High Court ruling has strengthened the lenders’ right to organise a sale when borrowers are in default.

Carol Beech and Paul Clark took out a loan with GMAC-RFC to buy a house in Chatham, Kent. Beech signed a mortgage deed which provided that the money they borrowed would become due a month after the start of the mortgage. If they missed one or more monthly payments, GMAC-RFC could give them notice and use its statutory power under the Law of Property Act 1925 to sell the property or appoint a receiver to conduct the sale.

Beech and Clark were unable to keep up mortgage payments and GMAC-RFC appointed a receiver who sold the house to a company that sold it on to Horsham Properties. The couple remained in the house and Horsham Properties brought an action to obtain possession on the grounds that they were trespassers.

The judge, Mr Justice Briggs, found for Horsham Properties. He said the law had been clear for 160 years – by the terms of the mortgage, Beech’s rights in the house were overridden by a sale of the property by GMAC-RFC or receivers at any time after a default.

There was no obligation by GMAC-RFC (or any other lender under a similar mortgage deed) to seek an order from the court before taking action to turf householders in default out of their homes.

Lenders have always been able to take possession of mortgaged property without the assistance of a court unless they have agreed in the mortgage deed to some other arrangement or disposition of rights between lender and borrower.

But the decision highlights the unsatisfactory state of the law on mortgage arrears where the power of the courts to grant relief to defaulting borrowers in the case of first mortgages is left largely to the discretion of lenders rather than being a duty imposed on them. It only arises if lenders bring a court action seeking possession and, as the case shows, lenders do not have to do that.

Patrick McAuslan is professor of law at Birkbeck College.