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Possible defences

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Possible defences in mortgage possession cases.

There are a number of possible defences in a mortgage possession case.

Pre-action conduct and protocol

The Pre-action Protocol for Possession Claims based on Mortgage Arrears sets out steps that lenders and borrowers should take to ensure that court proceedings are a matter of last resort. These steps are explained in detail on the page on the Pre-action protocol for mortgage arrears.

A lender's failure to comply with the protocol does not provide a real defence to a claim for possession but the court can suspend the possession order, or adjourn the proceedings, until the lender can demonstrate compliance. The court may also impose costs sanctions on the faulty party.

Defects in the mortgage document

Institutional lenders generally use standard form mortgages, which have been carefully drafted and tested in the courts. However, even large companies have been known to fail to satisfy legal requirements, such as those in the Consumer Credit Act 1974 and in the Consumer Rights Act 2014, and smaller lenders, and those using unusual or untested mortgage documents, may have defective documents.

Advisers should check that mortgage documents contain clear and fair terms and provisions about repayment of the loan and possession in case of default.

Payments made and set off

The arrears claimed should always be checked for accuracy, for example ensuring all recent payments have been recorded. Clarification should be obtained for unexplained or unusual items. Sums claimed for costs may be open to challenge.

A borrower may have a claim for damages that can be set off against the mortgage debt, but this will not usually defeat a claim for possession.[1] A lender's failure to comply with the Financial Conduct Authority's (FCA) regulatory regime, as set out in the Mortgage Conduct of Business (MCOB) Rules, does not provide a defence to a claim for possession. However, the court can suspend the possession order, or adjourn the proceedings, pending the outcome of a counterclaim for damages (whether at a hearing or following settlement between the parties) for a breach of any provision in MCOB which led to losses for the borrower.[2] See the page Steps before action for more information on the MCOB rules.

Tenants in the property

This is unlikely to be a defence at all. The borrower may not be living at the property but may have rented it out to tenants. In most situations, such tenants will have no right to remain in the property once it has been repossessed, unless the tenancy is 'binding' on the lender. Tenants can apply to the court to be joined in the possession proceedings in order to defend them. If a possession order is made and the tenancy is binding on the lender, the tenant will have the right to remain in the property.

From 1 October 2010, the court may, on the application of an 'unauthorised' tenant (ie where the tenancy is not binding on the lender), postpone the date for delivery of possession for up to two months.[3] The tenant will not need to be joined in the proceedings in order to make such an application. Unauthorised tenants may also be able to negotiate with the lender to remain in the property on a short- or long-term basis.

See Tenants of mortgagors for further details.

Public law and human rights defence

A defence based on public law or the Human Rights Act 1988, for example the right to respect for the home, private and family life under Article 8, can only be raised against a public body and will not succeed when raised against a private lender.[4] For more information see Public law and human rights defences.

Unlawful discrimination

A defence based on breach of duties imposed by equality law may be raised against service providers such as lenders, although often acts of apparent discrimination by the lender will be found to be 'a proportionate mean to achieve a legitimate aim' and therefore justifiable.[5] For more information about unlawful discrimination, see Equality law and Disability discrimination defences.

Fraud

A mortgage that has been fraudulently created, for example where someone pretended to be the borrower, will usually be void and ineffective. This is sometimes called 'non est factum' (not her/his deed).

Undue influence and misrepresentation

Where a transaction can be shown to have been procured by the 'undue influence' of one party on the other, or by 'material misrepresentation', it may be possible to get the transaction rescinded (set aside). To establish undue influence it is necessary to show that one person has abused a relationship of trust and confidence (by exercising some form of pressure or domination) and exploited the emotional involvement and trust of another. To establish misrepresentation it is necessary to show that one person misrepresented information to the other by making a false statement, for example about the amount of a loan or the purpose for which the loan was required. In both cases, it is also necessary to show that, as a result, the second person has entered into a transaction with a third party and that the third party was, or ought to have been, aware of the likelihood of undue influence and misrepresentation.[6] A bank 'ought to be aware' where there is a relationship of trust between the parties, and where (in taking out the mortgage) one of the parties is acting to her/his manifest disadvantage.

In the mortgage context, a typical situation is where person A owns a residential property where s/he lives with a family, one of whom is spouse or cohabitant B. A wants to raise money for his business, but the bank, C, wants to take a charge over the residential property. A persuades B to execute the mortgage with C, although B has no obvious benefit from the transaction. Subsequently, A's business fails, and C seeks possession of the family home. Some success has been had in cases involving banks, for example where a loan is being taken out solely for one partner's benefit,[7] such as for a business. While this is a typical situation, there are many other possibilities, including family relationships, such as parent/child, and certain business and professional relationships, such as solicitor/client, where the third party should assume that one of them might exert undue influence on the other.

If the lender is aware of the possibility of undue influence or misrepresentation then, in order to make sure that any charge is enforceable, it would need to take reasonable steps to protect the person likely to be influenced. If it takes such steps, it can then avoid being fixed with notice of any wrong that occurs outside the lender's knowledge. The principle requirement of mortgage lenders is that they should ensure that the person likely to be influenced has independent legal advice before executing the mortgage.

Where poor advice has been given, there may be no defence to possession proceedings, although the victim of undue influence may have a right of action against the solicitor. Legal action may need to be taken quickly, because the advice may have been given some time ago and the limitation period may be about to expire. In such cases, a key issue will be whether the negligent advice would have made a difference to the decision to proceed with the transaction.

The area of undue influence is a complex one that is subject to developing case law. The law has struggled to find a balance between protecting the rights of victims and upholding commercial loan transactions. The courts are often very reluctant to make a finding that the lender is on notice of the undue influence. It was not, for example, manifest disadvantage for a woman to execute a charge to secure her husband's business liabilities, where the charge simply replaced a previous guarantee given many years before.[8]

[1] National Westminster Bank v Skelton [1993] 1 WLR 62, CA; Ashley Guarantee plc v Zacaria [1993] 1 WLR 62, CA.

[2] Thakker & Anor v Northern Rock (Asset Management) PLC [2014] EWHC 2107 (QB).

[3] s.1 Mortgage Repossessions (Protection of Tenants etc) Act 2010 and Civil Procedure Rules, rule 55.10(4A).

[4] ECtHR - FJM v United Kingdom, App No 76202/16 (29 November 2018); McDonald (by her litigation friend) v McDonald and others [2016] UKSC 28; Southern Pacific Mortgage Ltd v V [2015] EW Misc B42 (CC).

[5] see, for example, Green v Southern Pacific Mortgage Ltd  [2018] EWCA Civ 854; Southern Pacific Mortgage Ltd v V [2015] EW Misc B42 (CC).

[6] On undue influence: Barclays Bank plc v O'Brien plc [1993] 4 All ER 417, HL; Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 43; Annulment Funding Co Ltd v Cowey [2010] EWCA Civ 711; Smith v Cooper (by her litigation friend the Official Solicitor) [2010] EWCA Civ 722; Link Lending Ltd v Bustard (by her litigation friend Walker) [2010] EWCA Civ 424; Bank of Scotland v (1) Hussain (2) Qutb (by her litigation friend Azam Qutb) [2010] EWHC 2812 (Ch); Santander UK Plc v (1) Fletcher (2) Fletcher [2018] EWHC 2778 (Ch). On misrepresentation: UCB Corporate Services Ltd v Williams [2002] EWCA Civ 555; Royal Bank of Scotland Plc v (1) Chandra (2) Chandra [2011] EWCA Civ 192.

[7] Hewett v First Plus Financial Group Plc [2010] EWCA Civ 312.

[8] Leggatt v National Westminster Bank plc [2001] 1 FLR 563, CA.

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