The Court of Appeal set out a test to apply when deciding whether to make a time order in response to a mortgage lender's possession claim.
Summary
This appeal involved three separate cases where the borrowers had fallen into arrears on secured loan agreements and the lower court had been asked to consider making a time order.
The Court of Appeal decided that a time order would be appropriate in each of the three appeals.
At the time these cases were heard, the time order provisions only applied to second mortgages. They now apply to almost all first and second mortgages.
Background
In Barnes v Southern and District Finance plc, the County Court had, in a comprehensive judgment, refused the defendant’s application for a time order.
In Ewart v J and J Securities, the deputy district judge had initially made a time order which reduced both the monthly repayment and the rate of interest charged. However, this decision was overturned on appeal to the circuit judge.
In Equity Home Loans Ltd v Lewis, the deputy district judge had initially refused the defendant’s application for a time order. The decision was overturned on appeal and the court made a time order reducing the monthly repayment and ordering that no further interest be charged to the account.
The Court’s decision
The Court of Appeal allowed a time order, or remitted the matter to the County Court to allow it to make a time order, in each of the three cases.
The Court of Appeal set out several principles that should be considered by the court in dealing with time order applications.
It must be just to make a time order
The court held that it must first consider whether it is just to make a time order. That involves consideration of all the circumstances of the case and of the position of the creditor as well as the debtor.
Temporary financial difficulties
The judgment states that a time order should normally be made for a set period of time to deal with temporary financial difficulty. If the debtor is unlikely to have an improvement in their situation that will allow them to resume payments, no time order should be made. It would be more equitable to allow the lender to enforce the agreement.
In one of the cases, the Court of Appeal agreed with the decision of the court of first instance, which had rescheduled the balance of the loan over a total of 18 years, reducing the interest rate to nil. This was not a time order to deal with temporary financial difficulties but could be justified because of the very high interest rate. The Court of Appeal dismissed the lender's appeal, commenting that: “Though the judge's methods were robust and his reasoning economical, his instincts were sound and his order just.”
The time order can deal with the full balance of the loan
Where possession proceedings have been brought, the “sum owed”, is normally the full balance of the mortgage.
In Southern and District Finance v Barnes the court held that the assistant recorder had been wrong to conclude that “any sum owed” was restricted to unpaid instalments and that the court had no power to alter the rate of interest payable.
Reasonable instalments
The court must consider what instalments would be reasonable both as to amount and timing, having regard to the debtor's income and essential expenditure.
Amending the agreement
The court may amend the agreement in consequence of a term of the time order where it is just to do so. For example, it may reduce or stop interest charges to be applied to the account or extend the term of the loan.
Suspending possession
Possession should be suspended for so long as the borrower complies with the terms of the time order.
Comment
Since this appeal was heard, the time order provisions in sections 129 and 136 Consumer Credit Act 1974 have been significantly widened to apply to most first mortgages as well as secured loan agreements. This is the key case for courts to consider when applying the time order provisions to any relevant mortgage.
Time orders have been historically underused by the courts. Borrowers' legal representatives have reported difficulties persuading judges to consider applying the provisions to assist their clients. Most courts appear to adjourn the case, require a formal application from the defendant, and list the matter for a much longer hearing. Section 129 Consumer Credit Act 1974 is clear that the court may exercise the power to make a time order of its own volition.
Temporary difficulties
Perhaps the most problematic aspect of this case for borrowers is the court’s stipulation that a time order should normally be made in respect of temporary financial difficulties. This is likely to mean that borrowers will be asked to provide evidence that their circumstances will improve.
In the Lewis case, the court refused an appeal against a time order that had been made over a fresh period of 15 years and where interest had been stopped, even though there was no indication the borrower’s financial difficulties were temporary. In Director General of Fair Trading v First National Bank [2001] UKHL 52 the court suggested that financial difficulties that are not temporary should not preclude the making of a time order: “… the broad language of s129 should be so construed as to permit the County Court to make such an order as appears to it just in all the circumstances.”
In practice, a time order that runs for a longer period is only likely to be made in cases where the borrower can demonstrate they have been unfairly treated or will suffer undue hardship.