Defences to mortgage arrears possession claims
Borrowers should check mortgage documents for defects, amounts claimed for accuracy and lender’s behaviour for violations of borrower’s rights.
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.
A lender's failure to comply with the protocol does not provide a defence to a claim for possession but the court can:
adjourn the proceedings, until the lender can demonstrate compliance
impose costs sanctions on the lender for breaches of the protocol
override the lender’s contractual right to recover their costs from the borrower if it can be shown the proceedings were brought unreasonably or the costs were unreasonably incurred
Defects in the mortgage
All mortgages are required to be secured by a properly executed deed. The terms and conditions are usually contained in a separate mortgage agreement. The Financial Conduct Authority (FCA) Mortgage Conduct of Business (MCOB) rules set out requirements for information to be provided before the agreement is executed and to be included in the contract. Failure to obtain the correct authorisation from the FCA is likely to mean a lender cannot enforce the mortgage.
The Consumer Credit Act 1974 contains strict rules for the form and content of some secured loan agreements. See Second charge loans for more details of when a second charge is a consumer credit back book agreement.
The Consumer Rights Act 2015 requires terms in consumer contracts to be fair and transparent. The court can order that terms that are unfair are unenforceable.
Other rules may apply if the agreement was executed prior to 2015.
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 and arrears charges may be open to challenge if they are very high compared to the lender’s loss.
The Financial Ombudsman Service can deal with complaints about arrears charges that have been added to Regulated Mortgage Contracts (RMCs).
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. A lender's failure to comply with the FCA regulatory regime, as set out in the 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.
Tenants in the property
The borrower may not be living at the property but may have rented it out to tenants. In most situations, tenants of mortgagors 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 has the right to remain in the property.
On the application of an unauthorised tenant (where the tenancy is not binding on the lender), the court can postpone the date for delivery of possession for up to two months. The tenant does not need to be joined in the proceedings in order to make this application. Unauthorised tenants may also be able to negotiate with the lender to remain in the property.
If the borrower has been the victim of fraud, the lender will not normally be able to enforce the agreement unless the borrower has received some financial benefit from the fraud.
Where a borrower has forged the signature of a joint owner the deed is defective, which creates an equitable charge against the forger’s beneficial interest. To enforce the agreement the lender must apply for an order for sale, and the court can take into account the circumstances of the innocent joint owner and any other residents of the property. An order for sale will normally be made in favour of the lender but may be postponed if there are children living in the property.
A borrower who has obtained a mortgage by fraud, for example by misstating income or employment details on the mortgage application, may face possession proceedings if the fraud is discovered.
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).
Establishing undue influence
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 has 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 of undue influence and misrepresentation, it is also necessary to show that, as a result, the other 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. This is referred to as constructive knowledge.
Rebuttable presumption of undue influence
A lender has constructive knowledge where there is a relationship of trust between the parties, and one borrower is entering into a transaction that is not readily explicable, for example providing a guarantee for the other borrower’s debts. This situation creates a ‘rebuttable presumption’ of undue influence.
The lender must take steps to satisfy themselves that the disadvantaged borrower is not entering the agreement under undue influence. This may require a lender to ensure the joint borrower receives independent legal advice. There may be some transactions that are sufficiently disadvantageous that a lender will not be able to rebut a presumption of undue influence even where the borrower has received legal advice.
A mortgage to joint borrowers that is not a guarantee will not normally require a lender to rebut a presumption of undue influence. The agreement is enforceable even where actual undue influence has taken place if there is no constructive knowledge and no evidence was available to the lender.
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 in cases where the mortgage does not provide a guarantee. 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.
Irrebuttable presumption of undue influence
Some relationships contain an irrebuttable presumption of undue influence. This relationships include:
parent and child
solicitor and client
doctor and patient
A lender should assume that the person in the position of power might exert undue influence over the other. Irrebuttable presumptions do not apply to spouses and civil partners or employer and employee relationships.
Poor professional advice
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 against a solicitor or adviser for negligent advice is likely to be subject to a limitation period.
In these cases, a key issue will be whether the negligent advice would have made a difference to the decision to proceed with the transaction. The Financial Ombudsman Service can deal with complaints about poor advice if the issue to be complained about has come to light in the last six years.
Public law and human rights defence
Last updated: 27 May 2021
CPR 3.1(4) and (5).
Gomba Holdings (UK) Ltd v Minories Finanace Ltd (No 2)  4 All ER 588, CA; Cooperative Bank v Phillips  EWHC 2862 (Ch).
s.2(1) Law of Property (Misc provisions) Act 1989.
Jackson (Trustee in bankruptcy of Mr Ayles) v Pumphrey and others  EWHC 995 (Ch).
sch. 2 Consumer Rights Act 2015.
see rules under Unfair Terms in Consumer Contracts Regulations 1999 SI 1999/2083 and Consumer Rights Act 1977.
National Westminster Bank v Skelton  1 WLR 62, CA; Ashley Guarantee plc v Zacaria  1 WLR 62, CA.
Thakker & Anor v Northern Rock (Asset Management) PLC  EWHC 2107 (QB).
s.1 Mortgage Repossessions (Protection of Tenants etc) Act 2010 and Civil Procedure Rules, rule 55.10(4A).
Patel v Mirza  UKSC 42.
Edwards v Bank of Scotland  EWHC 652 (Ch).
s.15 Trusts of Land and Appointment of Trustees Act 1996.
Bank of Ireland Mortgages v Bell  All ER 920, CA.
RBS v Etridge (No. 2)  UKHL 44.
CIBC v Pitt  UKHL 7.
See, for example, on undue influence: Barclays Bank plc v O'Brien plc  4 All ER 417, HL; Royal Bank of Scotland v Etridge (No 2)  UKHL 43; Annulment Funding Co Ltd v Cowey  EWCA Civ 711; Smith v Cooper (by her litigation friend the Official Solicitor)  EWCA Civ 722; Link Lending Ltd v Bustard (by her litigation friend Walker)  EWCA Civ 424; Bank of Scotland v (1) Hussain (2) Qutb (by her litigation friend Azam Qutb)  EWHC 2812 (Ch); Santander UK Plc v (1) Fletcher (2) Fletcher  EWHC 2778 (Ch). On misrepresentation: UCB Corporate Services Ltd v Williams  EWCA Civ 555; Royal Bank of Scotland Plc v (1) Chandra (2) Chandra  EWCA Civ 192.
Leggatt v National Westminster Bank plc  1 FLR 563, CA.
FJM v United Kingdom (Admissibility : inadmissible)  ECHR 1064; McDonald (by her litigation friend) v McDonald and others  UKSC 28; Southern Pacific Mortgage Ltd v V  EW Misc B42 (CC).
see, for example, Green v Southern Pacific Mortgage Ltd  EWCA Civ 854; Southern Pacific Mortgage Ltd v V  EW Misc B42 (CC).