A new civil procedure protocol for lawyers of much practical relevance came into effect on 19 November 2008. It applies to both money and possession claims by the lender on mortgages of residential property.

It affects litigators, conveyancers and commercial lawyers advising lenders. The protocol is a response to the ‘credit crunch’ and the government’s concern at the implications of large numbers of families becoming homeless as a result of an inability to maintain mortgage payments.

The protocol applies to all residential mortgages whether or not they are regulated under the Consumer Credit Act 1974. All references to paragraph numbers relate to this protocol.

Paragraph 2.1 states the aims of the protocol:

  • Ensure that a lender and borrower act fairly and reasonably with each other to resolve any matters concerning both mortgage and home purchase plan arrears;
  • Encourage more pre-action contact between the lender and the borrower in an effort to reach an agreement;
  • If an agreement cannot be reached, enable efficient use of the court’s time and resources.

    • Paragraph 1.1 says that the court will normally expect the parties to observe this behaviour before the start of a possession claim.

    The court may take into account non-compliance with an applicable protocol under the CPR ‘if, in the opinion of the court, non-compliance has led to the commencement of proceedings which might otherwise not have been needed to be commenced, or has led to costs being incurred in the proceedings that might otherwise not have been incurred’.

    Possible sanctions are:

  • An order that the party at fault pay the cost of the proceedings, or part of those costs of the other party or parties;
  • An order that the party at fault pay costs on an indemnity basis;
  • If the party at fault is a claimant in whose favour an order for damages or some specified sum is made, the court can make an order depriving that party of interest, or award interest at a lower rate than that interest would have otherwise been awarded.

    • The protocol does not apply to existing proceedings. It is often overlooked that possession proceedings, once commenced, are effectively always available for a lender’s use. The case of Greyhound Guaranty Limited v Caulfield [1981] CLY1808 in Leeds County Court held that, ‘once a mortgagor has fallen into arrears, the mortgagee’s right to possession crystallises and remains exercisable notwithstanding the repayment of the original arrears’. The proper course of action by a district judge is to adjourn such a claim, not dismiss it. The mortgagee can revive the action if further arrears accrue and to do so is clearly an efficient use of the court’s resources, not an abuse of court. Thus a lender does not need to commence new proceedings if previous possession proceedings have been started.

    Claims after 19 November 2008 The lender must do, or consider, the following:

    Provide information for the borrower(a) Paragraph 2.2 requires the lender to take reasonable steps to ensure that information is communicated to a borrower in language he can understand. There is an obligation placed upon the lender to make sure that the information is clear, fair and not misleading. If the borrower may have difficulties in reading and understanding, the lender is required to have regard to this.

    (b) Paragraph 5 states that when arrears occur the lender should:

  • Provide an information sheet or National Homeless Advice sheets on mortgage arrears;
  • Provide details concerning the amount of the arrears including: the total amount of the arrears; the total outstanding on the mortgage; whether interest or charge will be added, and an estimate of the interest or charges that may be payable where appropriate;
  • Advise the borrower to make early contact with the housing department of the borrower’s local authority or refer the borrower, where necessary, to an appropriate source of independent debt advice;
  • Consider a reasonable request from the borrower to change the regular payment date or method of payment. If the lender refuses such a request, it should, within a reasonable period of time, give the borrower an explanation of its reasons for refusing;
  • Respond promptly to any proposals for payment made by the borrower, such as ‘I will pay you £10 a week towards the arrears’. The lender who turns down such a proposal must give reasons in writing to the borrower within 10 business days of receipt of that proposal;
  • Give sufficient details in any lender’s offer to enable the borrower to understand it, and a reasonable period of time in which to consider it;
  • Give 15 business days’ notice in writing of its intention to start possession claims, unless the borrower remedies the breach in the agreement (business days for the purposes of the protocol are any week day excluding statutory holidays. Good Friday and Christmas Day are also excluded).

    • The word ‘agreement’ is not defined in the protocol, but must be presumed to apply to the loan agreement. If the parties have varied this, then these words are equally applicable to any variation of that loan agreement.

    Delay proceedings>The government has extracted from major lenders an understanding that they will not commence possession proceedings until lenders are three months in arrears.

    District judges may consider that it is not an efficient use of the court’s resources if lenders issue legal proceedings until at least three months’ arrears have accrued.

    Consider PPI policiesParagraph 6 states that a lender is required to consider not starting a possession claim for mortgage arrears where the borrower can demonstrate to the lender that:

  • The borrower has submitted a claim to an insurer under a mortgage protection policy with all evidence required to process such a claim;
  • The borrower has a reasonable expectation of eligibility for payments from an insurer;
  • The borrowers are able to pay a mortgage instalment not covered by the insurance.

    • Many lenders will have sold such a policy with the mortgage. The protocol is too weak on this issue. Many borrowers may not be familiar with the terms of the mortgage protection policy that they have been sold, or unsure what they need to do to make a claim.

    The protocol should have imposed upon lenders the duty to actively investigate whether a borrower has any form of mortgage payment protection. The protocol has left the obligation with the borrower rather than the lender.

    Consider a sale by the borrowerParagraph 6.2 allows borrowers to ask the lender to consider delaying possession claims if the borrower can demonstrate that reasonable steps have been taken to market the property at an appropriate price in accordance with reasonable professional advice.

    It is only those borrowers who are receiving professional advice who are likely to be able to avail themselves of this provision. A borrower must continue to actively market the property.

    Paragraph 6.3 gives the borrower further problems. In the event that the borrower has secured the agreement of the lender to postpone a possession claim, the borrower is expected to provide the lender with: a copy of the particulars of sale; a home information pack; and details of purchase offers received within a reasonable period of time specified by the lender.

    A borrower in financial difficulties is unlikely to incur the expense of a home information pack. The borrower must also sacrifice any element of confidentiality about his dealings with his professional advisers. Borrowers are expected to provide the lender with details of the agents and conveyancer instructed to deal with the sale, and to authorise them to communicate with the lender about the progress of the sale ‘and the borrower’s conduct during the process’. If a lender does not agree to postpone the start of possession proceedings, it must inform the borrower of the reasons for this decision at least five business days before commencing proceedings.

    Consider ADRParagraph 7 is worth setting out fully. The court takes the view that starting a possession claim is usually a last resort and that such a claim should not normally be started when settlement is still actively being explored. Discussion between the parties may include options such as: extending term of the mortgage; changing the type of the mortgage; deferring payment of interest due under the mortgage; or capitalising the arrears.

    Paragraph 7 applies only where ‘settlement is still actively being explored’. Usually, communications from lender to borrower go unanswered or ignored. Where the borrower is unable or unwilling to explore a settlement, then, provided the lender has complied with the initial steps expected by the protocol, the court will not be in a position to criticise the lender.

    Financial Ombudsman ServiceBy paragraph 8 a lender should consider postponing the start of a possession claim if the borrower has made a genuine complaint to the Financial Ombudsman about the potential possession claim. If the lender won’t wait, it must give its reasons to the borrower at least five business days before commencing proceedings.

    Inform the courtParagraph 9 requires the parties ‘if requested by the court’ to explain the actions that they have taken to comply with the protocol. Logically, the lender who has received little or no communication from the borrower will have little difficulty in doing this.

    Advice to borrowers and lendersIn cases where a borrower has made reasonable attempts to seek settlement and the lender has failed in their obligations, a court can impose sanctions on the lender. Most mortgage deeds or loan agreements enable the lender to add their legal costs to the amount of the loan so the court order must specify what costs are not added to borrowers’ debt. Judges must take a robust approach if borrowers are to receive protection. If such sanctions receive press coverage, it may influence lenders’ actions.

    Lenders should prepare a brief chronology of actions taken under the protocol in a witness statement in support of the claim exhibiting copies of correspondence with the borrower. This should overcome any difficulty in most cases. Where reasons have to be given for a decision, the lender should be prepared for the reasons given rejecting a borrower’s proposal to be scrutinised by the court.

    The court is required to consider if the protocol has been followed. It is not the court’s role to substitute its views for that of the lender. Legally the lender, in giving reasons for a decision to the borrower, will have complied with the protocol, even if the court might disagree with the lender’s reasons. In reality, if the lender’s reasons show a lack of understanding of the borrower’s position, a district judge will exercise his discretion to the borrower’s advantage.

    OverviewThe protocol should cause little problem for a reputable lender who acquaints himself with its terms and instigates suitable new procedures.

    Unwary or ill-informed lenders may have shocks ahead, especially if they think they can circumvent the protocol by bringing a money claim only.

    For lawyers, the protocol offers an opportunity to advise business clients on the need to adapt their processes and residential clients to discuss frankly problems with a potential sale.

    The protocol may help borrowers to avoid homelessness. However, only a small proportion seek financial or legal advice and a large proportion fail to attend court hearings. This protocol does not impose on the lender any role to help borrowers. Many borrowers have multiple money problems and are unlikely to be able to afford legal advice, or to avail themselves of the services of advice agencies.

    For cases that get to court, district judges are responsible for applying the rules firmly if borrowers are to receive the protection intended.

    What of the cases that don’t reach court? Ultimately, government ownership of the major banks and economic conditions may have the greatest effect on the behaviour of lenders. If there is no ready market for realising their security, there is no immediate benefit from obtaining possession. Lenders may prefer to keep borrowers responsible for properties rather than create streets of empty properties producing no return.

    However, lenders may drive a hard bargain with borrowers to agree a change of status from homeowners to tenants, and give up any interest in the property in exchange for lenders granting a periodic tenancy on ‘favourable terms’. The protocol does not protect vulnerable borrowers from such agreements outside legal proceedings.

    Most experienced district judges are aware many borrowers accept unduly onerous terms to avoid legal proceedings. If the protocol is to achieve its aim, further provision is required to ensure independent legal advice is given to borrowers on ‘agreements’ with lenders that are outside the scope of paragraph 7 and to make agreements void if they have not had such advice (similar to the provisions of section 38 of the Landlord & Tenant Act 1954). At present, the economic outlook for borrowers who have lost their employment negotiating ‘agreements’ with lenders is bleak.

    Christopher Atkinson is a partner and head of litigation at Philip Ross in London and an ex-deputy district judge