Mortgage Rights Act in practice
7 September 2003
Govan Law Centre (GLC) undertakes a steady number of applications under the Mortgage Rights (Scotland) Act 2001 (MRA). Around one to two new cases present each week. We receive referrals from direct approaches from clients, as well as Glasgow-wide (and beyond) referrals from various advice agencies. In around half of cases presented the client is either ineligible for civil legal aid or eligible with a financial contribution which he or she is unable to pay (as a law centre we can nevertheless assist if the client resides within our catchment area). However, on a Scotland-wide basis this trend raises access to justice concerns which the Scottish Executive is aware of (Mortgage Arrears and Repossession in Scotland, Research Findings No.158/2002, available at http://www.scotland.gov.uk/cru/resfinds/drf158-00.asp).
Since the MRA came into force (3 December 2001: the Act is available online at: www.scotland-legislation.hmso.gov.uk/legislation/scotland/acts2001/20010011.htm) the bulk of section 2 applications have been by way of minute where the creditor has raised recovery proceedings under the Conveyancing and Fedual Reform (Scotland) Act 1970. However, we have raised summary application proceedings on behalf of clients where calling-up notices have been served. We have also pursued several late section 2 applications by way of reponing note. There has only been one case to date where we secured a section 2 order and the client made no payment and failed to provide us with instructions. However, all other applications have been successful and clients have adhered to repayment interlocutors.
It is still early days, but GLC experience over the last twelve months reveals that 98% of debtors have complied with section 2 orders and have retained their homes. This is considerably higher that the compliance rate in England and Wales which runs at around 45% (see: http://www.scottish.parliament.uk/S1/official_report/cttee/social-00/sor00-04-02.htm#02). As noted, it may be premature to make comparisons. Certainly GLC takes a holistic approach to MRA casework and often pursues various benefit claims to maximise a client's income, attempts to write off a proportion of bank charges, and doggedly pursues mortgage protection insurance policies. We realise at the end of the day a client's income and expenditure has to balance otherwise legal intervention will only delay the inevitable (which is not our goal).
Since our case of Abbey National v. Briggs - which went to a full hearing at Glasgow Sheriff Court (which the creditor conceded after a full day of proof) we have found that creditors are generally keen to avoid full hearings. If we present a reasonable repayment plan most opponents will eventually consent to a section 2 order. It is perhaps worth noting that there are many debtors with repossession decrees pre 3 December 2001. Typically this is with respect to second secured loans over properties. Often the creditor will accept repayments after decree so clients can present with a scheduled eviction many years after decree was granted. While the MRA does not apply to such cases, practitioners can prevent eviction by way of a section 129 application under the Consumer Credit Act 1974. For practical resources on how to do this see: http://www.govanlc.com/s129.
The number of actual owner occupier repossessions in Scotland ranges from year to year at around 2,000 to 3,000 cases, with around 1,000 homeless applications to local authorities as a consequence of mortgage repossession (Communities Scotland written evidence: http://www.scottish.parliament.uk/S1/official_report/cttee/social-00/sor00-04-04.htm. The number of repossession actions raised is always higher, running at around 4,000 to 6,000 cases year on year, see: http://www.scotland.gov.uk/cru/resfinds/drf158-00.asp). I am not aware of any post MRA civil judicial statistics, but would expect figures to show a steady decline in actual repossession cases (as opposed to actions raised) as take-up of the MRA continues to improve.
MRA procedure - making an application
It is unnecessary to defend an action and lodge a notice of intention to defend in order to pursue a section 2 order. Moreover, I would suggest that it is bad practice to do so for the following reasons:
Late applications under the MRA
In the case of GMAC-RAF Limited v. Brian Murray and Elise Grant Murray, Sheriff Principal Bowen Q.C. held that it was competent to lodge a reponing note in order to pursue a late MRA application. This case is reported in full in the current issue of Greens Housing Law Reports (Issue 4, Hous LR).
In GMAC-RAF Ltd, decree was granted in absence before the defender could enter the process. Conceived wisdom might have suggested that this was an end to the matter, and that repossession loomed for the Murrays. Section 1(4)(c) of the 2001 Act provides that a minute must be lodged 'before the conclusion of the proceedings', and as the 2001 Act makes no provision for late applications the window of opportunity for lodging a minute appeared to be 21 days (the period in which a defender has to lodge a notice of intention to defend from service of an initial writ).
However, Sheriff Principal Bowen Q.C. decided that there was no reason why the equitable remedy of reponing (recalling of a decree granted in absence) should not apply to a section 2 application by way of minute. This is a progressive decision which makes practical sense of a statute which, as the Sheriff Principal observes, "is not a masterpiece of draughtsmanship'. The case turns upon the remedy of reponing and the scope of OCR 8.1, the relevant part of which provides as follows:
8.1.-(1) In any cause other than-
(a) a cause mentioned in rule 33.1(1)(a) to (h) (certain family actions), or
(b) a cause to which Chapter 37 (causes under the Presumption of death (Scotland) Act 1977) applies,
the defender may apply to be reponed by lodging with the sheriff clerk, before implement in full of a decree in absence, a reponing note setting out his proposed defence and explaining his failure to appear. &ldots;
(3) The sheriff may, on considering the reponing note, recall the decree so far as not implemented subject to such order as to expenses as he thinks fit; and the cause shall thereafter proceed as if the defender had lodged a notice of intention to defend and the period of notice had expired on the date on which the decree in absence was recalled.
The Sheriff Principal took the view that OCR 8.1 should be interpreted to include a section 2 application because this relates to a "proposed defence" in the broadest sense of the term. His reasoning is partly based upon the potential effect of a section 2 order. For example, if a debtor repays mortgage arrears while a section 2 order is in force not only can the action be dismissed, but section 2(3) of the 2001 Act provides that such payments have the effect as if the default had never occurred. While this is not a defence, it can have the same outcome as a successful defence.
It is submitted that this approach is consistent with the leading case on reponing note procedure: Forbes v. Johnston 1995 SLT 158. Forbes made it clear that the practice of requiring a reasonable excuse for not lodging a notice of intention to defend was wrong and was an unfortunate gloss on the then rules of court (disapproving dicta in McDonough v Focus DIY Ltd, 1994 SLT 596, and overruling the decision of Mullen v Harmac Ltd, 1994 SLT 926). Significantly, Forbes reaffirmed the principle that reponing was an equitable remedy entirely at the sheriff's discretion, having regard to all of the circumstances of a case. While there had been changing 'practice' over the years - in terms of court rules on reponing notes - the key principle remained: reponing was a discretionary remedy.
Sheriff Principal Bowen acknowledged that the consequences of his judgment did not fit with OCR 8.1(3) - which provides that a responded action proceeds as if a notice of defence were lodged - however, this was an issue he will draw to the attention of the Sheriff Court Rules Council. That said, the decision does throw up some interesting possibilities.
Could debtors attempt to use reponing note procedure for post-decree time orders such as section 129 time to pay applications in terms of the Consumer Credit Act 1974? While it is competent to lodge a section 129 application up until any time before implementation of a decree in full (see: Murie McDougall Ltd v. Sinclair 1994 SLT (Sh Ct) 74), the lodging of such an application does not of itself act a sist on diligence. A debtor's legal hand would be strengthened if a decree could be recalled, and a section 129 time to pay arrangement entered into. Following the decision in GMAC-RAF Ltd, a debtor could argue that there is no reason in principle why reponing note procedure should not granted for a section 129 time order if the debt is repaid, then decree in favour of the creditor is never granted. Is the outcome of a successful section 2 application that different from the outcome of a section 129 time to pay order?
Disposal of the application
A typical crave in a section 2 application may run like this:
'The defender respectfully craves the court to grant an order in terms of section 2 of the Mortgage Rights (Scotland) Act 2001 to continue the cause for [X months] to allow the payment of mortgage arrears to be made at the rate of [£X] per month and for payment of the defender's monthly mortgage payment with effect from [date] and to suspend the pursuer's rights of enforcement of the standard security which arose on default for [X] months from the date of the order, and for the expenses of this application if opposed'.
As noted, if the repayment plan is reasonable the creditor's agents will typically consent to the order being granted. In practice orders are often granted for 6 or 12 months. If the creditor is not prepared to accept the repayment plan then there should a full evidential hearing (on the pleadings, namely the minute and answers). Agents may wish to lead evidence from the debtor, and other relevant witnesses such as a GP, social worker, homeless expert etc.,
Full hearings have been rare because agents for both parties have rightly preferred to reach consensus. That said, some agents for creditors still believe that mortgage arrears require to be repaid within two years - that being some kind of unwritten rule. This approach is wrong in law. The key test set out in section 2(2)(b) provides that the court &ldots; is to have regard in particular to &ldots; '(b) the applicant's ability to fulfil within a reasonable period the obligations under the standard security in respect of which the debtor is in default &ldots;'.
In the English Court of Appeal decision of Cheltenham and Gloucester Building Society v. Norgan  1 All ER 449 the court held that a 'reasonable period' to repay mortgage arrears should be considered in relation to the outstanding term of the mortgage itself. It is submitted there is no reason why this approach should not be taken in Scotland standing the terms of section 2(2)(b). Thus the question is whether the debtor can repay his or her monthly contractual payments and arrears having regard to the overall period of the loan.
In most (well presented) cases parties will consent to a section 2 order being granted for a period of 6 or 12 months. If the debtor keeps to his or her repayment plan then I would suggest the best way for cases to be disposed of, after the debtor has demonstrated good faith over a period of time, is for the creditor to capitalise residual arrears, and dismiss the cause. The prospect of sisting cases indefinitely is not to be recommended. In practice this results in the court losing control of the action and is procedurally untidy for all concerned. Certainty and on-going judicial case management is to be preferred.
MRA applications - bank charges & penalty policies
This issue if frequently associated with MRA applications in practice and may be of interest to practitioners. Debtors' agents should check to see how much mortgage arrears relate to bank charges. GLC has seen cases where 30 to 40% of arrears relate to penalty charges as opposed to missed mortgage interest payments. GLC is currently challenging various bank charging practices with the Office of Fair Trading (OFT) and Financial Services Authority (FSA). For example, the Northern Rock plc charges its mortgage customers £55 each month if they are in three or more months of arrears. Other lenders have similar punitive charging policies.
An argument can and should be made that such charges are 'unfair' in terms of the Unfair Terms in Consumer Contract Regulations 1999 (SI 1999/2083 - available online at: http://www.hmso.gov.uk/si/si1999/19992083.htm). Challenges can be made inter alia on the basis that applicable contractual terms '[require] any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation' (paragraph 1(e) to schedule 2, UTCCR 1999). Agents may make an unfair term of contract challenge within the cause itself, and/or through the OFT (which, if successful, could result in the OFT requiring the lender to alter its policy for all consumers).
© Mike Dailly, Glasgow, September 2003. The author is Principal Solicitor at Govan Law Centre, editor of Greens Housing Law Reports and Housing Law in Practice (W. Green, forthcoming) which includes a chapter and styles on the MRA in practice.