NI Blog: Second charge lender is given right to possession where there is negative equity
Katharine Kimber, partner at TLT in Belfast, writes on a change in approach in Northern Ireland’s courts on second charge lenders’ right to recover possession.
The High Court in Northern Ireland recently decided on a case, which could see second charge lenders in negative equity being given the right to recover possession.
A previous ruling in 2010 meant that second charge lenders had to show the Court that there was equity available before they could seek possession.
The judgment in Swift Advances plc v David Cully (2016) NI Master 11 helpfully clarifies the law around the discretion available to the Court. It also provides an alignment with the rest of the UK and opens the door to second charge holders seeking possession even where equity may be marginal or negative.
Although this case appears to open the gates for second charge lenders to reactivate possession proceedings, it remains to be seen what commercial appetite there will be for such action in cases where there is considerable negative equity.
Some lenders may use the opportunity to commence legal action in an attempt to procure arrangements with customers, ultimately postponing the decision to take possession immediately. In turn, this may have a corresponding impact on first charge lenders where customers may have to once again address the arrears on their second loan.
Background to the case
On 19 September 2007, Mr Cully borrowed the sum of £137,190 from Swift Advances plc (Swift) through an unregulated credit agreement, which was to be secured against his dwelling house. A legal charge was duly registered on the title subsequent to a charge in favour of Morgan Stanley Bank International Ltd. Swift’s charge was therefore a second charge in priority.
The account fell into arrears and a possession order was granted in favour of Swift in January 2010. Before enforcement of the order could take effect, Mr Cully lodged a successful stay of enforcement application before the Master in November 2012. After negotiations between the two parties, the matter came to a satisfactory conclusion in November 2013 when a settlement was achieved and the proceedings were stayed. As part of the settlement agreement, Mr Cully received the benefit of a significant discount on the amount properly due to Swift and new payment terms were agreed. It should be noted that whilst this arrangement was put in place, the plaintiff still had the benefit of the possession order previously granted in 2010.
Mr Cully only made one payment under the terms of the settlement. Following an application by the legal representatives for Swift, the Master granted leave to enforce the terms of the original Possession Order on 29 June 2015.
Mr Cully then lodged a further stay of enforcement application on 4 February 2016. One of the strands of his application was that having obtained a valuation of the property at £230,000, there would be no equity whatsoever available to Swift. This was because the first charge holder was owed £268,062.53.
Mr Cully’s argument was that enforcement should not be allowed as it would have no useful effect given that there would be no equity.
Discretion of the Court
In reaching his decision, Master Hardstaff considered the discretion available to the Courts in Northern Ireland.
Section 36 of the Administration of Justice Act 1970 and section 8 of the Administration of Justice Act 1973 permit the Court to stay or adjourn proceedings if a borrower made proposals to deal with arrears by way of periodic payments over a reasonable period of time. In the absence of proposals the Court has sought to rely on schedule 7 of the Land Registration Act (NI) 1970.This provision states that in cases involving registered title in Northern Ireland, a Court should not make a possession order unless it was satisfied that such a course of action would be proper. It has been relied upon in a number of judgments since 2010 to refuse possession despite there being no proposals to address the arrears over a reasonable period.
In Swift Advances plc v Heaney (2010) the Court found that it should not be asked to grant an order for possession of a person’s property, let alone their home, in favour of a lender who could not release or protect its security due to negative equity. The Court relied upon schedule 7 and the second lender was refused possession.
As schedule 7 only applies to registered title, Master Hardstaff concluded that it would be “intolerable” for an owner of an unregistered title to be somehow disadvantaged by not being able to avail of some additional discretion.
The Master also referred to the recent judgment of the United Kingdom Supreme Court in the case of McDonald v McDonald & Ors (2016). This supported the view that the court must not stray into the realms of interfering with the normal contractual rights of parties in a private transaction so as to deprive one of the parties of an outcome to that transaction, which was provided for when it was first entered into.
Outcomes of the case
The Court dismissed the stay application of Mr Cully and granted Swift leave to enforce the Possession Order. The key conclusions from the judgment are:
The equity position should not interfere with a lender’s right to possession.The discretion available to the courts under the Administration of Justice Acts must simply relate to the staying or adjourning of proceedings. This is where there is a reasonable expectation that the arrears or the debt as a whole will be discharged as a result of realistic repayment proposals over a reasonable period of time. It was specifically stressed that this should apply within the United Kingdom as a whole, providing clarity on an aligned approach.The Court’s discretion will apply equally to matters that involve registered and unregistered title as the law has to be consistent and easily understood. Schedule 7 of the Land Registration Act (NI) 1970 does not confer any broader discretion than the Administration of Justice Acts.
The impact on you
In light of the judgments passed down previously many second charge lenders have been forced to place possession claims on hold despite considerable default as they have been unable to demonstrate sufficient equity.
This has had a considerable impact in Northern Ireland given the considerably high rates of negative equity when compared with other regions of the UK.
In this judgment, the Master has weighted up the discretion conferred on him and decided that lenders ought to be entitled to possession regardless of the equity position.
Whilst the case involved the enforcement of a possession order previously granted, the reasoning followed by the Court would suggest that they will adopt a similar approach for a lender seeking a possession order.
We have also seen the discretion provided by schedule 7 of the Land Registration Act (NI) 1970 being used by the Court in other cases as a ‘catch all’ discretion for registered title. This judgment helpfully clarifies that in future the Court will not interpret it to provide any broader discretion than those provided by the Administration of Justice Acts.