The Act will apply to unauthorised tenancies, providing greater protection to tenants who, often through no fault of their own, face eviction from their home as a result of their landlord falling into arrears with their lender.

What is the purpose of the Act?

The new Act gives unauthorised tenants significantly enhanced rights. These include:

• Postponing the date for delivery of possession in the possession order by up to two months.
• Alternatively, staying or suspending the date for execution of a warrant of possession by up to two months. (A warrant of possession can generally be issued at any time up to six years after the order has become enforceable).
• Requiring notice to be given that the lender is applying for a warrant of possession, and prohibiting execution of the warrant until at least 14 days after the notice has been served. The notice is in a form prescribed by regulations.

What do you need to do?

Nothing. Our procedures will be updated so that we serve the prescribed form of notice of execution on your behalf.

We will respond to any application for postponement by a tenant in accordance with your instructions.

Practical considerations

• It remains unclear whether the two-month postponement of the date for delivery of possession runs from the date of the possession order or is in addition to the usual 28-day period of a standard possession order. This is an issue which requires clarification by the courts.
• There is nothing in the Act or supporting regulations to prevent notice of enforcement being served during the 28-day period following a straight order for possession. However, the application for a warrant cannot be made until the 28-day period has expired. We therefore recommend that the prescribed notice is served on the same date as the application for a warrant is made, to avoid the risk of circumstances changing between service of the notice and applying for the warrant. In any event, only 1.35% of evictions we have been instructed in relation to over the last 3 months were listed for a date less than 14 days after the warrant application was made, so the new requirements are unlikely to delay existing timescales.
• We will serve a notice in the prescribed form upon every instruction to issue a fresh warrant, as well as every instruction to re-issue a warrant. We will need to certify to the court when applying for a warrant that the notice has been served.
• Where the identity of a tenant is known, we are required to address the notice to the tenant by name. In such cases we will serve a further notice in identical terms addressed to ‘the Tenant or Occupier’, to ensure any additional, unknown occupiers are validly served.
• Tenants can only apply to stay or suspend a warrant if they have asked the lender to give a written undertaking not to enforce the order for up to two months, and this has not been given. This should mean that the lender will be on notice of a potential application before it is made.
• When considering whether to make an order to suspend, the court can take into account whether the tenant has breached the terms of the unauthorised tenancy. If it decides to make the order, it can also direct that any rent is paid directly to the lender during the period of suspension, without the risk of creating any tenancy as between lender and tenant.
• We would recommend that field agents are instructed to inspect the property prior to enforcement in all cases where an unauthorised tenancy is suspected, to reduce the risk of an application to suspend being made.

Existing protections

Existing protections will continue. These include:

• Since 6 April 2009, lenders have been required to serve notice of the possession hearing on the occupier of the property within five days of receiving notification of the hearing date from the court. Most responsible lenders had already been doing this. Since 1 October 2009 the notice must be addressed to ‘the Tenant or Occupier’. In practice, notice of the hearing is sent on the same day as proceedings are issued using Possession Claims Online (PCOL).
• Under CPR rule 55.5, the possession hearing must take place between 4 and 8 weeks from the date of issue of the claim. In practice this means that unauthorised tenants already receive significant notice of the possession hearing.
• Whilst it is in the discretion of the court, many judges will allow unauthorised tenants to be heard at the possession hearing, or even joined as a defendant to the claim.
• As a matter of good practice, we already serve notice on occupiers at the time we issue a warrant of possession. From 1 October 2010, this notice will be in the prescribed form.
• We will also continue to write to occupiers to advise of the eviction date, once this has been set by the bailiff.

Where can you find the new rules?

Please click here to view a full copy of the Mortgage Repossessions (Protection of Tenants etc) Act.

Please click here to view the regulations containing the new prescribed form of notice.

Whilst the changes may at first glance appear subtle, the Act will have far reaching implications; from the man on the street involved in a car accident, to lenders dealing with professional negligence cases.  By way of example, let’s take our man on the street who has the misfortune of being involved in a car accident.  If the car belongs to an insured company, what happens if the company goes bust?  Similarly, it may be that an insured defendant company in a professional negligence case becomes insolvent before proceedings are commenced against it.  In both cases, must the would-be claimants reinstate and secure judgment against the now defunct company before recovering from the insurance company?  

The Law Commission, which called for the new Act, correctly identified this and the following as problems under the 1930s Act:

• The third party must establish liability and quantum against the insured before bringing proceedings against the insurer i.e. there was a need to bring two sets of proceedings;
• The third party sometimes had to restore the insured to the register of companies to enable it to be sued – a cumbersome process;
• The third party’s right to any information relating to the policy did not arise until the liability of the insured was established, by which time it might be discovered that there was, in fact, no valid insurer or insurance against which the third party could proceed;
• The insurer could rely on technical defences such as a failure by the insured to perform a particular task in time;
• The 1930 Act did not deal with partnerships.

From April 2011, the Act will address many of these concerns:

• A third party need no longer join the insured in proceedings, saving both expense and time.  Instead, the third party can seek declarations against the insurer in relation to both liability and quantum in one set of proceedings;
• A third party may seek information from the insurer as to the detail and extent of the insurance policy prior to instigating proceedings.  The insurer then has 28 days to respond, failing which the third party can apply to court;
• Insurers may no longer rely on the non-performance of a technical step by the insured if that step is equally capable of being performed by the third party.

 The practical effect of the changes is that there is now greater protection for third parties who suffer loss as a result of the actions of an insured who is now no longer solvent, as the third party can take action directly against the insurer without the inconvenience of having to resurrect the insured.  Perhaps of even greater potential effect, however, is the new right to obtain information from the insurer as to the policy in place.  This, combined with the 28 day deadline for a response, is likely to represent a powerful tool for would be third parties along with a corresponding and onerous burden for respondent insurers.  Insurers should therefore brace themselves for a potential flood of “information requests” and ensure that their systems are equipped to cope.

Whilst the Law Society has expressed its disappointment at the move, for many in the industry, the announcement comes as no great surprise.

Commenting on the move, David Duckworth, Partner said, “Lloyds’ decision to reduce their panels of solicitors is not unexpected and inevitably other lenders to the residential market will follow suit.  The decision is to be applauded as it will no doubt do much to improve the protection of home-movers, as well as minimise the risk to lenders.

Mortgage fraud has reached enormous proportions and, reportedly, currently exceeds £1billion per year. It is largely perpetrated through the legal and related processes which conveyancers either control or facilitate. Many conveyancers do not ensure training and procedures within their practices are adequate to counter this threat, with increasingly alarming and costly consequences. The effects are not only felt by lenders, but often by the home-mover.

Home-movers are now far more likely to take the time to research firms and increasingly look for reliability and efficiency above all else.  The appointment of their conveyancer to a lender’s panel is a good starting point for making an assessment on who to use.”

Optima Legal’s average turnaround from offer to completion has, on average, been reduced by fifteen days from July 2009 to June 2010.  From a lender’s point of view, this general trend is positive.  With properties taking less and less time to sell, lenders will increasingly be able to alleviate the debtors position by minimising costs added to customer’s mortgages and achieving the best possible price in the shortest possible time.

Optima Legal has also seen a decrease in cases that end up in negative equity following completion, which should reduce the need for lenders to incur additional costs and time spent attempting to recoup losses incurred on shortfall cases.

Whilst we all appreciate that there remains difficult times ahead to counter the effect of the recent financial crisis, there does appear to be hope for the future.

In Barclays Bank plc v. O’Brien 1994 the defendant borrowed a large sum of money from a bank to start his own business and the loan was secured over his house. The business failed and the bank called in its loan. The couple faced losing their home, but the defendant’s wife claimed that she didn’t know she was signing a charge over the house, and that if she had known, she wouldn’t have done it. Could the bank still take possession?

The House of Lords held that a mortgage was not enforceable against a wife who had simply accepted what her husband had told her about its effect and had signed without reading it.

In a similar case north of the border, Smith v. Bank of Scotland 1997, the House of Lords followed the Barclays decision so that Scottish and English law on the issue appeared to merge, but the outcome has never seemed definitive.  

Why, lenders might ask, should we be responsible if a wife or husband signs something without realising its effect? Before Smith, Scots law was that the bank shouldn’t be responsible, provided it had acted in ‘good faith’ – whatever that means.

Now, according to Smith, it seems to mean that if the lender knows that the customer and the person signing the security are married (or in a similar close relationship) it must take ‘reasonable steps’ to ensure that the spouse’s agreement is free and informed.

So what are reasonable steps? In Smith, Lord Clyde thought it would be sufficient if the lender warned the wife of the risks she was taking and recommended that she consult an independent solicitor.

Since Smith, there have been a series of cases which have tended to restrict its effect and have made escape more difficult for the wife or husband. Not only is it necessary for the spouse looking for a way out to show that he or she had not understood that the home could be lost, he or she also has to prove that the other spouse had actively misled him or her – that there had been what the court in Braithwaite v. Bank of Scotland 1999 called ‘an actionable wrong.’ And for one spouse simply not to tell the other about the potential effect of the security was not the same as misleading them. It has also been suggested that if the wife or husband stood to gain from the mortgage, Smith might not apply.  It wouldn’t matter how badly the spouse had been advised by his or her solicitor, the lender was entitled to assume the advice had been appropriate. 

Lenders rightly stipulate that independent advice must be given to a spouse or life partner in these circumstances, the result being that the onus shifts from the bank towards the solicitor. In Royal Bank of Scotland plc v. Etridge (No.2) 2001, an English case involving a Scottish bank, the House of Lords suggested some guidelines banks should observe where they are aware of a personal relationship between the customer and the granter of the security,  among them that:

• banks should require the spouse or life partner granting the security to come to a private meeting, should explain to him or her the potential risk involved in granting the security and should recommend that he or she takes independent legal advice before signing the security deed;
• solicitors could act both for the bank and the spouse or life partner, provided there was no conflict of interest, and the role of the solicitor was to explain the risks rather than to deter the spouse or life partner from granting the security;
• the bank should check with the spouse or life partner that the solicitor acting for him or her had provided a thorough explanation of the potential risks and consequences before signing the deed.

In practice, solicitors do not normally act for the bank and the spouse or life partner in these circumstances and the spouse or life partner is referred to another solicitor, who is notified of what the bank wishes him or her to cover, and who confirms to the bank that the information and advice has been given. But the responsibility is unwelcome and many solicitors will not act as the independent adviser. Those who do act often spend almost as much time devising disclaimers and waivers as providing advice. Some claim that they just advise the spouse or life partner not to sign and then make him or her confirm in writing that this was the advice given. Hardly the protection the judges envisaged.

Some Scottish lawyers would like you to think that Scottish mortgages are simpler (and better) than English ones, but they are not perfect. For example, issues in relation to the fairness of enforcement have had to be addressed (whether or not you believe they have been resolved) by recent legislation, such as the Home Owner and Debtor Protection (Scotland) Act 2010.

Moreover, Scotland has changed since the last review of mortgage law in 1970. At present, the law doesn’t encompass Islamic ‘mortgages’, and other legislation since 1970 generally assumes that all mortgages will be standard securities, so that, for example, the protection of spouses under matrimonial homes legislation can’t be applied to Islamic alternatives. 

Over the next five years, the Scottish Law Commission intends to review mortgage law in Scotland, and we can expect some changes which may further harmonise English and Scots law, for richer or for poorer.

Today, the FSA has spoken of “intensive and intrusive supervision” to ensure firms treat their customers fairly.  Specifically, the FSA’s new rules include:

• All mortgage advisers and those who arrange non-advised sales will be held accountable and will be required to demonstrate that they are ‘fit and proper’;
• Firms must not apply a monthly arrears charge where an agreement is already in place to repay the arrears;
• Payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later;
• Firms must consider all options for borrowers with repossession always being the last resort;
• Firms must record all arrears handling telephone calls and keep those records for three years;
• Cold calling and the dropping of promotional leaflets through letter boxes shall be prohibited.

By way of explanation of these new rules, Lesley Titcomb, the FSA director responsible for the mortgage sector, has cited instances of vulnerable homeowners being evicted from their homes after 6-12 months after selling to unscrupulous sale and rent back companies.  The FSA announcement also sets out its disapproval of the practice of arrears charges being taken from customers already in difficult circumstances and trying to get their finances back on track. 

It is fair to say that many of the new rules introduced today by the FSA are already implemented in some form by lenders under their own TCF policies.  In addition, lenders are always sympathetic to those who are struggling to make repayment and will, as a matter of course view repossession as a recourse of last resort.  However, the new FSA rules do provide greater clarity as to the FSA’s expectations of lenders and their advisors.  In addition, the FSA has, by setting out these specific and identifiable rules, laid down a marker as to its attitude to customers who are in arrears and its determination to protect those most at risk.  In Lesley Titcomb’s own words “Today’s rules make absolutely clear the standards we expect of firms, and we have already taken tough action against some of the worst offenders.”

Currently, as such tenancies are unauthorised; the tenants have no rights against the lender, often having to vacate the property at short notice.

The Department of Communities and Local Government recently estimated that as many as 330,000 households in England and Wales were at risk of eviction at short notice if their home was repossessed due to unauthorised tenancy agreements. 

The new Act will allow courts to postpone a possession order by up to two months so that an unauthorised tenant can look for other accommodation. This is welcome clarification as currently cases are assessed on a case by case basis making it time intensive and costly for lenders, causing delays in the possession process. 

In Scotland, unfortunately, there is currently no equivalent legislation.  Most tenancies of privately-owned residential property in Scotland are short assured tenancies under the Housing (Scotland) Act 1988.  Ground 2 of the Act provides for the eviction of tenants and the court has no discretion. However, for an eviction on Ground 2 to go ahead, the tenant has to have been notified prior to the commencement of the tenancy that there is a mortgage over the property. The tenancy agreement must also contain a clause stating that the tenancy might be ended by the lender if the landlord defaults in repaying the loan.

Where the tenancy has not been authorised by the lender and notice was not given, the lender would have to go to court to apply to have the requirement for notice waived, and if the clause has not been included,  the lender has to find another basis on which to terminate the tenancy – more often than not a lengthy process. We are currently acting for lenders who are having to take the unusual course of raising a court action for reduction of the tenancy in order to terminate it.  In some cases, lenders have little choice but to enter into possession of the property, in effect becoming the landlord, in order to move the process of eviction and repossession along.

No doubt many eyes will be watching the new Mortgage Repossessions (Protection of Tenants) Act 2010 with the hope that legislation clarifying the law relating to unauthorised tenancies will also be introduced in Scotland.

Clearly the priority is economy recovery so that people can aspire to owning their own homes in the longer term but interest rates need to be maintained to support that aspiration. With the increase in taxes and the anticipated loss in public sector jobs, it is unlikely that there will be little to rejoice about in the short term for a housing market recovery and the proposed levy on the banking sector will also undoubtedly dampen any enthusiasm for an easing of credit.

The specific increase of CGT to 28% for higher rate taxpayers is, in my view, unlikely to have a negative impact on the property sector. Only three years ago the previous Government taxed up to 40% and in the light of that the proposed rate does not seem excessive in these austere times.  Professional property investors tend to consider the longer term investment benefit combined with the receipt of regular income and as such I do not think the increase will have a great effect. In fact the affordability gap for home ownership is likely to worsen over the next few years with an increasing demand for rented accommodation as the likely result.

Conservative proposals in their manifesto also included:

• The launch of a free national financial advice service;
• The introduction of a seven-day cooling off period for store cards;
• A requirement that credit card companies provide “clear information” to their customers;
• Ensuring that no-one is forced to sell their home to pay unsecured debts of less than £25,000; and
• The setting up of a powerful Consumer Protection Agency (CPA) to take over the Financial Services Authority’s consumer protection role, with new powers to define and ban excessive borrowing rates on store cards (but it seems that this proposal has already been shelved).

Whilst “responsibility” remains the overarching theme, the specific debt industry measures listed in both documents are, on the whole, focused firmly on debtor protection.  Whilst this is laudable, the measures don’t seem to be that different from what we already have.  In particular, under the CCA, creditors are already obliged to provide a wealth of information to debtors before (and after) credit agreements are entered into.  Furthermore, whilst the specific inclusion of and reference to a cooling-off period for store cards is new, those who enter into credit agreements off premises already have a five-day cooling off period under the CCA.

If it is accepted that the provision of credit is a necessary and/or worthwhile economic facility, then one also has to accept that “responsibility” dictates that there is an equal obligation of payment.  That is not to say that there is ever any place for debtor exploitation and mis-selling, rather, it seems to me that there is already in place more than enough legislation to protect the debtor from such practices. The issue is one of ensuring that the purpose of the legislation is understood by all concerned.

The mushrooming of claims management companies (and some law firms) encouraging people to ‘fish’ for a way out of their credit agreements via technical breaches of the CCA legislation has clearly encouraged a view that the purpose of the legislation is to provide a means to escape your responsibility as a borrower, rather than to protect your interests.

However, recent judicial decisions such as McGuffick and Carey, which were in favour of the lender, perhaps demonstrate recognition of this trend and reaffirm the fundamental purpose behind the legislation – to protect the borrower, rather than release him from any obligations.

It is to be hoped that the measures suggested by the new coalition government will not only curb any unethical behaviour on the part of creditors, but will remind borrowers of the part they have to play in a healthy credit system. When the parties speak of ‘taking responsibility’ in the context of lending and debt management, let us hope they are referring to both the borrower and the lender.

We are pleased to announce that Maggie Batts has been appointed to the role of Associate Solicitor as we continue to expand our Professional Negligence team in response to an increase in work from our lender client base.

 Qualifying in 1998, Maggie has worked at Wragge & Co, Beachcroft and Vodafone’s in-house legal team. Previously she was at the Royal Institution of Chartered Surveyors , where she managed professional conduct and standard issues

 Lesley Wilkinson, Head of Professional Negligence comments: “Maggie brings extensive experience and a wealth of knowledge that will undoubtedly prove invaluable to the team.  We continue to see a marked increase in the level of work received from our lender client base and will recruit further to match this demand.”