17th December 2018
Lenders that have been granted security over a debtor’s property typically have two options when seeking to take possession: they can apply to the courts for a possession order; or they can exercise their common law right and take possession without a court order. Until recently, it seemed reasonable that a lender who could not use one of these methods for some reason, could simply turn to the other.
However the recent case of Goldhill Finance Ltd v Berry  directly challenges this approach. It decided that a lender who took possession pursuant to its common law right after seeking a court order had created an unfair relationship pursuant to section 140A of the Consumer Credit Act 1974 (CCA).
The case opens up a wider question as to whether all lenders risk giving rise to an unfair relationship by opting to take possession without a court order, and what impact such a finding would have on the right to possession, sums due and the loan agreement itself. Banking & Finance Litigation specialist explains.
The defendant borrower had obtained a loan from the claimant lender. The loan was secured over an investment property, was due to be repaid a few months later and featured a high rate of monthly interest. When the borrower failed to repay, the lender sought possession via the court and obtained a possession order.
A warrant for possession was requested however, before it was due to be executed the borrower applied to the court to have the warrant for possession suspended under section 36 of the Administration of Justice Act 1970 (AJA), as the borrower had agreed in principle to sell the property and believed it could then satisfy the debt. The court suspended the warrant accordingly.
The lender, no doubt being mindful of limited equity in the property and the high rate of interest, decided nevertheless to take possession –pursuant to its common law right.
Upon the lender taking possession, the borrower’s agreement to sell the property faltered and the lender had to relist the property for sale elsewhere. The property was finally sold months later. The lender applied the proceeds to the loan, which left a significant shortfall on the loan together with outstanding interest.
The lender then brought a money claim for the amount outstanding. The borrower counterclaimed, pleading an unfair relationship based on the circumstances in which the lender had taken possession.
Section 140B (9) of the CCA places the burden of proof on the claimant to show that the relationship was not unfair. The claimant lender here attempted to justify its taking of possession without a court order by reference to concerns as to the likely market price of the proposed sale, suspicions as to whether the proposed sale was genuine and doubts as to whether there was sufficient equity in the property to satisfy the debt.
The defendant borrower argued, however, that the proper course would have been to appeal the suspension order and that it would be nonsensical for the common law right and the statutory path to be used simultaneously, as that would lead to a position whereby a judge could be strong-armed by any claimant’s assertion that it would take possession regardless.
The judge agreed with the borrower’s submissions:
“it cannot be right… for a mortgagee to be able to say ‘whatever the court order says, I do not agree with it and therefore I’m going to exercise my common law right, ignoring the effect of the order and take possession in any event’…
It seems to me that… once a mortgagee has started court proceedings, the court may regulate the existence of the right to possession (under section 36), and whilst the common law right is not extinguished, it cannot be enforced”.
The court therefore found that taking possession in the face of an existing, suspended warrant for possession created an unfair relationship under the loan agreement. The judge ruled that the correct approach was to proceed on the basis that the original sale would have gone ahead and to award the lender the sum to which it would have been entitled on that date (which included considerably less interest than had accrued by the date of the actual sale).
Importantly, the court distinguished the earlier Ropaigealach  case, which had decided that the court cannot apply its power to adjourn possession proceedings under section 36 of the AJA to prevent a lender from taking possession without a court order. The judge explained that, once court proceedings have started and once an order under section 36 has been made suspending the warrant, it is no longer open to the mortgagee to exercise its common law right to possession – it cannot have been the intention of Parliament to give a borrower the protections afforded by section 36 in the face of court proceedings for possession, but nonetheless to allow a lender to take possession irrespective of any order under section 36. The situation is therefore clearly different where possession proceedings have been pursued through the courts.
The lender in this case managed to recover the debt owed to it. However the finding of an unfair relationship potentially opens the door to a range of issues for lenders seeking to enforce without a court order.
Where a relationship is found to be unfair, the courts have wide powers under section 140B (1) CCA to provide remedies to a borrower for any loss or harm suffered by a lender’s self-help enforcement. Though Goldhill related to a situation where the court had exercised its powers under section 36 of the AJA, it is possible that the courts may now go further and find that a lender should not be entitled to possession under the common law whenever court proceedings for possession have begun .
Whilst it is not expected that the courts will adopt the concept of unfair relationships to undermine the common law right to possession altogether, it may enable the court to look beyond the standard conditions imposed by a lender so as to come to a more flexible arrangement to satisfy a debt in a manner which it considers just.
However, in a worst case scenario, a lender giving rise to an unfair relationship could open itself up to an order to return the property, repay any sum paid under the agreement and discharge the debt, at a significant loss to themselves. This scenario is a far cry from Goldhill and each case will be decided on the individual facts of the case, but the case is clear authority that, to minimise risk, lenders should avoid juggling between the two methods of taking possession.
 (Heard 6-8 August 2018) County Court at Central London (Unreported)
 Ropaigealach v Barclays Bank Plc  1 QB 263
 Stephen Boyd, barrister ‘Ropaigealach distinguished’ in EG Magazine (17 November 2018) pp 70-71