Receivership Update – August 2014
Print newsletter04/08/2014

The increasing impact of Article 8 ECHR issues[...]
Article 8 Article 8 of the European Convention of Human Rights (ECHR) provides that everyone […]
Article 8
Article 8 of the European Convention of Human Rights (ECHR) provides that everyone has a right to respect for his home. A possession claim by a mortgagee for mortgage default will inevitably interfere with a person’s Article 8 rights. The ECHR allows such rights to be lawfully interfered with if it is “in accordance with the law and is necessary in a democratic society in the interests of…the economic well-being of the country, for the preventions of disorder or crime,… or for the protection of the rights…of others [emphasis added].”
The Law
Section 36 of the Administration of Justice Act 1970 (AJA) (as amended) allows a stay in the execution of a possession order only if it can be established that the borrower is likely to be able to repay sums owed to the mortgagee within a ‘reasonable’ period. Those sums include the arrears that the mortgagor has incurred plus interest, together with any further sums due within the reasonable period. Further, section 36 allows the court to impose conditions with regard to payments by the borrower of ‘any sum’ secured by the mortgage.
If there is little prospect that the borrower can repay the mortgage arrears and ongoing instalments of the mortgage, his application under section 36 will likely fail. Increasingly borrowers have turned to the wider discretion afforded to the courts by Article 8 of the ECHR and the courts have had to consider the application of human rights defences in possession claims.
In its decision in Manchester City Council v Pinnock [2010] UKSC 45, the Supreme Court set out guidelines for the consideration of Article 8 in possession cases of a person’s home by local authority landlords. Because the local authority was a public body, its actions in seeking to recover possession must be a proportionate means of achieving a legitimate aim in accordance with Article 8.
Recent cases have extrapolated the Pinnock decision to suggest that as the court hearing the possession proceedings is itself a public body, Article 8 is engaged, despite both parties to the claim being private individuals. In Malik v Fassenfelt [2013] EWCA Civ 798 it was made clear that an eviction application by a private landowner would be a major interference by a public authority – the court – to the respondent’s right to a family life and home and as such the proportionality of the claimant’s actions had to be assessed by the court.
Pinnock provided further details on the proportionality test. It confirmed that the impact of Article 8 and the need to consider proportionality is most significant where domestic law gives an unqualified right to possession. In those cases, the court is obliged to consider the proportionality of the order sought. The fact that domestic law entitles possession would be a strong indicator that the making of a possession order would be proportionate. In contrast, Article 8 should impact less on the court’s decisions in cases where, as a matter of domestic law, the court has a discretion whether to make a possession order based on the criteria of reasonableness (for example, landlord possession proceedings for secure and assured tenancies). Any factor affecting proportionality would already have been taken into account by the court under domestic law when it considered reasonableness.
Arguably, therefore, Article 8 should have less impact on Section 36 applications to stay mortgage possession orders because the court has used its discretion and considered whether the borrower is likely to be able to repay within a reasonable period. And yet, more borrowers are requiring the court to consider the impact of Article 8.
In the recent case of Bank of Scotland v Cloke (unreported 28 June 2013) a possession order by the claimant lender was suspended by the court under section 36 AJA on condition that the respondent pay the current monthly instalment plus an additional £2,000 per month towards arrears. The defendant failed to meet those conditions and sought to stay a further warrant for eviction due to the fact that her severely disabled son needed urgent surgery with a lengthy recovery time. Although the defendant was unlikely to be to meet the financial conditions and so would fail in a section 36 AJA application, the district judge allowed a stay of execution stating that Article 8 of the ECHR gave the court a wider discretion. The Supreme Court in Pinnock had suggested that proportionality was more likely to be a relevant issue in respect of occupiers who are vulnerable because of mental illness, physical or learning disability, poor health or frailty. And so, the district judge suspended the warrant for eviction for a further eight weeks.
Comment
The condition of the defendant’s son in Cloke was clearly an unfortunate and exceptional circumstance which the district judge considered warranted a full consideration of whether the lender’s actions in seeking to recover possession were a proportional means to achieve its aim and compatible with Article 8 ECHR.
Lord Neuberger said in Pinnock that the wide implications of the obligation to consider proportionality “will have to be worked out” and these cases are doing just that, but there is no doubt that Article 8 presents an additional obstacle to the recovery of possession. Tenants and borrowers’ advocates are likely to assert Article 8 with increasingly regularity and the courts will continue to grapple with what constitutes special circumstances and proportionality going forward.
In the meantime lenders and landlords alike can take certain best practice steps to minimise the risk of successful article 8 challenges, such as:
- assess whether any proposed action is a proportionate means of achieving a legitimate aim – can repossession be objectively justified on the facts of the particular case? Properly document the entire decision-process to enable the best evidence to be given if required
- take into account any medical evidence produced in respect of the tenant/borrower and their dependants and seek assistance of specialist agencies at an early stage in the process where ‘vulnerable’ individuals are involved.
For more information on possession orders and the impact of Article 8 contact Andrew Beck.

Private landlords – the Article 8 Defence and receivers’ powers
In the recent case of McDonald and Others v McDonald [1], the Court of Appeal […]
In the recent case of McDonald and Others v McDonald [1], the Court of Appeal considered whether (1) an order giving a private landlord possession of a premises held on an assured shorthold tenancy would breach Article 8 of the European Convention on Human Rights (ECHR) after serving a statutory notice under section 21(4) of the Housing Act 1988, and (2) whether receivers appointed by a mortgage pursuant to the terms of a legal charge were afforded powers for which there was no express provision in the mortgage terms.
In this case, a married couple borrowed money by way of mortgage from a third party (the Funder) in order to acquire premises. Upon purchasing the premises, the borrowers (the Landlords) granted, in breach of the mortgage terms, an assured shorthold tenancy agreement to their disabled daughter.
The Landlord subsequently defaulted on their mortgage and as a result, the Funder appointed receivers (the Receivers) pursuant to the terms of the mortgage. The Receivers served upon the tenant a notice in their own name pursuant to section 21(4)(b) of the Housing Act 1988 and subsequently commenced possession proceedings in the name of the Landlord. At the initial hearing, the County Court made an order for possession of the premises as they were required to do by statute after having satisfied themselves that the tenancy had expired and that the appropriate notice had been served.
The tenant appealed against the initial decision arguing that the order for possession infringed her right to respect for her home as guaranteed by Article 8 of the ECHR (the Article 8 Defence). The tenant appealed in the alternative on the basis that the notice served pursuant to section 21(4)(b) of the Housing Act 1988 was invalid as it had been served by the Receivers who did not have the express power to serve such notice pursuant to the mortgage terms.
The Court of Appeal stated that in cases where a defendant invokes the Article 8 Defence and the claimant is a public authority, the court is required to consider the proportionality of making such a possession order. However, there had not been sufficient case law to establish that the Article 8 Defence was applicable in a case involving private parties. Notwithstanding this, the Court of Appeal stated that considerations of the private Landlord’s proprietary rights and the Funder’s financial disadvantage outweighed the consideration of the mental health circumstances of the tenant. Therefore, even if the Article 8 Defence had been applicable, it would have been bound to fail.
Secondly, the Court of Appeal ruled that the mortgage terms should be interpreted purposively. The mortgagee afforded the Receivers the power to enter possession of the premises. As such, the powers of the Receivers should be interpreted to include anything which was necessarily incidental to affect the sale of the premises, including the power to take possession of the premises and sell it. In this regard, the Court of Appeal stated that the service of a notice pursuant to section 21(4)(b) of the 1988 Act was necessary in order to enable the Receivers to gain vacant possession of the premises and subsequently realise its value on behalf of the Funder. On such an interpretation, the Court of Appeal found that the Receivers could pursue proceedings in the aforementioned manner in order to accomplish the aim for which they had been so appointed.
The Court of Appeal dismissed the tenant’s appeal.
The Court of Appeal’s judgment on the receivers’ statutory powers is a sensible one and should be welcomed. It demonstrates that receivers can exercise powers beyond those expressly given to them under the mortgage deed if what they are trying to achieve is “incidental” to the powers they do have. The case is also the latest in a succession of Article 8 defence cases that are coming before the courts.
[1] [2014] EWCA Civ 1049

The approach of the courts to challenges to LPA receiverships
The High Court case of (1) Jumani (2) Tariq v (1) Mortgage Express (2) Walker […]
The High Court case of (1) Jumani (2) Tariq v (1) Mortgage Express (2) Walker Singleton [1] concerned a challenge to the continuing appointment of LPA receivers and is instructive of the approach the courts are taking to challenges to appointments.
The case concerned borrowers who had a buy-to-let portfolio with many of the properties mortgaged. The mortgage conditions provided that “If you have more than one mortgage with us, and you want to pay off just one of those mortgages, we have the right … to stop you paying off the mortgages separately and to insist that you pay them all off”.
Following default, the bank appointed receivers. The receivers were the second defendants in the case (the bank being the first defendants).
The borrowers alleged that there was a binding agreement, albeit an oral agreement, between them and the bank by which the bank agreed to terminate the appointment of the receivers and return the portfolio to them on the basis that they would manage the properties and return the account to credit. The borrowers maintained that the bank was not honouring the agreement by reason of its failure to terminate the receivership.
The court rejected the borrowers’ submissions. It held that under the terms of the mortgage the bank was entitled to appoint the receivers and, further, there was no obligation on the bank to terminate the receivership even if the arrears were cleared. If the borrowers were to succeed in showing a variation to the bank’s right to appoint receivers then they would have to adduce evidence of a binding and enforceable agreement to do so. This, the borrowers had failed to do. The court held that the terms alleged by the borrowers were very vague and that it was commercially unlikely that the bank would have agreed to such a variation to the mortgage conditions.
The court also considered the question of the receivers’ agency, noting that, in accordance with the mortgage conditions, the receivers were the agents of the borrowers not the bank and therefore the bank was not liable for the receivers’ actions even though their core duties were owed to the bank. This was the case unless it could be shown that the bank had interfered in the receivership or that the receivers were acting at its direction which, again, was not the case here.
The case should offer reassurance to LPA receivers that borrowers seeking to challenge their appointment or terminate their appointment face a high hurdle. In particular, it shows that the courts will adopt a strict contractual approach to any suggestion by the borrower that the mortgage conditions have been varied. It is also a reminder that the acts or omissions of the receivers are unlikely to bind the lender unless it can be demonstrated that the lender has taken additional steps to assume responsibility for the actions of the receivers.
[1] [2013] EWHC 1571 (Ch)

The duty of a mortgagee in possession on a sale
The issue in the recent High Court case of Aodhcon LLP v Bridgeco Ltd [1] […]
The issue in the recent High Court case of Aodhcon LLP v Bridgeco Ltd [1] was whether a bridging loan company had taken reasonable care to sell the property at the best price reasonably obtainable.
Aodhcon was a special purpose company established to develop a property. It sought a bridging loan from Bridgeco to complete the redevelopment of the property and to enable it to repay its bank loan. Bridgeco obtained a mortgage valuation which indicated that, as of March 2010, the value of the property with vacant possession was £1.4 million or £1.25 million on a 90-day sale.
Bridgeco advanced £750,000 over a six-month term, secured by way of a first legal charge over the property. Aodhcon proved unable to sell the property and voluntarily delivered up possession to Bridgeco. In March 2011, Bridgeco exchanged contracts with a third party for a sale price of £852,000.
Aodhcon argued that Bridgeco had breached its duty as mortgagee in possession to sell the property for the best price reasonably obtainable.
In a helpful judgment, the court listed the relevant applicable principles:
- the mortgagee has an equitable duty to take reasonable care to sell for the best price reasonable obtainable at the date of exchange of contracts
- this requires an informed judgment and there are no prescribed steps which the mortgagee must take generally, it is for the mortgagee to decide on the manner of the sale after having taken expert advice
- the property should be properly advertised, i.e. sufficiently frequently and widely to reach the appropriate pool of prospective purchasers
- the mortgagee is entitled to decide the length of marketing time, subject to the requirement that it is properly advertised
- the mortgagee is not obliged to improve the property for sale. However, he is obliged to advise prospective purchasers of achievable potential
- there is an acceptance that repossession can adversely impact the sale price
- the mortgagee will not have breached his duty unless he is “plainly on the wrong side of the line”
- the fact that a higher price might have been obtained does not mean the mortgagee has breached his duty
- the burden of proving a breach rests on the mortgagor.
The court made very clear that the duty of a mortgagee when exercising the power of sale to take reasonable care to achieve the best price reasonably obtainable is not the same thing as a duty to obtain the best price reasonably obtainable. There was a link between the breach of the duty and the duty to act in good faith. A breach of the duty to act in good faith would be a breach of the duty to exercise reasonable care to sell the property for the best price reasonably obtainable.
The court rejected the argument that it should adopt a “margin of error” approach (10-15 per cent was proposed). The court rejected this argument, noting that it would serve only to limit the flexibility of the court and would depart from the established approach that liability would be imposed where the mortgagee was “plainly on the wrong side of the line”.
Bridgeco had not breached its duty. Whilst it had not obtained a Red Book Market Value valuation it was under no obligation to do so. There was evidence that it had obtained valuation advice from a duly qualified agent. In any event, the Red Book Market Value was inappropriate in this case as the sale was by a mortgagee in possession within a short timeframe and the property was not ready for immediate occupation.
The judgment should be welcomed by mortgagees and is relevant anytime a mortgagee exercises its power of sale (even if the mortgagee has not taken possession and receivers have been appointed). It is also guidance for receivers or other professionals on the factors that should be considered in order to fulfil their own duties to a mortgagor. The only caveat is the various references throughout the judgment to mortgagees not being in breach of duty unless they are “plainly on the wrong side of the line”.Where the line is drawn will not always be clear. So, despite this helpful judgment, grey areas will no doubt remain.
[1] [2014] EWHC 535 (Ch)