Northern Ireland High Court of Justice, Masters' decisions

	Ref:	Master47
Judgment: approved by the Court for handing down	Delivered:	25/04/06
(subject to editorial corrections)*

 

2005/17105

 

IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND

 

CHANCERY DIVISION

 

Between

 

Bradford & Bingley PLC

Plaintiff

 

And

 

1.  Thomas Patrick Bennett

2.  Gabrielle Bennett

Defendants

 

MASTER ELLISON

Background

1.         This is an application by the plaintiff bank by originating summons dated 28 April 2005 for an order for possession of the dwellinghouse and premises 1 Donard Avenue, Bangor, County Down.  The property is owned by the Defendants subject to a mortgage dated 7 June 1994 by them in favour of Bradford & Bingley Building Society which subsequently on 4 December 2000 transferred all its property, rights and liabilities to the plaintiff. 

2.         The grounding affidavit of Catherine Mary Lawless, Credit Collections Manager of the plaintiff, sworn on 27 May 2005 sets out the state of the account between the parties (as at the date of swearing unless otherwise indicated) as follows:-

“(a)      the amount of the advance                                                                     £50,000

(b)        the total amount of further advances, if any                                            £   --

(c)        the amount of monthly instalments payable as at the date hereof             £343.00

(d)        the amount of instalments or other payments due under the mortgage

            in arrears         

            (i) at the date of issue of originating summons being 28 April 2005 £1,250.20

            (ii) at the date hereof                                                                             £1000.20

(e)        amount remaining due under the mortgage                                       £52,380.79”

3.         The affidavit also explained (among other things) that at the date of swearing the last payment on the mortgage account had been £250.00 on 4 May 2005 and that only the Defendants are in occupation of the dwelling house. 

4.         At the hearing of this matter on 21 February 2006 Mr McGranaghan, Solicitor, of the firm O’Reilly Stewart for the plaintiff announced that the arrears of instalments then stood at £2,220.90, the monthly instalment at £387.70 and the balance due under the mortgage was £53,143.89, the last payment having been £250 on 31 January 2006.

5.         In an affidavit filed on 27 October 2005 the first defendant Mr Bennett explained that his business as a solicitor closed in December 2001 and he was unemployed for several months, but despite this  and the death in the same month of the second defendant’s mother he and his wife continued to pay the monthly instalments due on foot of the mortgage and this continued down to the date of swearing.  In fact a monthly payment appears to have been missed in December 2001 or January 2002 (albeit the arrears at that time were cleared completely in December 2003).  Moreover, since February 2004 the defendants have been paying equal monthly sums of £250 each whereas the contractual monthly instalments according to by the plaintiff’s evidence have been somewhat higher over the last few years and have altered significantly between one financial accounting year and the next, most dramatically in 1994 when the contractual monthly instalment was increased from £263.30 to £367.80 with effect from January 2004.  That increase was stated in a letter of 26 February 2004 from the plaintiff to the defendants to be ‘due to litigation costs and fees charged in 2003, which have to be paid this year’.

6.         Mr Bennett claimed that a payment made towards the end of 2001 was not met by his bank but a failure of the plaintiff to inform the defendants of this development until July 2002 “appears to have caused arrears to accumulate”. 

7.         Mr Bennett further states that he made further payments in December 2003 which at the time he had believed ‘brought the arrears situation up to date’.  He adds that the value of the house greatly exceeds the balance due to the Plaintiff under the mortgage.

8.         The first defendant further avers that he contacted the plaintiff on a number of occasions by letter and telephone in an effort to discuss the matter with them as he felt the charges they were levying were unnecessary and excessive.  However, he ‘found their attitude to be inflexible and they simply were not prepared to enter into discussions on that aspect’.

9.         Mr Bennett’s affidavit also quoted extracts from a publication issued in January 1997 by the Council of Mortgage Lenders, of which the plaintiff is a member, headed ‘Handling of arrears and possessions – CML Statement of Practice’ as follows: -

“Mortgage Arrears

General Principles

The following General Principles are relevant to the question of mortgage arrears: -

 

(2)        (a) Where a borrower falls into arrears, the problem should be handled sympathetically and positively by the lender.  The lender’s first step will be to try to contact the borrower to discuss the matter. 

 

(b)  Once contact has been established, a plan for dealing with the borrower’s financial difficulties including the arrears will be developed consistent with the interests of both the borrower and the lender.

 

(c)  Possession of the property will be sought only as a last resort when attempts to reach alternative arrangements with borrowers have been unsuccessful.  The borrower will remain liable for the mortgage debt.

…

 

Possession

 

Methods of obtaining possession

 

(13)      Possession will be sought only as a last resort when all attempts to reach alternative arrangements have been unsuccessful.

…

(16)      In December 1991, after detailed discussions with the Government the CML reaffirmed it is the policy of lenders to take possession only as a last resort and to handle arrears problems efficiently and sympathetically.  A formal announcement was made by the Chancellor of the Exchequer in the House of

Commons and at a press conference on 19 December 1991.

The announcement referred to the fact that

(a)        where borrowers have suffered a significant reduction in their income but are making a reasonable regular repayment, lenders do not seek to take possession.

….”

 

10.       The first defendant’s affidavit describes the approach in the present case of the plaintiff to the arrears situation as having been ‘bureaucratic, institutional and inflexible’.  He believes that the action taken by the plaintiff has ‘mainly served to increase costs unnecessarily and that the costs levied by the plaintiff are the sole reason for the present arrears situation’.  As at the date of his affidavit in October 2005 he calculated that ‘the costs incurred by the lender since arrears first occurred amount to over £2,700’.  It was the intention of the defendants to place the property on the market for sale in the near future with a view to redeeming the mortgage out of the proceeds.  

 

 

The Next Year Payment Rule: costs and administration charges

11.       It appears from the first defendant’s affidavit and the submissions of the solicitor for the defendants, Mr Denis Humphreys, that the defendants are aggrieved about the plaintiff’s practice, where a mortgage is to be repaid on an ‘interest only’ basis, of requiring all legal costs and default administration charges accruing in any given mortgage accounting year (which corresponds with a calendar year) to be included in and paid in full by consecutive monthly instalments during the next calendar year.  (In this judgment I shall refer to this practice as “the Next Year Payment Rule” or “the Rule”.)

12.       In an explanatory document about the annual mortgage review process (for 2005) and exhibited to the plaintiff’s affidavit evidence (but not available to the defendants before completion of the mortgage transaction), the following appears under the caption ‘How does my mortgage work?’: -

“With an Interest Only mortgage, your new monthly payment includes:

 

·        The interest charged on your mortgage (including any changes in the interest rate during 2004).  The payment is calculated to ensure your balance is brought in line with the Interest Only loan amount by the end of the year.

 

·        Any unpaid property insurance which was debited in 2004 to your mortgage account.

 

·        Your monthly payment protection premium if debited to your mortgage account.

 

·        Any unpaid fees or charges debited in 2004”.

 

13.       The plaintiff has filed, in addition to the original grounding affidavit, three affidavits of Seamus McGranaghan, a solicitor of O’Reilly Stewart Solicitors, exhibiting relevant documentation covering the background to the mortgage transaction, the details of the mortgage contract itself, and subsequent correspondence and statements of mortgage account.  In his evidence and submissions for the plaintiff Mr McGranaghan denies that his client has been inflexible or unreasonable.  In this context Mr McGranaghan’s evidence referred to a number of occasions when the plaintiff wrote to the defendants about the arrears (which had been cleared in full in December 2003 only to recur the following month when the defendants increased their payments to £250.00 against a sharp increase in the contractual payment from £263.30  to £367.80), and that on 3 occasions the plaintiff instructed an enquiry agent to interview the defendants, whose attitude was described as ‘unco-operative’.  Mr McGranaghan also referred in his affidavits and submissions to the exhibited documentation in defence of the Next Year Payment Rule.

14.       I am satisfied from the exhibits to the affidavits filed for the plaintiff that the plaintiff is entitled under the mortgage contract to add to the mortgage debt not merely legal costs but also default administration and other charges properly incurred in connection with the default.  There is nothing exceptional about this and inasmuch as a mortgage lender adds these charges to the overall indebtedness it is quite consistent with the following paragraphs of the CML Statement of Practice which I have already mentioned (the emphasis being mine): -  

“The levying of charges on Accounts in Arrear

 

(9)        In recent years, lenders have developed effective administrative and forbearance procedures to deal with cases were the borrower is unable to meet the mortgage repayments in full.  A great deal of time and resources has been devoted to ensuring that these procedures operate to assist defaulting borrowers remain in their homes.  Taking into account the additional costs which might be incurred in administering accounts in arrear, lenders may levy a fee on the borrower’s account to meet a proportion of these costs.

 

(10)      However, lenders also recognise the difficulties facing borrowers who are experiencing problems meeting their mortgage repayments.  If the fee is levied on an account, it usually represents the reasonable costs of the additional administration required.  When fees are charged, these may be either on a monthly or quarterly basis.  Alternatively lenders may charge only where certain administrative procedures have been carried out, for example, a home visit by a money advisor (employed by the lender) or where legal proceedings have been initiated.

 

(11)      In practice, lenders advise borrowers of any fees which might be charged prior to the fee being levied or, when the fee is in respect of services, prior to the services being provided.  Lenders may also advise borrowers when they take out a mortgage that fees may be charged to the account if it falls into arrear.  Information on any fees is usually incorporated in mortgage documentation or published tariffs.”

 

15.       In the present case, and in ‘interest only’ mortgages generally, the plaintiff claims that it would be inappropriate for such additional charges merely to be added to the total indebtedness to be repaid in due course under the mortgage as that would increase the overall amount of principal beyond the amount initially advanced and which would have to be repaid out of the proceeds of an endowment policy or other repayment vehicle at the end of the mortgage term (if not redeemed sooner by sale,  remortgage or otherwise).  It is therefore appropriate, asserts the plaintiff, to require all legal costs and charges to be paid by incorporating them (at the time of each annual review) into the monthly instalment payable during the next succeeding financial year after they were incurred.   This, however, appears to be a matter of policy as opposed to a legal necessity under the mortgage contract which contains a number of provisions expressly permitting the plaintiff to add costs and administration charges to the capital balance and charge additional interest accordingly.

16.       As I have indicated, the terms of the mortgage and other documents including the relevant mortgage conditions and rules do indeed confirm there is an obligation on the borrowers to pay both legal costs and administrative charges levied in accordance with the mortgage contract and published tariffs and arising from default.   It falls to me to decide whether the mortgage contract requires the plaintiff to permit the defendants to defer payment of costs and charges on the same basis as the capital advanced under the mortgage or whether the plaintiff can insist on payment of costs and charges within a fixed period much shorter than the residue of the mortgage term.

Relevant Terms of the Mortgage Contract

17.       Clause 16 of the plaintiff’s exhibited Rules Relating to Mortgages reads as follows (the emphasis being mine): -

“(1)      If a member who has mortgaged land to the Society shall be in arrears with his periodical payments due under the mortgage, he may be charged additional amounts in respect of such arrears at such rate not exceeding the rate charged on his advance as the Board may from time to time determine, per month or part of a month during which the same shall be or were in arrear calculated as from the due date of payment.  Such member shall also pay to the Society all legal expenses (calculated as between Solicitor and own client) incurred by it in or about the recovery of such arrears or additional amounts.

 

(2)        All such additional amounts shall be deemed to be payable without demand on the date upon which the same is imposed.

 

(3)        Such additional amounts and legal expenses (calculated as aforesaid) payable by the member shall be a charge upon the mortgaged land together with interest thereon at the rate for the time being applicable to (sic) mortgage advance calculated in the case of such additional amounts from the date upon which the same were imposed and in the case of legal expenses from the date of payment thereof by the Society”.

 

18.       Clause 18 of the Plaintiff’s Rules Relating to Mortgages states (the emphasis again being mine):-

“The Board may demand payment from any member in respect of any costs, expenses or liability that the Society may incur directly resulting from any act, default or neglect of such member.  Such charges, including a proper sum for the costs of time, facilities, accommodation and services of its officers, employees and agents shall be recoverable from the member on the basis of a full indemnity.  In the case of a borrowing member this sum, if unpaid, may be debited to the mortgage account with interest at the rate payable from time to time.”

 

19.       Section 8(d)(1) of the plaintiff’s Mortgage Conditions (Northern Ireland) 1992 states:-

“The borrower shall pay on a full indemnity basis all costs, charges and expenses incurred by the lender in: (i)  the protection realisation and enforcement of this

Mortgage (whether involving litigation or not) including but not limited to any claims or proceedings brought by the Borrower or any third party in connection with the validity of this Mortgage or any part thereof and the exercise of any right remedy or power.”

 

20.       The defendants relied during submissions on the method of calculating ‘the monthly amount’ at paragraph 5.1.2 of the plaintiff’s Additional Terms to Offer of Mortgage Advance which reads as follows (so far as relevant): -

“calculating or recalculating as at any subsequent date (ie. after completion of the advance) the Monthly Amount shall be based on the Borrower’s Indebtedness and the Interest Rate as well as the Repayment Period then applicable.”

 

21.       However, this paragraph is qualified crucially by paragraph 5.3 which reads as follows (again, so far as relevant):-

“5.3 the Monthly Amount may be varied at any time and from time to time by written notice to the Borrower from the  lender so as –

…..

5.3.2 to include any increased or additional amount which the lender may require to be paid in its discretion or costs.”

 

22.       As a matter of interpretation of the mortgage contract this is sufficient in law for the plaintiff to insist (if it elects to do so, which in my experience of over 12 years in post would in the context of residential mortgages be an election made by very few lending institutions and no other mainstream lending institution of which I am aware) on payment forthwith or upon demand of such legal costs and charges.  I mention at this point that, as the mortgage contract was entered into before 1 July 1995, it is unnecessary for me to consider paragraph 5.3.2 or any of the other terms of the mortgage contract under the provisions of The Unfair Terms in Consumer Contracts Regulations 1994, which Regulations were revoked by The Unfair Terms in Consumer Contact Regulations 1999 which came into force on 1 October 1999.

23.       Paragraph 5.3.2, unlike 5.1.2, is free of any reference to the Repayment Period  and given the other provisions in the mortgage contract requiring payment of costs and default administration expenses by the borrowers, perhaps especially Clause 16 (already quoted by me) of the plaintiff’s Rules Relating to Mortgages, I am bound to conclude the plaintiff is within its strict legal rights in demanding payment of legal costs and other default charges within a fixed period.  The counter-argument by the defendants, that there is a contractual requirement that the relevant legal costs and default charges will simply be added to the mortgage debt to be repaid with interest over the residue of or at the end of the mortgage term cannot succeed as the references to adding the costs and charges to the mortgage debt are not in terms which prevent the plaintiff from going further and calling for full payment by an early date of the relevant costs and charges.  The plaintiff therefore has succeeded on the main legal issue under contention in these proceedings. 

Implications of the Next year Payment Rule: Policy Statements Published on behalf of the Plaintiff

24.       However, I am also satisfied that the plaintiff’s practice in this area is not consistent with various commitments given by it and many other lenders to prospective and existing borrowers under the Mortgage Code and the CML Statement of Practice – which, while not being contractual obligations, must be regarded as standards by which the fairness and reasonableness of the mortgage practices of subscribing lenders may be assessed.  (Incidentally, some of the Banking Code’s terms mirror exactly a number of relevant commitments contained in the Mortgage Code but the Banking Code was not relied on in these proceedings and I shall make no further reference to the latter publication in this judgment.)

25.       I quote the following promises contained in the Code: -

“KEY COMMITMENTS

 

1.1       We, the subscribers to this Code promise that we will: -

 

·        Act fairly and reasonably in all our dealings with you;

 

·        Ensure that all services and products comply with this Code, even if they have their own terms and conditions;

 

·        Give you information on our service and products in plain language and offer help if there is any aspect which you do not understand;

...

 

·        Help you to understand the financial implications of a mortgage;

 

·        Help you to understand how your mortgage account works;

 

·        Ensure that the procedures our staff follow reflect the commitments set out in this Code;

…

 

·        Consider cases of financial difficulty and mortgage arrears sympathetically and positively;…”

 

26.       In my opinion the practice of this lender, in ‘interest only’ mortgages which fall into arrears, of increasing the mortgage instalment in the next succeeding financial year so that by the end of that year accrued legal costs and other administrative charges are repaid in full is inconsistent with each of the key commitments as listed above.  Moreover, the Next Year Payment Rule appears to be applied inflexibly to unpaid costs and charges under all interest only mortgages on which arrears have accrued, even where (as in the present case) there is substantial equity to protect the plaintiff against any shortfall in repayment of capital.

27.       Although the relevant edition of the Code appears to have been published after the 1994 mortgage transaction between the parties, the promises are made for the apparent benefit of both prospective and existing borrowers.  I draw attention to the following specific commitments in paragraph 3.2 (so far as is relevant): -

“3.2      When providing information to help you to choose a mortgage …we will give you the following:

 

·        For interest only mortgages

 

·        an explanation of the main repayment methods we offer (for example, repayment or interest only) and the repayment periods available; …

 

·        an explanation of the effect of making suitable arrangements to repay the mortgage; …

 

·        a general description of any costs, fees, or other charges in connection with mortgage that may be payable by you…”

 

28.       There is nothing in the documentation to suggest that prior to completion of the mortgage transaction the lender provided a clear or adequate explanation of the Next Payment Repayment Rule to these defendants or their solicitors.  The closest thing to such an explanation appears to be Clause 10 (b) of the plaintiff’s Information for prospective Borrowers which reads as follows:-

“(b) Interest and One Capital Repayment Mortgages:  The Mortgage is for a fixed capital amount which does not vary throughout the mortgage term.  Monthly payments are composed of interest plus one twelfth of any other items charged to the account such as insurance premiums.”

 

There is, however, no express reference in this provision to items as important as legal costs and administration fees.  There is such an express reference in the next Clause of the same document which deals as follows with how costs and charges will be treated by the lender:-

“11.  The Society may make charges for any costs incurred directly from any act, default or neglect of a borrower.  Such charges shall be recovered on the basis of full indemnity.  Unpaid account charges may be debited to the mortgage with interest.” (the emphasis is mine.)

 

The failure to provide a clear or adequate explanation of the Rule is compounded by the fact that the plaintiff’s Standard Instructions to Solicitor require the borrowers’ solicitor merely to advise the borrowers to read the booklet Information for Prospective Borrowers; he is evidently not expected to read the document himself or to advise the borrowers on its content.

The problem is compounded further by the explanatory leaflet about the annual mortgage review process where it is stated (under “Options available”) as follows (emphasis supplied): -

“1.        If you have an ‘interest only’ mortgage you may wish to consider the following: -

Spread the shortfall over the remaining term of your mortgage rather than over the next 12 months, by completing and returning the coupon in this leaflet.  We will then contact you to inform you of your revised monthly payments”

 

A reader might well conclude from this that it covers unpaid costs and administrative charges and that borrowers may opt out of the Next Year Payment Rule.  However it appeared from submissions in these proceedings that the reference to “the shortfall” does not include unpaid legal costs or other default charges, but refers to shortfalls under endowment policies.  (Incidentally, those shortfalls are not included in the extract I have quoted from an explanatory document at paragraph 12 of this judgment.)

The plaintiff’s solicitor was unaware of the Next year Payment Rule when the defendants’ solicitor drew attention to its existence at the initial hearing before me.  I mention this not merely to highlight the lack of any satisfactory communication from the plaintiff about this Rule, but to emphasise that my comments later in this judgment about a failure to draw the practice to the court’s attention in past cases should not be taken as suggesting any lack of candour on the part of the plaintiff’s solicitors.

Implications of the Rule for Defaulting Borrowers

29.       The plaintiff’s practice in this area makes it significantly more difficult for borrowers to address mortgage default at all or within a reasonable time.  The monthly instalment is increased, sometimes dramatically, to ensure payment of legal costs and administration charges within a relatively short predetermined period.  This means that if the plaintiff instructs solicitors with a view to bringing  proceedings for possession, even where arrears of instalments are addressed in Year One by borrowers with limited resources, their task in meeting the new increased monthly instalments in Year Two may have been rendered insuperable.  The bar may have been raised to a height which makes it impossible for them to put a realistic proposal to either the plaintiff or the Court to discharge the arrears within a reasonable time.  This will be so even where the financial commitments of the borrowers have improved and stabilised so as to enable them to address the initial default, but not to the extent that they can afford the increased monthly payments in Year Two.  Default in Year Two would then trigger more charges, which, if unpaid, would presumably lead to another increase above the normal level of monthly instalments in Year Three.  There is of course a range of alternative scenarios in which the Rule could operate to the disadvantage of borrowers trying to address their financial difficulties.  The net effect is that the plaintiff, by requiring payment within the next succeeding calendar year of the relevant legal costs and other default charges, has substituted its own period for payment of monies due under the mortgage without giving any, or any sufficient, consideration to the means of the borrowers to address their payment obligations within that or any other period.

30.       This practice is at variance not only with the statements in the Code and the Statement of Practice already mentioned in this judgment but also with the following extracts from paragraph 8 of the Code (which broadly follows some extracts I have already quoted from the Statement of Practice, which I believe bear repetition): -

“8.1  We will consider cases of financial difficulty and mortgage arrears sympathetically and positively…

 

8.2  We will do all we can to help you overcome your difficulties… the more you tell us about your full financial circumstances the more we may be able to help.

 

GENERAL PRINCIPLES

 

8.3  We will follow the general principles of the CML Statement of Practice in handling arrears and possessions, including: -

 

·        With your co-operation, developing a plan with you for dealings with your financial difficulties and clearing the arrears, consistent with both our interests and yours;

 

·        Possession of your property will be sought only as a last resort when attempts to reach alternative arrangements with you have been unsuccessful.”

 

31.       I am not aware of any other lending institution which adopts the Next Year Payment Rule.   Moreover, given that the Rule and its implications were not adequately explained to the defendants as prospective borrowers or notified to their solicitors in advance of or during the initial mortgage transaction, the defendants were not afforded the option of applying instead to the very many lenders with a more benign practice about payment of legal costs and default charges.

Regulated Mortgage Contracts

32.       The application to regulated mortgage contracts made on or after 1 November 2004 of the Rule, requiring in effect that unpaid default administration charges and costs be treated as arrears which must be paid before the end of the next calendar year, is not consistent in my view with section 13.3.2 of the Financial Services Authority’s Mortgages: Code of Business requiring that a mortgage lender’s written policy and procedures about mortgage default include the following: -

“(c) adopting a reasonable approach to the time over

       which the payment shortfall…should be repaid”

 

            At paragraph 13.3.6 G of that Code it is stated: -

 

“…the FSA takes the view that the determination of a reasonable repayment period will depend upon the individual circumstances.  In appropriate cases this will mean that repayments are charged over the remaining term of the regulated mortgage contract.”

 

The Rule and the Court’s Powers to Defer Possession

 

33.       As I have mentioned, in terms of the mortgage contract the plaintiff has made out its case for an order for possession.  That is subject to the exercise in appropriate circumstances of the court’s discretion, where the mortgage involves residential property, to allow borrowers time under section 36 of the Administration of Justice Act 1970 (as amended by section 8 of the Administration of Justice Act 1973) where the court is satisfied that “in the event of it exercising the power the mortgagor is likely to be able within a reasonable period” to address the relevant default.  Section 36(2) of the 1970 Act summarises the powers of the Court where the Court is so satisfied as follows: -

 

 

“(2)      The court may –

 

(a)        adjourn the proceedings, or

 

(b)        on giving judgment, or making a order for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order -

 

            (i) stay or suspend execution of the judgment or order, or

 

            (ii) postpone the date for delivery of possession

 

for such period as the court thinks reasonable.”

 

34.       One implication of the Next Year Payment Rule should be that a Court may take its existence and effect into account as a relevant circumstance in considering whether to exercise the statutory discretion and, if so, in determining what is a reasonable period within which the borrower must be likely to be able to address the relevant default.  I refer to subparagraph (c) (“What was the reason for the arrears which have accumulated?”) of Lord Justice Evans’ summary of the main types of circumstances to be considered when deciding ‘a reasonable period’ in this context in Cheltenham & Gloucester Building Society –v- Norgan [1996] 1 WLR 343.  This summary was approved and endorsed in the judgment of Girvan J in this jurisdiction in National & Provincial Building Society –v- Lynd [1996] NI 47 (which judgment however differs in other important respects from the English Court of Appeal judgments in Norgan; essentially by eschewing any presumption that a reasonable period should be the entire residue of the mortgage term in favour of a ‘reasonable period’ determined only after considering all the relevant circumstances of the case including the borrower’s best realistic proposal to address the default).

Conclusions   

35.       The plaintiff’s failure in many past cases in this jurisdiction to draw attention in the course of possession applications to the Rule’s existence and implications for mortgage instalment levels (past, present and future) may have frustrated the proper exercise of the Court’s statutory discretion.  That failure may also have frustrated the compliance by defaulting borrowers with the payment terms of adjournments, suspended orders for possession or other arrangements based on normal assumptions about the factors likely to cause contractual mortgage payments to be revised.

36.       In the present case the operation of the Rule and the failure of the defendants to meet in full the resulting increases in instalments have led to a situation in which in effect the mortgage arrears consist entirely or substantially of legal costs and other default charges.   The defendants are endeavouring to redeem the mortgage by selling their home.  In the event that no sale has been agreed or completed when I deliver or hand down this judgment but I am satisfied that the defendants are genuinely endeavouring to address the default, I may be more inclined to exercise the court’s discretion to adjourn or to impose a period of stay on an order of possession by reason of payments made by the defendants and the history and composition of arrears than would otherwise be the case. 

37.       Prior to these proceedings the defendants might have raised their concerns about the Rule in a less formal context with the Financial Ombudsman Service.  The jurisdiction of that service to determine complaints about mortgages is summarised as follows in its website briefing on the ‘Abbey National dual variable mortgage rate lead-case’ (determined in 2001 before the Mortgage Code was superseded by the relevant FSA regulations for mortgage contracts entered into on or after 1 November 2004) : -

“We decide cases on the basis of what is fair in the circumstances of the case, taking into account the law the principles of the Mortgage Code and good industry practice’.

 

38.       The defendants have not complained to the Financial Ombudsman Service.  Had such a complaint been made and proved successful, these proceedings might have been averted.  The defendants have drawn the Court’s attention to the Next Year Payment Rule and the plaintiff has successfully defended that rule’s legality.  My conclusion that the existence and operation of the Rule are inconsistent with the standards of reasonableness and fairness to which the plaintiff subscribes in published policy documents may benefit the defendants should they require further time within which to address the mortgage default. 

39.       In future, when considering mortgagee possession applications by this plaintiff based on interest only mortgage contracts and for as long as the Next Year Payment Rule subsists, I would wish the grounding affidavit to identify and quantify so much of each figure stated for the monthly instalment and for the arrears of instalments as is attributable to the inclusion of legal costs and default administration or other charges pursuant to the Rule.  (This would be in keeping with a requirement of a  rule of court in England and Wales.)  To this end it may be necessary for me to propose a practice direction or a change to the requirements of the Supreme Court Rules.  That said, should I consider that any shortcoming in the affidavit evidence in this area in a particular case could prejudice a defendant unfairly I may adjourn and deal with costs appropriately.  

40.       I shall invite submissions as to costs in the present case.