Consolidation is not emancipation

In the current economic environment, mortgage arrears are increasing and lenders are taking action to enforce their security by taking possession of mortgaged properties. The tipping point for a lender is of course the performance of a mortgage account and whether a borrower has maintained the monthly instalments due under his mortgage. If a borrower misses payments, arrears will accrue and this can eventually give rise to the instigation of legal proceedings by a lender for possession of the mortgaged property with a view to selling it and repaying the mortgage debt.

In the recent case of Zinda –v- Bank of Scotland Plc [2011] EWCA Civ 706, the Court of Appeal considered the effect of the consolidation of mortgage arrears upon a lender’s position in terms of enforcement action where an Order for possession has been suspended on terms. This case provides useful clarification for lenders who have been encouraged by the Financial Services Authority (“FSA”) to deploy forbearance measures rather than instigating legal proceedings, including the capitalisation or consolidation of arrears that have accrued on a mortgage account in order to allow a borrower some respite.
The Facts

Mr Zinda took a mortgage with Bank of Scotland Plc (“BOS”) in 2003. By 2005, Mr Zinda had fallen on hard times and arrears had accrued on his mortgage account. Consequently, BOS issued possession proceedings and obtained an Order for possession suspended on terms that Mr Zinda would pay off the accrued arrears on his account over a period of 10 years. The Order also provided that Mr Zinda was responsible for meeting the monthly instalments payable to BOS as and when they fell due.

An Order for possession suspended on terms is a useful tool for the Court if it wishes to allow some breathing space for a borrower who has fallen on hard times whilst preserving the lender’s position in respect of the mortgage as it provides both for any accrued arrears to be discharged within a reasonable period and for the monthly instalments due under the mortgage to be paid. Unless the Court is able to conclude that a borrower has no prospect of resolving his financial predicament, it will usually consider an Order for possession suspended on terms.

In this case, BOS deployed forbearance measures by agreeing to consolidate and capitalise the outstanding arrears on Mr Zinda’s mortgage account to be repaid as part of the main loan over the existing term. Consequently, Mr Zinda was not required to pay the additional amount per month in respect of the arrears which reduced the financial burden. Unfortunately for Mr Zinda, he again fell into arrears and BOS took the view that it must seek to enforce the original Order for possession granted in 2005.

Mr Zinda was clearly not pleased and argued before the District Judge in the County Court that the consolidation of the arrears, which gave rise to the original Order for possession, had effectively discharged the Order for possession and therefore BOS could not seek to enforce it by requesting a Warrant of possession. Mr Zinda’s argument was rejected by the County Court and also by a Circuit Judge sitting in the County Court by way of a first appeal. Ms Zinda therefore applied to the Court of Appeal for permission to appeal and the Court of Appeal granted permission on the basis that the form of Order for possession suspended on terms was commonly used throughout the County Courts and therefore the case and the challenge by Mr Zinda raised an important point of principle.

The Decision

The Court of Appeal held that, when granting an Order for possession suspended on terms, the Court had jurisdiction to set out a framework for the repayment and discharge of any accrued arrears and to set down how future sums due under the mortgage will be repaid, including the monthly instalments.

The Court agreed that the consolidation of the arrears by BOS in 2008 had discharged and extinguished the arrears on the mortgage account. However, neither Mr Zinda’s obligation to pay the monthly instalments due nor the validity of the Order for possession had been affected. The terms of the suspension of the original Order for possession were not limited to the repayments of the arrears within the time stipulated by the Court and Mr Zinda was still required to pay the monthly instalments going forward. Consequently, the consolidation of the arrears had not had the effect that Mr Zinda had hoped for and, when he fell into arrears again, BOS was entitled to enforce the original Order for possession.

This decision provides clarification for lenders and borrowers regarding the jurisdiction of the Court to impose terms upon for which an Order for possession will be suspended and the effect of this. The power of the Court to impose terms upon the parties is not restricted to how arrears will be discharged but extends to the payment of any sum that is secured by the mortgage, including the payment of future instalments due for the remaining life of the mortgage. Mr Zinda’s arguments appeared to be ill conceived and the Court of Appeal may have taken this case to send a message to the County Courts, rather than as a reflection of the merits of the arguments.

As lenders struggle to comply with the changing landscape created by the FSA by deploying forbearance measures to ensure that they treat their customers fairly, this decision is helpful as it confirms that the consolidation or capitalisation of arrears will not prevent a lender from subsequently enforcing an Order for a possession that was suspended on terms if a borrower then fails to pay the monthly instalments due under the mortgage. The capitalisation or consolidation of arrears does not free the borrower from his obligation to pay his debt.

For further information please contact Georgina Squire or the partner with whom you usually deal