Protecting borrowers... and deposits

Although mortgage possession cases have formed a regular part of the work of district judges for many years, the current economic climate has seen a significant increase in their volume. The most recent statistics published by the Ministry of Justice show that more than 38,500 claims by mortgage lenders were commenced in the county courts in the third quarter of 2008, a rise of 9 per cent on the figures for the corresponding quarter in 2007.

It is expected that these figures will continue to rise, particularly as borrowers find it ever-more difficult to keep up their mortgage payments, and lenders become increasingly concerned at the reduction in, or elimination of, any equity in properties because of the fall in house prices.

New pre-action protocol

The most recent amendment to the Civil Procedure Rules 1998 introduces a new pre-action protocol for possession claims based on mortgage or home purchase plan arrears in respect of residential property. When this was publicised, it was erroneously thought to be a knee-jerk reaction to the economic downturn. In fact, the protocol had been in preparation for many months by the Civil Justice Council, which was also responsible for the earlier protocol for possession actions in respect of rented homes.

The protocol, which applies to proceedings commenced on or after 19 November 2008, describes the behaviour the court will normally expect of the parties prior to the start of a possession claim. It is not overly complex, and many lenders have no doubt followed their own procedures for years along the same lines.

The protocol seeks to ensure that, before actually commencing proceedings for possession, there is a real attempt by lenders to engage with their borrowers once it becomes apparent that payments are not being made, and, if possible, to reach some agreement. Proceedings should always be a last resort, and other forms of dispute resolution should be actively considered.

Like most pre-action protocols, the new one contains no direct sanctions for non-compliance, but the courts will now be expecting parties to show that a real attempt has been made to follow the protocol before proceedings are commenced. Failure on the part of the lender may encourage the court to adjourn claims so that the spirit of the protocol can be observed. Failure on the part of the borrower without good explanation may make it more difficult to persuade the court that some form of possession order is inappropriate. The protocol does not of course alter the legal rights and obligations of the parties.

Courts are now likely to require evidence of compliance with the protocol, and this may increase the length of each hearing.

Draconian sanctions

Most district judges have presided over small claim hearings in which students and other tenants have sought repayment of a deposit paid at the outset of a tenancy.

Usually, the landlord will argue that the property has been left in a bad condition, and there is a counterclaim for the cost of repairs. In some cases, the landlord has had no real defence, but has simply hung on to the deposit until forced to pay.

Such landlords should beware, and take careful note of the provisions of ss.212 to 215 of the Housing Act 2004. These sections came into full effect for tenancies commenced after 6 April 2007, and they provide some draconian sanctions for non-compliance.

The main thrust of the legislation requires landlords who take a deposit, in addition to rent, to place the deposit into an authorised deposit holding scheme, and to serve written notice on the tenant that this has been done. Strict time limits are laid down. Under s.214, a tenant may apply to a county court if he considers that the initial requirements have not been complied with, or he has been advised by the landlord that the deposit has been placed in a particular authorised scheme, but has been unable to obtain confirmation that the deposit is being held in accordance with the scheme.

Under s.214(3), the court, if satisfied that the landlord is in default, must order repayment of the deposit, or order that the deposit be paid into an authorised scheme, in either case within 14 days.

This is not the end of the story. Two further sanctions apply. Under s.214(4), if a court makes an order under s.214(3), the court must also order the landlord to pay to the applicant a sum of money equal to three times the amount of the deposit within 14 days. There is no discretion. Under s.215, if a landlord has failed to comply with the requirements to hold a deposit in an authorised scheme, or the initial requirements of such a scheme have not been complied with, no s.21 notice (to determine the tenancy) may be given in relation to the tenancy.

Lawyers acting for landlords of residential property need to ensure that their clients are fully advised of these provisions. Failure to comply is likely to be costly, and obtaining possession may be more difficult. Nothing in this legislation appears to prevent a landlord from pursuing a counterclaim on the grounds of damage having been caused by the tenant.