BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!

IN THE SUPREME COURT OF JUDICATURE CCRTI 95/1501/H

IN THE COURT OF APPEAL (CIVIL DIVISION) FC3 96/7161/H

(HIS HONOUR JUDGE BARRY GREEN QC )

Royal Courts of Justice

Strand

London WC2

Tuesday, 22nd October 1996

B e f o r e:

LORD JUSTICE BUTLER-SLOSS

LORD JUSTICE MILLETT

LORD JUSTICE PHILLIPS

- - - - - -

CHELTENHAM & GLOUCESTER BUILDING SOCIETY

Plaintiff/Appellant

- v -

(1) AARON KRAUSZ

(2) REBECCA KRAUSZ

Defendants/Respondents

- - - - - -

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

- - - - - -

MISS KATHRYN PURKIS (Instructed by Messrs Church Adams Tatham & Co. London, WC1V 6RH) appeared on behalf of the Appellant

MR. H. J. SMITH (Instructed by Messrs Bude Nathan Iwanier, London, NW11 0QN) appeared on behalf of the Respondents

J U D G M E N T

(As approved by the Court )

©Crown Copyright

This appeal raises an important issue as to the extent of the jurisdiction of the Court to suspend a warrant for possession of a dwelling house.

On the 30th January 1987 the Guardian Building Society, whose rights the Plaintiffs have inherited, lent to the Defendants ("the Mortgagors") £58,300, secured by a mortgage on their home, 8 Springhill, Clapton, London, E5 ("the property"). I shall refer to the Plaintiffs and to their predecessors in title as "the Mortgagees". On the 12th February 1990 a possession action was commenced by the Mortgagees against the Mortgagors, who had defaulted on their repayment obligations. On the 25th July 1991 an order for possession was made. On four occasions warrants for possession were issued. On each occasion an accommodation was reached between the Mortgagors and the Mortgagees, under which the warrant was discharged. On each occasion the terms of that accommodation were breached by the Mortgagors and a fresh warrant was issued. The fifth warrant fell due to execution on the 12th June 1995.

On the 23rd February 1995 the Mortgagors obtained a written valuation of their home from a firm of chartered surveyors, who reported:

Although the area could be considered reasonably popular, this particular house is in such a poor state of repair needing a substantial amount of money spent on it, that we are of the opinion that its current value is no more than £65,000. We ought to point out that should the property be offered at auction we doubt whether it would reach that level.

The Mortgagors then contacted the MYA Charitable Trust. This Trust purchases properties from owners who are facing dispossession and then lets the properties to them. The Trust offered to buy 8 Springhill from the Mortgagors for £65,000 on this basis. The Mortgagees were not prepared to agree to this sale. They considered that the property had a value of about £90,000, based on what has been described as a "drive-by" valuation.

On the 7th April 1995 the Mortgagors informed the Mortgagees that they intended to apply for an Order that the property be sold, pursuant to Section 91(2) of the Law of Property Act 1925 ("LPA"), and requested the Mortgagees to agree to this application being made to the County Court. On the 18th April 1995 the Mortgagees refused their consent. On the 9th June the Mortgagors applied to District Judge Silverdale for :

(1) An Order suspending the Warrant for Possession on the grounds that the Defendants have found a purchaser for their property and will apply to the High Court of Justice for an Order pursuant to Section 91(2) of the Law of Property Act 1925.

By this time arrears had grown to the extent that the total mortgage debt amounted to some £83,000. The District Judge dismissed their application. The same afternoon they appealed to Judge Green Q.C. on short notice. He allowed their appeal and ordered a stay of execution of the warrant for possession pending an application which the Mortgagors undertook to make promptly to the High Court under Section 91(2) of the LPA. Against that Order the Mortgagees now appeal, with the leave of this Court. The appeal is resisted solely by the Second Defendant. Mr. Krausz has been declared bankrupt and his trustee makes no claim to any interest in the property.

There were two issues before Judge Green. The first was whether he had jurisdiction to suspend the warrant for possession. The second was, if he had such jurisdiction, whether in his discretion he should exercise it. Before us the primary argument advanced by the Mortgagees was that the Judge had no jurisdiction to suspend the warrant. Alternatively, the Mortgagees have sought to challenge the manner in which the Judge exercised his discretion. So far as the latter issue is concerned the Judge was anxious to evaluate the strength of the Mortgagors' contention, supported by their valuation, that the market value of the property was £65,000. He offered the Mortgagees a short adjournment to enable them to obtain a valuation in support of their contention that the property had a higher value. They declined this offer. In these circumstances the Judge concluded that it was appropriate, if he had the jurisdiction, to suspend the warrant for possession pending the determination of an application by the Mortgagors under Section 91(2). He went on to decide, not without some reservations, that he had jurisdiction to take this course.

On the 31st August 1995 the Mortgagors issued an Originating Summons in the Chancery Court claiming an Order that the property be sold to the Trust, pursuant to the power of the Court conferred by Section 91(2). Directions were given on the 15th November 1995 as a result of which the Action was transferred to the Shoreditch County Court on the 20th March 1996. That Court has not yet provided a hearing date, perhaps because the result of this appeal has been awaited.

On the 26th June 1995 the Mortgagees obtained a valuation of the property for the purposes of the Section 91 proceedings. On the day of the hearing of this Appeal the Mortgagees sought leave to adduce this by way of further evidence. We refused their application. It did not seem to us that the Mortgagees, having declined the opportunity to place such evidence before the Judge, could properly seek to improve their case by putting it before us at the very last moment.

With this introduction I turn to consider the principal issue raised by this appeal, the question of jurisdiction.

This appeal requires consideration of the inter-relationship of two areas of the law relating to the mortgage of a dwelling house:

(1) The circumstances in which the mortgagor is entitled to an order for the sale of the mortgaged property;

(2) The circumstances in which the Court has jurisdiction to suspend entry into possession of the dwelling house by the mortgagee.

S.91 of the Law of Property Act 1925 ("LPA") provides as follows:

(1) Any person entitled to redeem mortgaged property may have a judgment or order for sale instead of for redemption in an action brought by him either for redemption alone, or for sale alone, or for sale or redemption in the alternative.

(2) In any action, whether for foreclosure, or for redemption, or for sale, or for the raising and payment in any manner of mortgage money, the court, on the request of the mortgagee, or of any person interested either in the mortgage money or in the right of redemption, and, notwithstanding that-

(a) any other person dissents; or

(b) the mortgagee or any person so interested does not appear in the action;

and without allowing any time for redemption or for payment of any mortgage money, may direct a sale of the mortgaged property, on such terms as it thinks fit, including the deposit in court of a reasonable sum fixed by the court to meet the expenses of sale and to secure performance of the terms.

The origin and history of these provisions are described by Sir Donald Nicholls, V.C. in Palk v Mortgage Services Funding Plc [1993] Ch.330 at p.335. The Vice Chancellor also cited the statement of Lord Jessel, M.R. about the essentially identical provisions of Section 25(2) of the Conveyancing and Law of Property Act 1881:

The Act is a remedial Act, one effect of it being to allow a mortgagor whose property is worth more than the mortgage-money, but who cannot raise it, to obtain a sale and get the benefit of the surplus.

Union Bank of London v Ingram (1882) 20 CHD 463 at p.464. Until Palk it was the practice of the Chancery Court only to entertain an application for sale by the Mortgagor if the proceeds of sale were expected to be sufficient to discharge the entirety of the mortgage debt. In such circumstances the mortgagor might initiate proceedings by bringing an action for sale under S.91(1), or, if the mortgagee sought to foreclose, the mortgagor could apply for an order for sale in place of foreclosure. The practice thus reflected the heading to S.91: Sale of mortgaged property in action for redemption or foreclosure.

Palk established, for the first time, that the Court has power under Section 91(2) to make an order for sale on the application of a Mortgagor, notwithstanding that the proceeds of sale will be insufficient to discharge the mortgage debt. In Palk the mortgagees had obtained an Order for possession with the intention, not of proceeding to sell the property but of waiting in the hope that the market might improve. The mortgagor was anxious that the property should be sold so that the proceeds would reduce the mortgage debt, on which interest was accruing at an alarming rate. The Court of Appeal held that, as the mortgagees could buy the property themselves if they wished to speculate on an increase in its value, in the interests of fairness the property should be sold.

In Palk the Mortgagor had initially applied for an order for sale to the Eastbourne County Court. It is not clear on what basis that Court entertained the claim, for the jurisdiction of the County Court to make an order for sale is limited to cases where the value of the property does not exceed £30,000. It also appears from the judgment in the Court of Appeal that the mortgagees obtained an order for possession, which was suspended pending the result of their application. It is not clear which Court made the order for possession, or which court suspended that order. What does seem clear is that no challenge was made of the jurisdiction to suspend the possession order.

In Palk the issue was simply whether or not the property should be sold. No issue arose as to the terms on which it should be sold. As to that matter, Section 91(2) empowers the Court to direct a sale "on such terms as it thinks fit". In cases before Palk, where the proceeds of sale were likely to exceed the mortgage debt, the Court was prepared to entrust the sale to the mortgagor on the basis that the mortgagor had a keener interest than the mortgagee in obtaining the best price. We have not been referred to any case, however, where there was a contest between the mortgagee and the mortgagor as to who should have conduct of the sale.

Barrett v. Halifax Building Society (1995) 28 H.L.R. marks the next development in this area of the law, and one which demonstrates the importance of the present appeal. In that case the Plaintiffs had mortgaged their home and then defaulted on their repayment obligations. The situation was one of negative equity - the mortgage debt substantially exceeded the value of their home. On August 6th 1992 the mortgagees obtained a possession order, with a view to exercising their power of sale. There were numerous suspensions of this order to give the Plaintiffs a chance to discharge the instalment arrears. What then occurred was explained by the Judge as follows, at p.636:

"On March 6th, 1995 there was a further suspension of the order for the purpose of leaving mortgagors in possession of the property themselves to find a buyer notwithstanding that there was a deficit over the sum secured so that the property would be on the market, lived in and without it becoming known to the market that it was subject to a forced sale, thereby increasing the realisations available to discharge at least part of the amount due"

The Plaintiffs then applied to the Chancery Court for an order for sale pursuant to Section 91 LPA. By the time that their Action came on for hearing they had negotiated a sale of the property, subject to contract. They sought an order that they be permitted to proceed with that sale and to remain in possession until completion. The Judge summarised the evidence on which they relied as follows at p.637:

The evidence of the plaintiffs, including the expert evidence of a valuer, is that it is a recognised feature of today's property market that where a mortgagee obtains possession of property and sells in the exercise of its power of sale it is able to obtain a price which is usually not as good as the price which might have been obtained by the mortgagor had the mortgagor remained in possession and the fact of the forced sale not become apparent. It is also the plaintiffs; evidence that if the mortgagee building society were to take over the sale or were now to obtain possession and proceed to sell itself there would be likely to be a delay of some months at least before a fresh purchaser could be found and a sale completed.

The Mortgagees resisted the Order sought. They did not contend that they would be able to obtain a better price but urged that if the sale went ahead it would break their established policy not to permit borrowers with negative equity themselves to conduct the sale of their property without also at the same time making proposals for the repayment of any resulting deficit. The Judge held that this was not a material circumstance which he ought to take into account when exercising his discretion. He held at p. 640:

I am left, therefore, with a case which, on the evidence before me, there is no discernible advantage to the building society in refusing to allow this sale to complete, whereas there is an obvious advantage to the mortgagors to complete their proposed sale at what is accepted as the best price that is likely to be obtainable in the current market.

He proceeded to grant the Plaintiffs the Order that they sought.

Just as in the case of Palk the report does not suggest that in Barrett any challenge was made by the mortgagees to the order suspending possession pending the Plaintiffs' application to the Chancery Court.

The consequences of the procedure followed in Barrett appear to me to be far reaching. In any case in which there is negative equity it will be open to the mortgagor to resist an order for possession on the ground that he wishes to obtain a better price by remaining in possession and selling the property himself. In not every case will the primary motive for such an application be the wish to obtain a better price than that which the mortgagee is likely to obtain on a forced sale. Often the mortgagor will be anxious to postpone for as long as possible the evil day when he has to leave his home. This Court has ample experience of hopeless applications for leave to appeal against possession orders designed to achieve just that end. There will be a danger, if the mortgagee does not obtain possession, that the mortgagor will delay the realisation of the property by seeking too high a price, or deliberately procrastinating on completion. At present there is a simple procedure for seeking possession in the County Court and the issue tends to be whether there are arrears and whether the mortgagor is likely to be able to discharge these in a reasonable time. If possession is to be suspended whenever this appears reasonable in order to give mortgagors the opportunity to sell the property themselves, the Courts are going to have to enter into an area of difficult factual enquiry in order to decide in the individual case whether or not this course will be to the common benefit of mortgagor and mortgagee. Furthermore there will be obvious practical difficulties for mortgagees in monitoring the negotiations of mortgagors who are permitted time to market their properties.

For these reasons it seems to me that the procedure followed and the decision reached in Barrett tend fundamentally to undermine the value of the mortgagee's entitlement to possession.

Having touched on the implications of the issue raised in this case I turn to consider whether, in law, the County Court has jurisdiction to suspend possession in such circumstances.

The right of a mortgagee to enter into possession of the mortgaged property was one which the common law protected strictly. The position was accurately stated by Russell J. in Birmingham Citizens Permanent Building Society v. Caunt [1962] 1 Ch. 883 at p. 912:

Accordingly, in my judgment, where (as here) the legal mortgagee under an instalment mortgage under which by reason of default the whole money has become payable, is entitled to possession, the court has no jurisdiction to decline the order or to adjourn the hearing whether on terms of keeping up payments or paying arrears, if the mortgagee cannot be persuaded to agree to this course. To this the sole exception is that the application may be adjourned for a short time to afford to the mortgagor a chance of paying off the mortgagee in full or otherwise satisfying him; but this should not be done if there is no reasonable prospect of this occurring. When I say the sole exception, I do not, of course, intend to exclude adjournments which in the ordinary course of procedure may be desirable in circumstances such as temporary inability of a party to attend, and so forth.

The rigours of the common law in this respect were mitigated by Section 36 of the Administration of Justice Act 1970 ("AJA"), which provided:

(1) Where the mortgagee under a mortgage of land which consists of or includes a dwelling-house brings an action in which he claims possession of the mortgaged property, not being an action for foreclosure in which a claim for possession of the mortgaged property is also made, the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.

(2) The court-

(a) may adjourn the proceedings, or

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

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

(ii) postpone the date for delivery of possession,

for such period or periods as the court thinks reasonable.

It seems likely that the draughtsman of this section intended to confer on the Court power to suspend possession where the mortgagor was in a position to pay arrears of instalments within a reasonable period. He overlooked the fact that most mortgages provide for the principal to become immediately payable if instalments are in arrears. It was held in Halifax Building Society v. Clark [1973] Ch.307 that in that event, the Court was only given power to suspend if it appeared that the mortgagor would be able within a reasonable time to repay the total mortgage debt. To reverse the effect of this decision Section 36 was amended by Section 8(1) of the Administration of Justice Act 1973, which provided:

8 Extension of powers of court in action by mortgagee of dwelling-house

(1) Where by a mortgage of land which consists of or includes a dwelling-house, or by any agreement between the mortgagee under such a mortgage and the mortgagor, the mortgagor is entitled or is to be permitted to pay the principal sum secured by instalments or otherwise to defer payment of it in whole or in part, but provision is also made for earlier payment in the event of any default by the mortgagor or of a demand by the mortgagee or otherwise, then for purposes of section 36 of the Administration of Justice Act 1970 (under which a court has power to delay giving a mortgagee possession of the mortgaged property so as to allow the mortgagor a reasonable time to pay any sums due under the mortgage) a court may treat as due under the mortgage on account of the principal sum secured and of interest on it only such amounts as the mortgagor would have expected to be required to pay if there had been no such provision for earlier payment.

(2) A court shall not exercise by virtue of subsection (1) above the powers conferred by section 36 of the Administration of Justice Act 1970 unless it appears to the court not only that the mortgagor is likely to be able within a reasonable period to pay any amounts regarded (in accordance with subjection (1) above) as due on account of the principal sum secured, together with the interest on those amounts, but also that he is likely to be able by the end of that period to pay any further amounts that he would have expected to be required to pay by then on account of that sum and of interest on it if there had been no such provision as is referred to in subsection (1) above for earlier payment.

The effect of Section 36, as amended, on the power to suspend possession is as follows:

(1) The power can be exercised to enable the mortgagor to pay off instalment arrears due under the mortgage agreement from sources other than the sale of the mortgaged property, but

(2) If the mortgagor intends to sell the mortgaged property to provide the source of payment, the Court must be satisfied that the proceeds will be sufficient to discharge the entirety of the mortgage debt: Royal Trust Co. of Canada v Markham [1975] 1WLR 1416; National and Provincial Building Society v Lloyd [1966] 1 All ER 630.

Before the decision in Palk it seemed that Section 36 AJA and Section 91 LPA were complementary. An application under Section 91 would only be contemplated where the proceeds of sale were expected to exceed the mortgage debt. In these circumstances Section 36 gave the Court the power to suspend possession in order to enable an application for sale under Section 91 to be made. It is, however, quite clear that Section 36 does not empower the Court to suspend possession in order to permit the mortgagor to sell the mortgaged premises where the proceeds of sale will not suffice to discharge the mortgage debt, unless of course other funds will be available to the mortgagor to make up the shortfall.

A mortgagor seeking relief in the circumstances of Palk is thus unable to invoke any statutory power to suspend the mortgagee's right to enter into possession.

For the mortgagors, Mr. Smith argued that the provisions of S.36 did not define exclusively the jurisdiction of the Court to suspend possession. The Section was accurately headed "Additional powers of court in action by mortgagee for possession of dwelling-house" The Court enjoyed in addition a power to suspend possession as part of its inherent jurisdiction. He referred us to the general statement or principle, albeit in a criminal context, of Lord Morris of Borth-y-Gest in Connelly v DPP [1964] A.C. 1254 at 1301:

There can be no doubt that a court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction. I would regard them as powers which are inherent in its jurisdiction. A court must enjoy such powers in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of its process.

Mr Smith elaborated his argument as follows:

On an application by a mortgagor for sale under Section 91 LPA the Court has power to order that the mortgagor be entrusted with the sale and that he remain in possession while effecting the sale: Barrett. Should the mortgagee attempt to frustrate such an Order by entering into possession, the Court seized of the Section 91 application must have an inherent power to restrain him from doing so. In these circumstances, the County Court must also have an inherent power to suspend an order or warrant for possession, at least for such short period as is necessary to enable the mortgagor to make a Section 91 application.

In my judgment this argument breaks down at a number of stages.

In Royal Trust Co. v. Markham Sir John Pennycuick, when delivering the leading judgment of this Court cited with approval the passage from the judgment of Russell J. in Caunt which I have myself cited above. He then said at p.1420:

"A characteristic instance in which that sole exception is applicable is where the mortgagor has entered into, or is about to enter into, a contract for the sale of the property at a price which will enable the mortgage to be paid off in full...

So, as the law stood before 1970, the mortgagee had a right, subject only to that one exception mentioned by Russell J., to possession, and it was not in the power of the court to refuse him possession."

Megaw L.J. added at p. 1423 :

There was, as I think is clear, no power, before the enactment of section 36 of the Administration of Justice Act 1970, for a court to grant a stay or suspension of execution of an order for possession in a mortgagee's action, such as the present one, based on default in payment or breach of other obligations. Therefore, if there be such power to suspend or stay the execution of the order for possession, it can come only from the provisions of section 36 of the Act of 1970 as amended by section 8 of the Administration of Justice Act 1973.

In my judgment the very specific delimitation of the power given by Section 36 makes it clear that the legislature did not intend that the Court should have any wider jurisdiction to curtail the mortgagee's right to possession. That right enables the mortgagee to exercise his power of sale in the manner he chooses and in the confidence that he can offer a purchaser vacant possession. Section 36 circumscribes that right where the proceeds of sale are likely to discharge the mortgage debt. It does not do so where the mortgage debt will not be fully discharged, and it is in those circumstances that the mortgagee's rights are of particular importance.

I recognise the principle of the inherent jurisdiction of the Court, as explained by Lord Morris in Connelly, but I question whether that principle can justify the Court in exercising its power to order a sale of mortgaged property under Section 91 in circumstances where the mortgagee is seeking to enter into possession in order to sell property in which there is negative equity and where the sole object with which the mortgagor seeks that order is to prevent the mortgagee exercising his right to possession so that the mortgagor can negotiate his own sale while in possession.

Even if one assumes that the Chancery Court has power to order sale of mortgaged property on terms that displace the mortgagee's right to possession, I do not consider that it follows from this that the County Court, as part of its inherent jurisdiction, can properly suspend an order or warrant for possession in order to enable a mortgagor to apply to the High Court for an Order under Section 91. It seems to me incumbent on the mortgagor to seek from the High Court any relief which that Court is empowered to give before the possession warrant takes effect.

In the present case the Judge purported in 1995 to suspend a warrant for possession that was properly issued pursuant to an order for possession made in 1991. For the reasons I have given I consider that he had no jurisdiction to make such an Order and this appeal should be allowed.

I have had the advantage of reading in draft the judgment of Phillips L.J. with which I am in full agreement.

Palk was a case in which the mortgagee had no wish to realise its security in the foreseeable future, whether by sale or foreclosure. It established that in such a case the mortgagor might obtain an order for sale even though the proceeds of sale would be insufficient to discharge the mortgage debt. It does not support the making of such an order where the mortgagee is taking active steps to obtain possession and enforce its security by sale. Still less does it support the giving of the conduct of the sale to the mortgagor in a case where there is negative equity, so that it is the mortgagee who is likely to have the greater incentive to obtain the best price and the quickest sale.

Both these steps were taken in Barrett v Halifax Building Society (1995) 28 HLR 634. I have serious doubt whether that case was rightly decided. In fairness to the Judge it should be said that it does not appear to have been argued as a matter of principle; the mortgagor's application was resisted on purely pragmatic grounds, and somewhat feeble ones at that.

For the reasons given by Phillips L.J. I agree that this appeal should be allowed.

I agree with both Judgments and that this appeal should be allowed.

Order: application to adduce further evidence refused; appeal allowed; application for leave to appeal to the House of Lords refused; legal aid taxation.