Title: Defending Mortgage Proceedings Date: 18 th October 2013 Presenter: Mahmud Samad BL e: mahmudsamadbl@gmail.com t: 087-2611694 What are Mortgage proceedings? Mortgage proceedings include any proceedings brought by any person in relation to a mortgage. Typically, such proceedings are brought by banks seeking to re-possess property on foot of its security. However, the borrower may also issue proceedings, for example, seeking a declaration that the mortgage is invalid and that the bank is not entitled to rely upon it should it decide to do so in the future. The most common types of mortgage proceedings which practitioners are asked to advise on include: - Summary proceedings for liberty to enter judgment; - Possession proceedings. It is intended here to discuss each of these, with a particular emphasis on the best advice to borrowers against whom the proceedings are issued. It is also worth briefly mentioning that, in the case of a judgment mortgage or an equitable mortgage, the mortgagee will issue proceedings for a well-charging order followed by an order for sale. While the procedure differs slightly to that discussed below, the principles and defences remain the same. Summary Proceedings In the context of mortgage cases, summary proceedings are almost invariably issued in the High Court. 1 Technically, they are not mortgage proceedings at all; they are completely independent of the bank s security and the reason they are issued is to obtain judgment against the borrower without actually enforcing the judgment against the mortgaged property. Why do banks issue summary proceedings? A question which often arises is, Why do banks bother issuing summary proceedings if they already have a valid mortgage and may simply seek possession of the mortgaged property in order to realise their debt? The following are some of the reasons why summary proceedings are popular with lenders: 1 Order 2, Rules of the Superior Courts 1986
- If the mortgaged property has insufficient value to satisfy the whole debt then the bank, once it obtains judgment using the summary summons procedure, may register that judgment against other property belonging to the borrower. In other words, a judgment has more scope than a mortgage because it can be enforced against almost any of the borrower s assets. A mortgage may be enforced only as against the property subject to the security; - A judgment may be required for enforcement of the debt against the borrower s foreign assets. 2 - The bank may want confirmation of the validity of the loan. Where the borrower disputes that he owes money to the bank, or disputes the amount of the debt, then the bank will want to have the debt confirmed by the court by way of judgment obtained in summary proceedings. This gives the bank and its advisers the peace of mind of knowing that the debt (as distinct from the mortgage) cannot be challenged at a later stage. If the borrower wishes to challenge the debt then he may do so within the framework of the summary proceedings (for which, see below). - The decision of Dunne J in the case of Start Mortgages v. Gunn 3 placed major obstacles in the path of banks seeking possession orders (see below). It was therefore necessary to enforce their loans by some other means, which often required the debt to be evidenced by judgment of the court. - As a scare tactic. In many cases the bank will have no intention of seeking possession of the mortgaged property. However, borrowers are often terrified of the idea of any proceedings being brought against them in respect of the loan. They often see it as a step in the possession process, which it is not. This is where clear advice of practitioners becomes essential. Procedure for bringing summary proceedings The following is the procedure governing summary proceedings in the High Court. - Proceedings are issued by summary summons in which the bank will normally be named plaintiff and the borrower defendant. - The summons will seek a specified sum, normally the amount of the loan which remains to be paid as well as any interest thereon. - Technically, the defendant must enter an appearance within eight days of the service of the summons, however, in practice this time period is normally overlooked and an appearance may be entered after eight days. Where no 2 The EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Brussels I Regulation) requires, with limited exceptions, courts of EU member states to automatically recognise judgments, orders and decrees of courts of other member states. 3 [2011] IEHC 275
appearance is entered then the plaintiff may seek judgment in default of appearance. - Once the defendant has entered an appearance, he need not do anything else. For example, he need not enter any defence or even an affidavit. The onus shifts to the plaintiff to issue a notice of motion, grounded on affidavit, in order to move the proceedings to a hearing. The notice will have a return date, namely the date on which the matter will be heard by the Master of the High Court. Both the notice and affidavit are served on the defendant. The primary relief sought in the notice will be an order for liberty to enter final judgment against the defendant. - Only once the defendant has received the notice and affidavit is he required to take action. The defendant/borrower s response will depend on his objectives. If he wishes to challenge the plaintiff s application then he must file a replying affidavit setting out the factual basis for his challenge. The replying affidavit should be sworn, filed and served on the plaintiff s solicitor in advance of the return date on the notice of motion. If this is not possible then the defendant may apply for an adjournment on the return date in order to give him additional time to file and serve the affidavit. - Once all affidavits have been filed and served, the motion will be heard by the Master of the High Court. The Master has no jurisdiction to dismiss the plaintiff s claim (RSC, O 63), however, he is obliged to forward the motion to the judges list if satisfied that the defendant s affidavit discloses a bona fide contest to the plaintiff s claim. The defendant is not required at this stage to prove his defence on the balance of probabilities. However, it would appear that the defendant may not rely by way of defence to summary proceedings, on legislation or rules intended to apply specifically to possession proceedings. 4 - If the defendant is unable to show a contest then the Master will not generally adjourn the motion or stay execution of a judgment in the plaintiff s favour, for the reason alone that the defendant needs time to come up with the money. However, such an adjournment or stay may be granted in exceptional cases. 5 - If the defendant is successful in the Master s court then the matter will be adjourned to the Judge s list where a judge of the High Court will decide (normally on a Monday morning, unless the hearing is expected to take more than 2 hours, in which case it is adjourned once again to a different day) 4 See Start Mortgages v. Broderick, unreported, 25 th February 2013, High Court (McDermott J) where it was held that the Central Bank s code on Mortgage arrears could not be used as a defence in summary proceedings. 5 D & F Health Partnership Ltd v. The Limerick Private Hospital, 30 th October 2009, Master s decisions
whether the defendant has established a bona fide defence such that the matter should proceed to plenary hearing in the ordinary way. 6 - If the defendant succeeds in showing a bona fide defence then he will be given leave to defend the plaintiff s claim. Otherwise, the plaintiff will be granted liberty to enter judgment in the sum claimed in the summons, or some lesser sum (where, for example, the defendant is given leave to defend part of the plaintiff s claim but not all of it). - While the ordinary rule that costs follow the event applies in summary proceedings, judges have often been prepared to relax the rule in cases involving family homes and to make no order as to costs despite granting judgment to the plaintiff. Advising the borrower in Summary cases A borrower s usual reaction to receiving a summary summons is to panic. Therefore, the best advice to give to borrowers in that situation is to assure them that the summons is not a step towards possession of their property. In fact, they do not need to respond to the summons at all, except to put in an appearance. After receiving the plaintiff s notice of motion and affidavit, it is necessary to decide whether or not to defend the proceedings and to file an affidavit for that purpose. Normally, this is done in one of the following situations: - Where the defendant has a genuine defence and he fully intends to defend the proceedings through to plenary hearing. It should not be assumed that the plaintiff has a cast-iron case; practitioners should examine the bank s documentation carefully to ensure that it is in order. Could the debt be statutebarred? Does it raise a possible estoppel argument? Is the money actually due and owing? - Where the defendant has no intention of defending the proceedings through to their conclusion but is anxious to buy time. This is not generally advisable because it does no more than delay the inevitable. It serves to increase the plaintiff s costs, which may ultimately be ordered against the defendant. It may, however, be an advisable tactic where, for example, the defendant expects to receive payment from a third party within a short period of time and intends to use the funds to discharge his debt to the bank. The alternative to filing an affidavit is to consent to the bank s order. While clients may be averse to this on the basis that it amounts to letting the bank win, it can often be the most cost-effective and sensible approach in circumstances where the defendant has no reasonable basis for a defence. Moreover, it may be in the 6 For a discussion of what amounts to a bona fide defence, see Aer Rianta v. Ryanair [2000] IEHC 205, First National Commercial Bank plc v. Anglin [1996] 1 IR 75, Banque De Paris v. De Naray [1984] 1 Lloyd s Law Rep 21
borrower s interest to save his/her limited financial resources for defending any subsequent possession or bankruptcy proceedings which the bank may commence. Possession proceedings Possession proceedings normally signal a bank s intention to sell the mortgaged property. From the borrower s point of view, they are far more serious than summary proceedings since possession essentially means vacant possession and the borrower (or his tenant, if he is renting the property) will be required to vacate the property upon an order being made. Why do banks seek possession orders? In most cases, the bank will first write to the borrower seeking voluntary possession. Apart from that, the bank has no means of securing possession without obtaining an order of the court. 7 The bank s right to obtain possession derives from s 97(2) of the Land and Conveyancing Law Reform Act 2009 (LCLRA 2009) which provides: A mortgagee may apply to the court for an order for possession of the mortgaged property and on such application the court may, if it thinks fit, order that possession be granted to the applicant on such terms and conditions, if any, as it thinks fit. The bank may not, as an alternative to this statutory power, seek possession pursuant to a specific power in the mortgage deed. 8 However, Hogan J in Irish Life and Permanent plc v. Dunphy 9 referred to the Supreme Court the question of whether possession proceedings may be brought on foot of a contractual power independent of statute. That question remains to be answered by the Supreme Court. Banks will almost invariably seek a possession order prior to selling the mortgaged property. This makes commercial sense since the property is likely to fetch a greater price if it is sold with vacant possession. Procedure for seeking possession orders An application for possession may be made to the High Court or the Circuit Court. 10 However, where the mortgage is a housing loan mortgage 11 then the application may only be made to the Circuit Court for the circuit in which the property is situated. 12 7 See section 97(1) of the Land and Conveyancing Law Reform Act 2009 8 Irish Life and Permanent plc v. Duff [2013] IEHC 43 9 [2013] IEHC 235 10 s 101, LCLRA 2009 11 Which is defined in s 2 of the Consumer Credit Act 1995 and includes all residential mortgages 12 s 101(5), LCLRA 2009; see also s 3 of the Land and Conveyancing Law Reform Act 2013.
Applications are made by special summons in the High Court 13 and by civil bill in the circuit court, in which the bank is plaintiff and the borrower is defendant. They are grounded on affidavit sworn by a representative of the bank. The prayer for relief in the summons/civil bill will include an order for possession pursuant to s 97(2), LCLRA 2009 and, very often, an order for sale pursuant to s 100(3), LCLRA 2009. Where proceedings are brought in the circuit court then the civil bill is served along with a letter stating: - that, except with the consent of each defendant in the proceedings, no order for possession will be made on the return date before the County Registrar and that the proceedings will be adjourned to such later date as the County Registrar considers just in the circumstances; - the importance of the defendant or his legal representative attending before the County Registrar on the return date and on any date to which the proceedings are adjourned, should the defendant wish to make any representations to the County Registrar concerning the proceedings; and - that a defendant not intending to enter a defence is not required to file and serve on the plaintiff a replying affidavit. The matter will normally be adjourned on the first occasion before the county registrar. No order for possession may be made on that day, except with the consent of the defendant. 14 Where proceedings are in the High Court then the special summons will come before the Master of the High Court and will be transferred by him to the Chancery Summonses list once it is ready for hearing. If the defendant wishes to challenge the possession application then he may do so by filing a replying affidavit setting out the factual basis for his defence. In the circuit court, if the county registrar is satisfied that the defendant s replying affidavit discloses a prima facie defence then he/she will forward the matter to the judge s list. 15 The judge will decide whether or not the defendant has a defence to the proceedings and may adjourn the matter for plenary hearing to determine any question at issue. 16 In the case of the High Court, the judge of the Chancery Summonses list will hear the matter on a Monday morning and, if satisfied that the defendant has a bona fide defence, will adjourn it for further hearing. If the defendant has not raised a prima facie or bona fide defence then the county registrar (or the judge in the High Court) may grant the order for possession and sale (if an order for sale has also been sought). Defending possession proceedings 13 Rules of the Superior Courts, O 3 r 9A 14 Circuit Court Practice Direction CC11 Actions for Possession 15 Circuit Court Rules, O 5B r 7(2) 16 Circuit Court Rules, O 5B r 8(2)
Defences to mortgage proceedings include: - The Gunn defence; - The COMA defence; - General defences The Gunn defence Start Mortgages v Gunn 17 was a landmark decision in which Dunne J held that a mortgagee was not entitled to an order of possession where the mortgage was created prior to 1 st December 2009 and the right to possession accrued after that date. This was because, prior to the enactment of the LCLRA 2009, the mortgagee s right to possession of registered land derived from s 62(7) of the Registration of Title Act 1964. However, that section was repealed by the 2009 Act which re-enacted the section in respect of any mortgages created after 1 st December 2009. A party may only rely on a repealed provision to enforce rights which were acquired or accrued pursuant to the section prior to the date of its repeal. 18 Dunne J held that a mortgagee s right to possession accrued at the date on which he would have been entitled to apply for a possession order. That date will be determined in accordance with the terms of the mortgage document, however, it will normally be the date on which the borrower has defaulted and demand has been made of him for repayment of the entire loan. Thus, where the demand was made after 1 st December 2009 (the date of repeal of the section), the mortgagee s right to possession accrued after the date of repeal and, as such, was not saved by s 27 of the Interpretation Act. In those circumstances, the mortgagee had lost his right to possession. The result of the Gunn decision was that most home owners who had entered mortgages prior to 1 st December 2009 but had not defaulted until after that date no longer faced the possibility of a possession order being made against them. The bank would instead need to resort to other remedies, such as obtaining a well-charging order and selling the home using the court procedure rather than conducting a sale out of court. The decision led to much confusion 19 and its effect was ultimately reversed by legislation, namely s 1 of the LCLRA 2013. The COMA defence COMA stands for Code of Conduct on Mortgage Arrears. It is issued, and updated from time to time by the Central Bank pursuant to s 117 of the Central Bank Act 1989. The Code applies to possession proceedings over a mortgagor s primary residence and places certain obligations on banks to facilitate 17 [2011] IEHC 275 18 s 27 of the Interpretation Act 2005 19 see the subsequent cases such as Kavanagh v. Lynch [2011] IEHC 348, EBS v. Gillespie [2012] IEHC 243, Moran v. AIB Mortgage Bank & ors [2012] IEHC 322, McEnery v. Sheahan [2012] IEHC 331, Irish Life and Permanent plc v. Duff [2013] IEHC 43, ACC Bank plc v. Ruddy [2013] IEHC 138, Irish Life and Permanent plc v. Dunphy [2013] IEHC 235
negotiations with those borrowers in arrears before resorting to litigation. In particular, the code requires banks to do the following: - Provide the borrower with information about his arrears and the manner in which the lender intends to handle them; - Make every reasonable effort to offer the borrower an alternative repayment arrangement; 20 - Draw up and implement procedures for dealing with mortgage arrears; - Provide borrowers with forms necessary to apply for State support; - Actively encourage borrowers to engage with it about arrears; - Draw up a Mortgage Arrears Resolution Process, or MARP; - Provide borrowers with a booklet setting out the terms of the lender s MARP; - Use standard forms for obtaining financial information about borrowers in arrears; - Have an appeal mechanism whereby the borrower may appeal a decision of the lender taken under the MARP. 21 The precise status and legal effect of the Code remains to be determined, 22 however the bank is required in an application for possession to prove that it has complied with the Code and a failure to do so will defeat its application. 23.Each incarnation of the Code generally has retrospective effect, meaning that arrears which occurred before the introduction of the 2013 Code will still be covered by it. 24 A borrower will lose the protection of the Code if he is properly classified by the lender as being a non co-operating borrower, namely a borrower who is refusing to co-operate with the bank s MARP or other reasonable requests pursuant to the code. Therefore, it is essential to advise clients to contact their banks and keep in communication with them from the moment they anticipate falling into arrears. The full text of the code is available at www.centralbank.ie General defences Apart from the foregoing, practitioners should also be aware of the more general defences applicable to possession proceedings. The following questions are particularly relevant when examining the bank s documents: - Has the bank actually acquired a right to possession under the terms of the mortgage? For example, has there been an event of default? 20 See Irish Life and Permanent plc v. Duff [2013] IEHC 43 where the failure to do so resulted in the bank being denied a possession order. 21 See Stepstone Mortgage Funding Ltd v. Fitzell [2012[ IEHC 142 where the bank was refused a possession order because it had wrongly informed the borrower that it was not entitled to appeal. 22 See Zurich Bank v. McConnon [2011] IEHC 75, Irish Life and Permanent plc v. Duff [2013] IEHC 43 23 Stepstone Mortgage Funding Ltd v. Fitzell [2012[ IEHC 142 24 Stepstone Mortgage Funding Ltd v. Fitzell [2012[ IEHC 142
- Has the bank followed the correct procedure under the mortgage for seeking possession? For example, if the mortgage requires certain notice to be given before seeking possession, was the notice given? - Has the correct court procedure been followed? For example, have proceedings been issued in the correct court? Does the summons/civil bill correctly identify the land etc? - Did the bank comply with the provisions of the Family Home Protection Act? - Was the bank in breach of consumer protection legislation? - Could there be a limitations issue? - Could the defendant rely on an estoppel? Moreover, the defendant may be able to rely on the provisions of the Personal Insolvency Act 2012 in reaching a compromise or arrangement with the bank, or indeed compelling the bank to compromise in certain situations. 25 The defendant may also be prepared, albeit in exceptional situations, to consider voluntary bankruptcy pursuant to the Bankruptcy Act 1988. While these courses of action are beyond the scope of this lecture, it is important to remember that bankruptcy will almost invariably lead to the sale of the defendant s home. Position of tenants One of the unfortunate consequences of possession orders is that tenants residing in the property will be required to vacate it and find a new home. They are often innocent parties inasmuch as they have done nothing wrong they paid their rent as it fell due, kept the property in good repair and complied with all the other covenants of their lease. In practice, county registrars and judges are sympathetic to the plight of tenants in these circumstances they will require the tenants to be served with the possession proceedings and will make appropriate orders, such as staying the possession order for a period to allow the tenants sufficient time to find alternative accommodation. In rare cases, the tenant may have an equity in the property, such as a right of residence, which takes priority to the bank s interest. 26 Even then, the tenant will be paid a sum representing the loss of that interest rather than being allowed to continue residing in the property. 25 See also the Land and Conveyancing Law Reform (Amendment) Bill 2013 which concerns, inter alia, adjournment of possession proceedings to enable borrowers to discuss matters with a personal insolvency practitioner. 26 Tynan v. County Registrar of Kilkenny [2011] IEHC 250