It is clear from examining its case reports that the Financial Ombudsman Service has recently been dealing with numerous complaints from borrowers relating to lenders who make payments of lease arrears and costs to landlords.

The issue is of importance because when the Ombudsman determines that the lender should not have intervened in this way,  the lender will often be required to credit the payment (plus interest) back to the mortgage account and fund it from its own resources.

The context

A landlord who is owed monies due under a residential lease (such as ground rent, service charges and administration costs), may decide to inform a lender with a charge secured against the property and invite it to make payment [1].

Some borrowers may request the lender to assist by making the payment required to clear the lease arrears and acknowledge that it should be added to the mortgage debt. However, others may be in dispute with their landlord regarding the amount owing or be unaware of the outstanding sums due, or be unwilling to make the payment for some other reason.

The Financial Ombudsman Service

If the lender makes a payment without the borrower’s consent, its actions may be subject to challenge by the borrower. Borrowers can refer the matter to the Ombudsman in circumstances where they feel that their lender has not provided a satisfactory response to their complaint.

The Ombudsman’s powers include the ability to award compensation to borrowers in respect of financial loss; to direct the lender to take steps to remedy the complaint and to award compensation for non-financial losses (e.g. for distress, inconvenience or damage to reputation).

Each determination is made based on the facts of the individual case and in accordance with the exercise of discretion (therefore decisions based on similar facts can vary).  Referrals are initially considered by an Adjudicator.

If the borrower or lender disagrees with the Adjudicator’s determination, an appeal can be made to the Ombudsman who will review the complaint and the Adjudicator’s decision. An Ombudsman’s decision is final and cannot be overturned.

Determinations made by the Financial Ombudsman Service

Determinations from 1 January 2012 are published on the Financial Ombudsman’s website. Some overall themes have emerged from our review of the reported cases which involve lenders making payments of lease arrears and associated costs to a landlord.

In the vast majority of cases where a landlord had obtained a court judgment in respect of the arrears or there had been a Property Tribunal determination that the sums were payable by the borrower, the Ombudsman’s finding was that the lender was entitled to act by making payment to the landlord in order to protect its security.

By contrast, referrals to the Ombudsman which involved payments made by lenders in the absence of a judgment or determination are often upheld, leading to orders requiring the lender to remove the payment from the mortgage debt, together with any associated mortgage interest.

The Ombudsman also often takes a strict approach towards the actual sums paid. For example, if a landlord had obtained a judgment for monies owing, it finds that only the arrears and costs covered by the judgment should be paid by the lender. The payment of any additional monies (e.g. further legal costs or additional lease arrears, which the landlord states had been incurred or fallen due after the judgment) will not normally be considered by the Ombudsman to be necessary to protect the lender's security. Consequently, the lender is likely to be required to refund the borrower by removing these sums from the mortgage debt.

Conclusion

The approach taken by the Ombudsman needs to be taken into account by lenders when determining what payment policy they should adopt in this situation.

In the absence of consent to pay from the borrower, a lender’s actions may be successfully challenged where it has made a payment to a landlord in circumstances where the latter has not obtained a judgment or tribunal determination or cannot produce evidence of an admission from the borrower that the arrears are payable. Lenders should therefore seek the consent of the borrower before making a payment in this situation.

Even if satisfied that a judgment or a determination has been made, lenders should try to establish whether the borrower is challenging these (e.g. by an appeal or via an application to set aside the judgment) before deciding to make a payment.