Waiting period for claims for support for mortgage interest (SMI) increased from three to nine months with effect from 1 April 2016
Borrowers receiving certain income related benefits may be entitled to help with interest payments on their mortgage. If the borrower qualifies for SMI, they’ll get help paying the interest on up to £200,000 of the mortgage or £100,000 if the borrower is receiving Pension Credit.
SMI is normally paid direct to the lender after a waiting period, which until 31 March was 13 weeks after the borrower submitted their claim. (If the borrower is receiving Pension Credit, there is no waiting period). However, from 1 April 2016, the waiting period increased to 39 weeks. Also from April 2018 SMI becomes a loan with interest added, which needs to paid back once the borrower is working again.
This change is a concern to lenders because the pre-action protocol for possession claims (MPAP) states at paragraph 6.1(a) that “a lender must not consider starting a possession claim for mortgage arrears where the borrower can demonstrate to the lender that the borrower has submitted a claim to the Department for Works and Pensions (‘DWP’) for SMI (and has provided all the evidence required to process a claim)”. Paragraph 6.1(b) goes on to state that “a lender must not consider starting a possession claim for mortgage arrears where the borrower can demonstrate to the lender that the borrower has a reasonable expectation of eligibility for payment from the DWP…”. Paragraph 6.1(c) states “a lender must not consider starting a possession claim for mortgage arrears where the borrower has an ability to pay a mortgage instalment not covered by a claim to the DWP in relation to a claim under paragraph 6.1(1)(a) or (b)”.
The wording suggests that paragraphs 6.1(a), (b) and (c) are independent of each other, such that a possession claim should not be issued by a lender where the borrower has submitted a claim to DWP even where there is no reasonable expectation of eligibility for payment from the DWP and/or no ability to pay a mortgage instalment not covered by a claim to the DWP. It remains to be seen however what approach the Courts will take and whether it can be successfully argued that a borrower must be able to comply with all 3 provisions to prevent a lender from issuing a possession claim.
Where a lender is considering issuing a claim for possession and is informed that a claim for SMI has been made, lenders may want to review each case on their merits now that the waiting period has increased, rather than making a blanket decision not to issue a possession claim until the outcome of the claim for SMI is known.
The following is a checklist of points for lenders to consider when reviewing any applicable cases:
- Is the mortgage buy to let? If not, MPAP does not apply (and the borrower may be ineligible for SMI on a buy to let loan in any event). Therefore a possession claim can be issued notwithstanding a claim for SMI may have been submitted.
- Has the borrower demonstrated that the DWP has been provided with all the evidence required to process a claim for SMI? If the borrower fails/refuses to demonstrate this, the lender should be entitled to issue the claim without criticism.
- Has the DWP previously refused an SMI claim?
- Is it clear that the customer will not be eligible for SMI assistance (eg. he/she is not receiving qualifying benefits?)
- Has the term of the loan expired? If so, the payment of interest will have no bearing on the borrower’s liability to repay the entire outstanding balance and so the lender should be entitled to issue the claim without criticism;
- Is the customer able to clear the arrears even if SMI assistance is forthcoming (SMI will not clear the arrears)?
- If the loan is interest only and for more than £200,000 (or £100,000 if the borrower is receiving pension credit) does the borrower have any ability to pay interest on the balance over and above £200,000/£100,000?
- Is the mortgage a capital repayment mortgage? If so, can the customer afford to repay the capital element of the loan (as SMI will only pay the interest on up to £200,000 of the loan)?
Further information concerning eligibilty for SMI (via gov.uk)
Update to MCOB rules affecting possession proceedings
The FCA introduced a new rule from 21 March 2016 in the Mortgage Conduct of Business Rules. This new rule, MCOB Rule 13.4A (“Data sharing with other charge holders”) is similar to the requirements of CPR 55.10 (i.e. to serve notification of legal proceedings on registered charge holders). However, there are key distinctions:
- MCOB Rule 13.4A introduces a new requirement for lenders commencing possession proceedings. Notice must be given to all charge-holders at the time of commencement of legal proceedings, or as soon as reasonably practicable afterwards.
- MCOB Rule 13.4A expressly states that the charge-holders to be notified are “person[s] having a legal or equitable mortgage in the relevant property”.
Guidance to the rule states that “legal or equitable mortgage” includes legal or equitable charges. The purpose of MCOB Rule 13.4A is intended to help avoid instances of subsequent charge holders bringing their own proceedings where a prior charge holder already has proceedings underway. The implications are that a wider group will need notifying going forward.
Case law updates
Lender succeeds in setting aside trust deeds preventing enforcement of charges under Insolvency Act
In Swift v Ahmed  EWHC 3265 (CH), the Lender succesfully applied to set aside two trust deeds which would otherwise have prevented it from enforcing its charges on the basis of s423 Insolvency Act 1986.
Swift made two advances to Mr Ahmed in 2007 both of which were secured as second charges against properties registered in his sole name. When possession proceedings were issued, Mr Ahmed’s wife alleged that she held a 100% beneficial interest in both properties that took priority over Swift’s second charges by virtue of Trust Deeds completed on 1 March 1996 and 28 December 2006.
Swift applied to set aside the Deeds relying on s423 Insolvency Act alleging that they were transactions at an undervalue and entered into for the real purpose of putting assets beyond the reach of parties who may have a claim against them.
Between the first hearing and reserved judgment being handed down, a transfer dated 10 November 2006 was disclosed which showed that immediately prior to the 2006 Deed of Trust, one of the properties concerned had been transferred from the joint names of Mr and Mrs Ahmed into the sole name of Mr Ahmed. This transfer stated that Mrs Ahmed was transferring all her legal and beneficial interest to Mr Ahmed.
The Court determined that this transfer could be admitted in evidence because to exclude the documents “would be an affront to common sense”. Lord Wilberforce in Mulholland –v- Mitchell  AC 666 was cited by the Court in support of this decision.
Having accepted the 2006 transfer, the 1996 Deed was superseded and it was no longer necessary to consider it.
The parties accepted that the 2006 Deed of Trust was a transaction at an undervalue and the Court found that Swift had satisfied the requirements of S423 Insolvency Act and set aside the 2006 Trust Deed.
This is a useful reminder that S423 Insolvency Act 1986 exists and can be used to set aside transactions entered into at an undervalue. Where a person has entered into such a transaction, the court may make an order restoring the position to what it would have been if the transaction had not been entered into and protecting the interests of persons who are victims of the transaction.
Can the principles established in Stack v Dowden  UKHL 17 be applied when the property has been purchased as an investment rather than as the family home?
In Erlam and others v Rahman and Farid  EWHC 111 (CH), the Court confirmed that they could not.
The Claimants obtained a Costs Order against Mr Rahman (D1). D1 did not pay it and the Claimant sought to secure the judgment against 3 properties solely owned by him. The Second Defendant (“D2”) was D1’s wife. D2 applied to challenge the Charging Orders on the basis that she had a beneficial interest in the properties.
D1 played no part in the trial, declaring at the outset that he saw no purpose in participating. However he did refer the Court to evidence he had provided in previous Freezing Order proceedings, which included information regarding the applications for mortgages in respect of the properties.
As the property was in D1’s sole name the burden of proving that D1 held less than a 100% interest fell on D2. She alleged that there was a declaration of trust which evidenced that she had a 74% interest in the property with the consideration being her contributions to the purchase price.
The Claimants alleged that the declaration of trust was a sham and that in any event the property was purchased as an investment rather than the family home so it was not appropriate to apply constructive trust principles.
The Court rejected D2’s claims that the property was purchased as a family home and concluded that the property was purchased as a buy to let investment in line with the information given in D1’s mortgage application. It followed that Stack v Dowden was not applicable to the situation and resulting trust principles would apply. The Court clarified that Stack v Dowden will not apply to properties purchased by joint owners as investments rather than as the family home.
The Court found that D1 held the entire beneficial interest in the property and D2’s application was dismissed.
What interest rate should be applied to a loan post judgment?
In the recent case of Parr v Tiuta International Limited  EWHC 2 (QB), the High Court reviewed the Doctrine of Merger in circumstances where, after the repossession and sale of its security, a lender has suffered a shortfall on a secured loan.
The Doctrine of Merger states that where a contract does not specifically provide for interest to be charged post judgment, the applicable interest rate for any sums due under the contract post judgment is that set out in statute (currently within the County Courts (Interest on Judgment Debts) Order 1991 and the Judgments Act 1838). It is also widely accepted that where a lender has a charge, the contractual interest can continue to be charged post-judgement whilst its charge remains in place.
In brief, the facts of the case are that Parr (P) took a loan from Tiuta (T) which was secured by way of a Legal Charge over P’s property. The terms and conditions of the loan contained provisions for the charging of interest but did not have a specific term or condition stating the interest rate that should apply post judgment or that interest could be applied post judgment. There was also no separate agreement reached between P and T as to whether interest could be applied post judgment.
P failed to maintain the payments due under the loan. T issued a claim for possession and money judgment in Bromley County Court. In July 2009 T was awarded possession and judgment for the sum outstanding on the loan at the time it was granted. Thereafter, the property was repossessed and sold but the sale proceeds were insufficient to discharge the debt owing to T in full.
T issued an application for a Charging Order against another of P’s properties in April 2011. Within the application T stated that the sums owing to it were £77,044.81. This was the amount of the judgment debt plus interest that had accrued thereon at the contractual rate. The application was not opposed and an interim and final Charging Order were granted and registered against P’s equitable interest in a property.
Three years after the Charging Order was made, P applied to set aside the Charging Order. His application was dismissed and he appealed that decision to the High Court. The issue considered by the court, and ultimately conceded by T, was whether the sum protected by the Charging Order was correctly stated within the application. T argued that as the debt was secured, there could be no merger and interest would continue to accrue at the contractual rate in any event.
In his judgment, Mr Justice Dingemans took the view that T was entitled to claim and receive contractual interest up to the point of the sale of the security property. This was because, until the sale of the property, T was exercising its rights under the charge and the charge made express provision for the payment of "all liabilities" and made provision that that should be "TOGETHER with interest … computed and compounded in the manner set out in the facility letter". Mr Justice Dingemans followed the existing precedent that once the conclusion is reached that the property mortgaged is in such a form that it "cannot be taken out of the hands of the mortgagee without payment of the principal and full interest, then the covenant has no more to do with it than if it related to another subject-matter altogether".
The effect of the above is that the law relating to interest post judgment has been confirmed. Unless there is a contractual term detailing the interest provisions that will apply post judgement, or an agreement between the parties, a lender will be bound by the Doctrine of Merger unless they hold a Charge which contains appropriate provision to charge interest. As such, in the event that a secured lender without such protection or its borrower sells the security property, the applicable rate of interest after the property has been sold will be the statutory rate of interest.
What is the meaning of ‘actual occupation’ when considering a claim for overriding interests?
The Court considered this question in detail in the case of AIB Group (UK) Plc v Turner  EWCH 3994 (Ch).
Mr and Mrs Turner were registered as proprietors of a property, part of which was known as ‘the Cottage’, in 1974. In 1987 their son married Maxine Turner but the son passed away in May 1991. Following his untimely death, the daughter in law and her son went to live with the Turners. They arranged for the restoration of the Cottage as a home for the daughter in law and grandson who moved into the Cottage in 1993. In 2002/2003 Maxine Turner rented a home in Barbados. She later purchased a home there and her daughter went to school in Barbados whilst her son remained in boarding school in England. The son went to Barbados when on holiday from school.
In September 2005, Mr Turner sought a re-mortgage facility from the Bank. The Turners signed a declaration that no-one but them had a beneficial or equitable interest in the property and they were the sole occupiers of the property together with Maxine Turner. The Bank required a Deed of Consent from the daughter in law and on 11 October 2005 the remortgage was completed.
In July 2009, the daughter in law returned from Barbados to the Cottage to live.
In 2012, the Bank brought proceedings for possession against Mr and Mrs Turner and a possession order was obtained in December 2013 but in October 2014, the daughter in law was joined as a party to the proceedings and opposed the Bank’s entitlement to seek possession. She sought to argue that she had a beneficial interest in the Cottage on the basis of common intention constructive trust or proprietary estoppel.
The points which the Court had to consider were:
- Did the daugher in law have an actual interest in the property?
- If so, was it an overriding interest binding on the Bank?
- Was the lender subrogated to the rights of the previous mortgagee?
- Was the daughter in law’s defence and counterclaim an abuse of process?
The Court found that the daughter in law did not have a beneficial interest in the Cottage whether arising under a common intention constructive trust or proprietary estoppel. The Court was not satisfied that there was an agreement, arrangement or understanding that she should have a beneficial interest in the Cottage or that payments the daughter in law had made to the borrowers following the son’s death related to the acquisition of a beneficial interest. Nevertheless, the Court still went on to address the other questions.
Pursuant to Land Registration Act 2002 ss. 29 and 30 and Schedule 3 paragraph 2, for the daughter in law’s equitable interest to be binding on the lender, she needed to show that at the time of the mortgage, she was in ‘actual occupation’ of The Cottage. Maxine Turner’s case was that she had two homes at the time of the mortgage was entered into and the Cottage was her permanent residence. The Court admitted that the occupation issue was not easy to resolve but determined that on 11 October 2005 when the remortgage competed, the daughter in law was resident in Barbados and only occasionally returned to the Cottage. When the Turners said in their mortgage application that she was in occupation of the Cottage, the Court considered that they meant no more than that the Cottage was kept by them for her and their grandchildren should they want it but their occupation of it at the relevant time in 2005 was not ‘actual’. Further, the use by the son of the Cottage on Sundays during term time, had no affect on the case and his occupation was certainly not the daughter in law’s occupation (it being the daughter in law who claimed to have an interest in the property, not her son).
Although it didn’t need to, the Court also went on to confirm that:
- on the evidence before it, it was not satisfied that the Deed of Consent was signed by the daughter in law;
- the Bank would have been entitled to be subrogated to a prior charge;
- the daughter in law’s defence and counterclaim was not considered to be an abuse of process.
The lengthy and detailed Judgment re-confirms that the issue of whether a person has an interest in property and is in actual occupation is very fact sensitive and not easy to determine. All the relevant authorities, as detailed in the Judgment, will need to be considered when trying to determine these issues.