In Graves v Capital Home Loans Ltd  EWCA Civ 1297, it was held that the appointment of Law of Property Act Receivers by a mortgagee because the borrower lacked the mental capacity to manage his financial affairs was valid even if the borrower was mentally fit by the time of the appointment. It was further held that the treatment of the borrower by the lender in such circumstances did not give rise to an unfair relationship under ss 140A and 140B of the Consumer Credit Act 1974 (CCA 1974).
In November 2007, the borrower, Mr Graves, applied to Capital Home Loans for a buy to let mortgage in respect of his property. The lender lent £319,860 on an interest only basis for 15 years.
It was a term of the mortgage that if the borrower failed to pay in full any monthly payment or other sum due under the mortgage, or became incapable of managing his affairs by reason of mental capacity, the statutory power of sale would be immediately exercisable and the lender would be authorised to appoint a receiver.
There was a long history of arrears on the mortgage account and an established pattern of broken promises of repayment and threats to appoint a receiver. In March 2012, the lender wrote to the borrower asking for the arrears to be paid and advising that, unless an arrangement could be reached, the lender would appoint LPA Receivers.
It then became apparent that the borrower had been admitted to hospital. In order to discover the extent of his health problems, the lender sent to the borrower at the hospital, a Debt and Mental Health Evidence Form (a form developed by the Royal College of Psychiatrists in consultation with various credit agencies as a means of obtaining information about a patient’s state of health). The guidance published by the Office of Fair Trading in March 2010 for lenders advocates the use of this form for that purpose.
The borrower signed the form and gave it to a mental health nurse on the ward where he was being treated. The nurse then completed the form, stating that the borrower had mental health problems which meant that he did not have the capacity to deal with financial issues and that he had been compulsorily admitted to and detained in hospital pursuant to s.3 Mental Health Act 1983. The lender then received a letter from the borrower’s consultant psychiatrist, confirming that the borrower remained sectioned and still lacked capacity to deal with his affairs, although he added that this was a temporary loss of capacity due to illness. The doctor went on to say that the borrower was making a good recovery and ought to be able to manage his affairs again in the near future.
Subsequent to this, the lender sent a seven day letter to the borrower, at his home address rather than to the hospital, stating that in light of his lack of capacity the lender had no alternative but to appoint a receiver. The receiver was appointed on 25 May 2012. On 29 May, the borrower’s doctor wrote to the lender to advise that the borrower was no longer sectioned and had regained his capacity to manage his financial affairs.
By the time the receivers had carried out their assessment, the property was vacant. Accordingly, the lender wrote to the borrower at his home address informing him that the receivers were to resign and that the lender intended to sell the property as mortgagee in possession. The receivers resigned on 28 August and the property was sold on 15 October 2012.
Just prior to the sale, the borrower brought two claims against the lender seeking possession of the property. In his claims, the borrower denied being unable to manage his affairs. The judge was asked to consider three allegations including that the LPA Receivers had not been validly appointed because he was not mentally unfit to manage his own affairs at the time and that the taking of possession by the lender was in breach of industry guidelines.
The appeal judge rejected all three of the borrower’s allegations. The judge held that it was unnecessary to decide the borrower’s mental capacity because arrears alone justified the appointment of receivers, but went on to hold that the power to appoint a receiver was exercisable if the borrower became incapable of managing his affairs. Since this was clearly the case prior to the receivers’ appointment, it made no difference if his incapacity ceased by the time the appointment was made.
After the appeal was dismissed, the borrower raised for the first time an argument that ss.140A and 140B of the CCA 1974 applied to his mortgage and that the relationship between him and the lender was unfair because of the way in which the lender enforced its rights under the agreement notwithstanding his mental disability. The lender conceded that ss.140A-140B did apply to the mortgage. The borrower conceded that it could not be said that it was unfair for the lender to have included a power to appoint a LPA Receiver in the event of a debtor becoming unable to manage his financial affairs. The Court held that although the lender failed to engage the borrower in any meaningful sense prior to the appointment, and sent the seven day notice to his home address rather than the hospital as promised, none of this ultimately led to the loss of the property.
The borrower argued that he was not treated with sufficient understanding in the period leading up to the sale and, even when he regained his capacity, the lender was not prepared to negotiate a further payment plan to cover the arrears. The lender’s position was either he had to redeem in full or the property would be sold.
The court held that the guidance contained in the Good Practice Awareness Guidelines for Consumers with Mental Health Problems and Debt, published by the Money Advice Liaison Group in 2009, was substantially complied with by the lender during the relevant period. The evidence from the lender was that it bent over backwards to accommodate the borrower over the years to keep the mortgage going rather than taking possession. The Court found that the lender's decision to ‘play hardball’ in 2012 should be looked at in the wider context.
In conclusion, the Court indicated that it would have to be an exceptional case for the Court to conclude that a mortgagee, whose power of sale had become exercisable due to non-payment of mortgage instalments, was to be treated as acting unfairly in deciding to release its security. The advice from the OFT to treat borrowers in default with understanding and due consideration does not mean that the lender has to ignore the history of the account or the ability of the borrower to maintain it in the future.
Clearly this is a favourable judgment for lenders if they are faced with the unsavoury prospect of having to take action concerning a property where its borrower is mentally incapacitated. However, some caution should be exercised as the judge did comment that the position might have been different if the borrower had an unblemished record of payments up to his admission in hospital and the lender had chosen to exercise its power of sale solely on the basis of arrears which occurred when he was unable to manage his financial affairs.