What is it?

The new guidance has been issued to mortgage lenders and is enshrined in the Pre-action Protocol ("the protocol") which comes into force on 19 November 2008.

The protocol sets out considerations and steps that should be taken before possession proceedings are instigated by mortgage lenders. 

Does it apply to all possession cases?

The protocol governs arrears on first and second charge residential mortgages, home purchase plans, Consumer Credit Act regulated secured loans and unregulated residential mortgages.

There are nevertheless important parallels to be drawn with Order for Sale possession cases. The end result is that homes are being repossessed to satisfy an outstanding debt. It is likely that Judges will therefore apply the spirit of the Protocol to Order for Sale cases.

On the whole lenders are being encouraged to consider repossession as a last resort and will be expected to demonstrate that reasonable steps have been taken to explore other means of satisfying the arrears.

How is it likely to impact on Order for Sale Actions?

The protocol aims to ensure that both parties act fairly and reasonably in resolving any arrears.

It encourages the sharing of information and early settlement of disputes. Parties will be expected to be able to explain what actions they have taken to comply with the protocol.

Claimants should be able to demonstrate that alternatives to repossession have been considered and that they have acted fairly. In return debtors will be expected to provide information that could assist with the early resolution of the matter.

It is often difficult to obtain redemption information in order to ascertain whether there is enough equity to pursue the Order for Sale. This new guidance may well assist in obtaining the debtor's agreement to release the information.

If the debtor fails to respond to the correspondence and/or assist in these preliminary investigations this could work in the claimant's favour.

Judges are likely to adjourn and/or stay claims where the claimant has failed to demonstrate that all reasonable steps have been taken and/or considered.

What steps should we be taking?

Once the debtor falls into arrears, the debtor should be invited to contact you to:

  • Discuss the cause of the arrears;
  • Provide evidence of the debtor's financial circumstances; and
  • Propose suitable repayment options.

You should then consider the information to determine whether the causes of the arrears are temporary or long term and whether the debtor is likely to pay the arrears in a reasonable time.

The pre-action claim letter should re-iterate the invitation to the debtor to contact your legal representative to pay the debt or to shed light on the debtor's financial circumstances. Any settlement proposals should also be carefully considered as you might be asked to justify any refusals.

All information provided by the debtor should be considered as part of the preliminary investigations. If it is unlikely that the debtor will be able to pay the arrears/discharge the debt in a reasonable time an Order for Sale can be pursued. There is no guidance at this stage as to what will be deemed a reasonable time.

The protocol does not change mortgage lenders' rights to effect a Power of Sale nor does it change the Court's powers to deal with Orders for Sale. The Order for Sale is still a legally viable mechanism to recover debt, albeit that additional evidence may be required to prove that the action is fair and that no suitable alternatives exist.

It remains to be seen just how much of an impact the protocol will have on Order for Sale cases. However, by adopting the best practice of adhering to the spirit of the protocol, you are maximising the chances of a successful outcome.

The protocol recognises that whilst it is in the interests of all parties to resolve the dispute promptly without the need for court action, in some cases an order for possession may be the best course of action for all involved.