The Wealth Finance Brief - 1 October 2014
- Lending to law firms
- A Lender's Right to Take Possession of Residential Property
- Litigation or Arbitration?
- Lending to Limited Partnerships against Capital Calls
The High Court recently confirmed, in Thakker & another v Northern Rock plc , that a lender's failure to comply with MCOB would not prevent it from taking possession of the residential property. This article considers whether MCOB still offers any meaningful protection to borrowers who are in arrears, or whether lenders now have free reign.
Facts of the case
Since 31 October 2004, a set of regulatory rules ("MCOB ") has governed the way in which lenders conduct much of their mortgage business in the UK. MCOB focuses on mortgages over residential property and includes detailed rules regarding how lenders should treat borrowers who are having payment difficulties.
In 2002, Northern Rock lent Mr and Mrs Thakker £242,000 which was secured on their home. Another 12 secured advances totalling £259,000 followed between 2003 and 2006, and by November 2010 the Thakkers owed the bank a total of £585,000. The bank brought proceedings to repossess the property but the Thakkers appealed a County Court decision in the bank's favour, alleging that Northern Rock had repeatedly breached MCOB when making advances after 31 October 2004 and that damages due to them arising from those breaches of MCOB should be set off against, and would eclipse, any arrears.
The High Court was asked to reconcile the borrower protections in MCOB with an earlier 1989 Court of Appeal decision  that a lender's claim for possession cannot be defeated by setting off sums as part of a counterclaim.
Mrs Justice Simler ruled in favour of the bank: its alleged failures to comply with MCOB would not defeat its right to repossess the residential property. In her view, repossession proceedings have 2 stages:
- Stage 1: does the lender have a legal right to possession? This will be a yes/ no decision. At this stage the Court will look at the mortgage documents and the only defences available will concern the voracity etc of those documents, for example fraud or arguments that the mortgage documents are void;
- Stage 2: are there any grounds for a Court to exercise discretion? This is when issues relating to counterclaims should be considered by the Court.
- So at which stage would MCOB be relevant? Mrs Justice Simler noted that under the Financial Services & Markets Act 2000, a contravention of the FSA's rules – such as MCOB - would not make any transaction void or unenforceable . Breaches of MCOB might, however, give rise to a claim for damages. It follows that MCOB will not be relevant to the yes/ no question at Stage 1, although the bank's behaviour and alleged breaches of MCOB might be relevant to counterclaim by the borrower at Stage 2. This analysis would also be entirely consistent with the Court of Appeal's decision in Skelton.
Carte blanche for lenders?
- Not quite! Although a breach of MCOB will not usually defeat a lender's right to obtain possession of a property, it will still have negative consequences for that lender:
- There is a risk that the lender's poor practice may extend more widely and jeopardise the enforceability of the mortgage documents - the Stage 1 question - so that the mortgage is unenforceable on other grounds (e.g. there has been a fraud, or where the lender fails to identify an underage borrower or one who is unwell so does not have legal capacity, or a borrower who is acting under duress or undue influence).
- The lender may find itself liable to pay damages to a borrower who can show that (s)he has suffered loss as a result of that breach of MCOB.
- A breach of MCOB will be relevant to Stage 2 of possession proceedings so may give a Judge grounds to stay or suspend the proceedings.
- The FCA may pursue the matter and impose penalties for a breach of its rules. This is particularly the case if the breach is part of a pattern of behaviour by the lender, or particularly grievous. The FCA can take action either against the lender itself, or against staff within the lender who carry out particular functions. Penalties might include unlimited fines, an order to pay compensation to affected borrowers, public censure by the FCA, the variation or suspension of the lender's FCA authorisation, an order prohibiting an individual from performing certain functions, injunctions or restitution orders. The type and level of penalty will, of course, reflect the nature of the breach.
- Bad publicity may result if the borrower is seen to be harshly treated by the lender, or if the lender is seen to be breaching FCA rules as part of a regular pattern of behaviour.
A closing thought
Mrs Justice Simler also noted in her judgement that as part of its Stage 1 review, a Court would look at the mortgage documents to see whether there was any express limitation in them of the lender's rights to take immediate possession of the property or (in rare cases) it might be willing to consider an implied limitation to that effect.
Even where lenders are impeccable in their compliance with MCOB, they should check that the right to immediate possession is enshrined in their documents and (perhaps most importantly) that people negotiating those documents with individual borrowers know not to go "off piste" and delete these provisions.
It may seem a basic observation, but from the lender's perspective, its compliance with the detailed rules in MCOB regarding how it should treat borrowers who are having payment difficulties will be somewhat academic if it does not have a right to enforce possession.
1.  EWHC 2107 (QB) (5 February 2014)
2. The Mortgage: Conduct of Business sourcebook can be found at http://fshandbook.info/FS/html/handbook/MCOB. Chapter 13 focusses on arrears, payment shortfalls and repossessions.
3. National Westminster Bank plc v Skelton (reported  1 AER 242)
4. This is now re-enacted for the FCA in section 138(e) of the Financial Services Act 2012
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