19 November 2008

Mortgage Arrears Pre-Action Protocol Comes Into Force

The pre-action protocol (“PAP”) for possession claims based on mortgage arrears comes into effect on 19 November 2008. It was drawn up by the Civil Justice Council and encourages mortgage lenders to take certain steps before resorting to possession proceedings.

The PAP will only apply to residential properties, but will affect both regulated and unregulated mortgages.

The purpose of the PAP is to encourage the parties to act reasonably and fairly when a borrower falls into arrears, and to communicate with each other at an early stage in a manner that is open and honest in order to try and agree an amicable arrangement regarding repayment of the arrears without the need for court action.

Ultimately, the PAP seeks to emphasise to all parties, but particularly lenders, that possession claims should only be commenced as a last resort.

An example of some of the steps set out in the PAP are:

• Requiring the lender to provide the borrower with certain information, including (where appropriate) the required regulatory information sheet or the National Homelessness Advice Service booklet on mortgage arrears, as well as information concerning the amount of arrears owed;
• Requiring the parties to take all reasonable steps to discuss with each other the cause of the arrears, the borrower’s financial circumstances and any proposals for repayment;
• Requiring the parties to consider any proposals for payment and respond promptly, giving reasons if the proposal is refused,
• Requiring the parties to consider alternative ways of resolving the dispute, which may include extending the terms of the mortgage or capitalising the arrears; and
• Requiring the lender to consider postponing a possession claim in circumstances where a borrower is actively marketing the property at an appropriate price, and requiring the borrower to provide the lender with information relating to the sale.

Although the PAP does not alter the parties existing rights and obligations, it does set out the behaviour that the court will normally expect of the parties, and the steps they should normally have complied with, prior to the start of a possession claim.

In the event that parties are unable to demonstrate to the court that they have taken steps to comply, at least in substance, with the PAP, the court has the power to impose sanctions on the non-compliant party, which are likely to include costs or interest penalties.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

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