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IM On The Money - Issue Four

Suspended Possession Orders; an end to uncertainty?

A Suspended Possession Order (SPO) is exactly what it says – a possession Order that cannot be enforced while the borrower sticks to its terms.

These are allowed pursuant to the Administration of Justice Acts, more specifically Section 36 of the 1970 Act which allows the Court to suspend possession if, in the event it does so, the borrower is likely to be able, within a reasonable period, to remedy the default (i.e. pay off the arrears).

The standard wording of such an Order is that possession is granted but is "not to be enforced so long as the borrower pays the lender the un paid instalments due under the mortgage of £x by the payments (as set out) in addition to the future instalments under the mortgage".

The effect is that the borrower is obliged to pay off the arrears over the agreed (or ordered) term as well as servicing the loan payments going forward. If he defaults then the lender can enforce the possession Order by way of a Warrant.

But what of the situation where the arrears are cleared entirely, whether by payment from the borrower or by the, increasingly common, practice of them being consolidated, i.e. added to the mortgage balance?

Surely, in the instant there are no arrears, the lender’s cause of action falls away and the Order for Possession should accordingly fall away also?

On the other hand, the lender’s right to possession arises as soon as the first arrears arise. At that point the lender is entitled to ‘call in’ the loan and demand possession. Once that point is reached, how can it be reversed?

This apparent dichotomy has lead to much confusion as to whether an SPO is capable of enforcement after arrears are cleared and reoccur in the future.

Many lender clients have complained about conflicting advice on the point from solicitors and, whilst our view has long been in accordance with the Judgment below, we are grateful to the Court of Appeal for clarifying the law in this area.

Zinda v Bank of Scotland plc was a long running possession case involving Mr Zinda who was at the time a law student.

In essence, Zinda fell into arrears and an SPO was granted in 2005. This anticipated the arrears being paid off in instalments over a 9 year period.

However, in 2008, the lender consolidated the remaining arrears into the main debt (i.e. added them to the loan).

At this point, Zinda claimed (and the lender acknowledged) that there were no arrears on the account.

In due course however Zinda fell into arrears once more and, rather than issue fresh possession proceedings, the Bank sought to rely on the existing SPO and applied for a Warrant of Possession.

There followed numerous applications by Zinda to suspend the Warrant, citing many grounds but the main thrust being that, the effect of the consolidation had been to extinguish the SPO as the arrears fell away, even if only for a short time.

His applications were dismissed but leave was given to appeal. The Court of Appeal also dismissed the application but, unusually, leave was given for a second appeal on the above point alone on the basis that, on this one issue, the case raised an important point of law or practice.

This second appeal was heard in June 2011 before 2 Lords Justices of Appeal and a High Court Judge.

Ultimately, the case turned on the precise wording of the SPO (which, by way of recap) was in a standard form.

The SPO suspended possession upon payment of BOTH the arrears and the future instalments under the mortgage.

Once the future instalments were not paid the suspension fell away regardless of whether the arrears had been dismissed by consolidation or suchlike. Thus, despite the arrears having been cleared in 2008, the lender could still enforce the SPO if further arrears arose.

One of Zinda’s points was that, allowing the SPO to subsist indefinitely was equivalent to a rewriting of his contract with the lender, thus interfering with his freedom of contract. Lord Justice Mundy pointed out the ‘exquisite irony’ of the fact he was seeking to take the benefit of a statute (i.e. the AJA 1970) which did itself interfere with the lender’s freedom of contract and that, without that Act, he would have been evicted in 2005.

Whilst acknowledging that the continuing SPO could be considered a Sword of Damocles for Zinda, the Judge made the point that this was only due to his own default and he did of course retain the ability to apply for a suspension of the Warrant on other grounds and also that, once 6 years had elapsed from the making of the SPO, the lender would require the Court’s permission to enforce it.

This is an important decision for lenders and reinforces the slightly obscure case law in this area which existed previously.

It is a little disappointing that the Court of Appeal did not go on to consider, even obiter, what the position would have been had the precise wording not been present. In our view, the outcome should be the same as there is no authority to suggest an SPO can be discharged on clearance of the arrears.

It remains to be seen whether borrowers and their advisers will in future seek an express Order to the effect that the lender’s right to enforce falls away on clearance of the arrears and whether lenders and the Courts will agree to them.

In the meantime, lenders agreeing SPO’s by consent would be well advised to ensure the precise wording of Form N31 is used, as was the case with these proceedings.

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