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Defending Mortgage Proceedings

Family home possession proceedings

More than a decade following the global financial recession (and the Irish property crash which accompanied it), the courts are still dealing with a significant number of families at risk of losing their family homes as banks, many of which have long ceased trading in Ireland, seek to enforce mortgages by taking possession of properties. While the number of possession cases have decreased in the past few years, we continue to receive enquiries about them from families desperate to find solutions or possibly even defences to the bank's claim. This article is intended to provide some commentary on some of the legal options available to borrowers facing repossession proceedings of their family homes. It is worth noting at the outset that, as a consequence of the sheer volume of such cases which came before the courts shortly after the property crash, a great number of legal defences began to emerge for borrowers. Some of these resulted from legislation enacted by the Government in order to prevent families from being evicted. Others were pronounced by the courts as pre-existing defences which had simply never been argued before. The result of the sudden rise in possession cases meant that it suddenly became one of the most complex areas of law. That remains the case today notwithstanding the relative decline in the volume of possession proceedings before the courts.

The Family Home Protection Act 1976

The protection of the family home is a sacred tenet of Irish society, enshrined as it is in the Family Home Protection Act 1976. Section 3 of the Family Home Protection Act 1976 provides as follows:

"Where a spouse, without the prior consent in writing of the other spouse, purports to convey any interest in the family home to any person except the other spouse, then, subject to subsection (2) and (3) and section 4, the purported conveyance shall be void."

This provision normally takes effect where one spouse creates a mortgage over the family home. Such a mortgage will be void unless he/she has first obtained the written consent of the other spouse prior to executing the mortgage. The section typically applies where the family home is in one of the spouse's sole names but there is nothing to prevent its operation in the case of joint ownership.

The leading authority on section 3 is the decision of the Supreme Court in Bank of Ireland v. Smyth [1995] IESC 3. In that case a husband and wife owned a 100-acre farm on which their family home was located. The husband created a charge over the property in favour of the bank. Appended to the charge was a form of consent for the purposes of the Family Home Protection Act which was signed by his wife.

When the husband defaulted on the loan, the bank sought possession of the property, including the family home. At trial, the wife produced evidence that, although she was interviewed by a bank official prior to signing the consent form, she was always of the view that the charge was in respect of the farm and did not extend to the family home. The Supreme Court, finding in favour of Mrs. Smyth, held that the consent required under section 3 must be "fully informed consent", that the person giving the consent should not be mistaken as to what exactly he/she is consenting to. The Court accepted Mrs. Smyth's evidence that she did not know what she was consenting to and found that the mortgage was invalid.

The Supreme Court noted that, while the consent must be fully-informed, there was generally no duty on the bank to recommend to the spouse that she should obtain independent legal advice.

Although the Act and the Supreme Court decision have been around for a long time, it is surprising how many cases we come across where the bank has not obtained the consent of the non-owning spouse or where the consent appears to be dubious in its form and/or wording. Sometimes the error is purely clerical in nature – the bank has lost the original signed consent form – which is not altogether surprising given that many of these mortgages have passed through several financial institutions before finally reaching the courts (normally sold by the original lender to the so-called vulture fund who then tries to enforce it). A second scenario is where the bank never obtained consent in the first place. On more than one occasion we have advised borrowers where the bank has attempted to rely on a "deed of confirmation" in place of a spousal consent. Although a detailed explanation of what precisely a deed of confirmation is and does is beyond the scope of this article, it is sufficient to explain that such deeds were never intended to function as spousal consents. Deeds of confirmation are intended to be used where, for example, a parent provides a gift to their child to assist with the deposit for a house. The bank will ask the parent to sign a deed "confirming" that they will not have any equitable interest in the house despite the gift. While there is no direct case law on the point, it is our view that a deed of confirmation cannot and should not replace a spousal consent for the purposes of the 1976 Act.

Judgment mortgages and the family home

For many years it was thought that the effectiveness of the 1976 Act was doubtful because, even when mortgages were declared void under its provisions, banks still had other options for taking possession of the family home. One such option was to obtain judgment against the borrower- spouse and then enforce that judgment by registering it as a mortgage over the family home. In other words, the bank could simply replace the void mortgage with a second mortgage. While there were pitfalls for a bank in going down this route (for example, the judgment mortgage would be subject to any intervening mortgages registered by other creditors) and while the procedure for it was more complicated and expensive, it still posed a significant risk for borrowers of losing the family home notwithstanding the bank's failure to comply with section 3 of the Family Home Protection Act.

In the Court of Appeal case of Muintir Skibbereen Credit Union v. Crowley [2016] IECA 213 Hogan J was asked to consider whether a judgment mortgagee was entitled to an order for partition and sale of a property co-owned by a husband and wife in circumstances where the loan giving rise to the judgement mortgage was an unsecured loan to the husband without the consent of the wife. The lender, a credit union, had already obtained a judgment in respect of the loan and was seeking a well-charging order and order for partition/sale of the property pursuant to section 31 of the Land and Conveyancing Law Reform Act 2009. Hogan J noted that the provision afforded the court a broad discretion and, in the circumstances of the case, he decided to exercise that discretion in favour of the borrowers. Specifically, he noted that the family had three young children, that there was insufficient equity in the property to enable them to purchase alternative accommodation, that such a sale would be contrary to the spirit of the Family Home Protection Act and that the wife had given no consent whatsoever to the original loans and neither was she a party to them.

This is a significant decision because it suggests that, at least in the context of the family home, a judgment mortgagee will now struggle to sell such property to discharge its debt notwithstanding that it has obtained judgment and the Family Home Protection Act does not strictly apply. It remains unclear, as Hogan J admitted, what factors precisely will be taken into account by a court in deciding whether or not to exercise the jurisdiction under section 31. However, since much of Hogan J's analysis revolved around the Family Home Protection Act, it is suggested that a judgment mortgagee is more likely to succeed where the property in question is not the family home.

Limitation periods in mortgage proceedings

There is a 12-year limitation period for enforcing a mortgage. This is subject to the usual extension pertaining to the acknowledgment of debts. The general rule is that, once a mortgage debt becomes "due and owing" then a bank has 12 years in which to issue possession proceedings in respect of it. When the time begins to run is a matter of interpretation which will depend on the specific facts of the case. But in most cases involving "on demand" facilities, the time begins to run from the date of the letter of demand and not from the date of default of the loan. For this reason, banks tend to avoid serving formal demands until they have decided to go down the litigation route.

Limitation periods become a more urgent consideration where the borrower is deceased, as was the situation in AIB v. Pollock [2016] IEHC 581. The defendant in that case was the executor of the estate of the borrower. The bank was seeking judgment in respect of loans it had advanced to the borrower prior to his death. The defendant argued that the bank was statute-barred by section 9 of the Civil Liability Act, which requires proceedings concerning a cause of action which subsisted at the date of a person's death to be brought within 2 years of that date. The bank argued that its cause of action arose after the death of the borrower (and was therefore not subject to the two-year limitation period) because, under the terms of the loan agreements, the bank was required to make a formal demand for payment before taking further action. Since demand was made following the death of the borrower, the cause of action was not subsisting at the date of his death. The court, finding in favour of the defendant, held that, although the loan document did make certain references to the issuing of a formal demand by the bank, it also contained a term which stated that such demand was "subject to" a redemption date of 30th September 2009 (prior to the borrower's death). Thus, the loan was required to be paid in its entirety by that date and, since this was not done, the bank's cause of action arose as of that date and therefore subsisted at the date of the borrower's death. As such, the proceedings were subject to the two-year limitation period and were statute-barred because they had not been commenced in time.

Code of Conduct on Mortgage Arrears (CCMA)

In order to address the prevalent issue of borrowers losing their homes during the financial crisis of 2008, the Central Bank introduced the Code of Conduct on Mortgage Arrears (CCMA). The purpose of the Code was to ensure that possession of the family home was a last resort for lenders after attempting to reach alternative arrangements with borrowers. The Code requires lenders to do a number of things, including:

• Provide the borrower with information about his arrears and the manner in which the lender intends to handle them;
• Provide the borrower with a moratorium of at least eight months from the date of default;
• Make every reasonable effort to offer the borrower an alternative repayment arrangement;
• Provide borrowers with forms necessary to apply for State support;
• Actively encourage borrowers to engage with it about arrears;
• Draw up a Mortgage Arrears Resolution Process, or MARP;
• Provide borrowers with a booklet setting out the terms of the lender's MARP;
• Have an appeal mechanism whereby the borrower may appeal a decision of the lender taken under the MARP.

While the Code was hailed shortly after its introduction as an effective shield for borrowers, it has since lost much of its effect. In Irish Life and Permanent v. Dunne and Dunphy [2015] IESC 46 the Supreme Court held that, since the Code was issued by the Central Bank rather than being primary legislation enacted by the Oireachtas, a breach of its terms did not have the effect of preventing a bank from obtaining a possession order (although it may entitle the borrower to monetary compensation). The Court went on to say that only a breach of the most fundamental provision of the Code, namely that borrowers should be given a moratorium before possession proceedings are issued against them, would have the effect of depriving the bank of a possession order. The result of the Supreme Court decision is that, while the CCMA continues to apply and is still taken seriously by County Registrars keen to ensure families stay in their homes where possible, it is rarely now an obstacle to possession proceedings.

Other defences

The above is an overview of some of the more common defences raised by borrowers defending possession proceedings against the family home. These are not, however, the only defences. Others, including a breach by the bank of the Consumer Credit Act 1995 or of the other consumer-protection codes issued by the Central Bank, may also assist borrowers in at least advancing negotiations with lenders to try and reach a settlement which protects the family home. There may also be defences raised by the specific facts – for example, undue influence by one spouse over the other in obtaining the latter's signature to a mortgage or indeed the outright forgery of the latter's signature on the mortgage documents. Possession cases have always been - and remain – fertile ground for the discovery of novel defences which judges and county registrars are often willing to entertain.

Conclusion

In most cases borrowers in mortgage arrears will only seek legal advice once the bank threatens to issue, or actually issues, legal proceedings for possession of the family home or summary proceedings for judgement. This typically occurs after years of correspondences between the parties where the lender attempts to find an alternative to issuing such proceedings. After all, it is in the lender's interest to compromise the amount of the debt rather than issue expensive court proceedings. But if those court proceedings, in addition to being expensive, also appear to be uncertain because the borrower raises defences with real merit, this often hastens a compromise. That is normally the objective of defending possession or summary proceedings – to raise the possibility that the bank may get nothing at all and therefore increase the borrower's bargaining power. However, we have also advised in cases where the defence is so strong that it goes much further than simply cajoling the bank – it can cause the bank to abandon the proceedings altogether or have its application denied by the court. We would therefore advise borrowers - and indeed lenders – to seek legal advice about their case at the earliest opportunity. For borrowers this will normally mean having a lawyer conduct a legal review of the case, to test the bank's documents for any signs of a potential defence. There may ultimately prove to be no defence but it is a necessary step in attempting to save the family home.

If a borrower has no legal defence to possession proceedings, he/she will be advised to consider the insolvency route as an alternative to the legal route. The Insolvency Act 2012 provides borrowers the opportunity to compel their creditors to compromise secured and unsecured debts when certain specified conditions are met. It has proved to be a valuable alternative to formal bankruptcy and, since its administration falls within the remit of Personal Insolvency Practitioners (a new profession created by the legislation, who are normally accountants) we will refer clients to them where we believe it is more beneficial for the client to take the insolvency route.

Author: Mahmud Samad BL
Publication date: 27th February 2024