Can a Second Charge Lender exercise its Right to Possession if a Property is in Negative Equity?

April 11, 2017

Until recently in Northern Ireland, second charge lenders have been unable to succeed in their possession application against borrowers whose property is in negative equity. However, this position may change arising from a recent decision in the matter of Swift Advances Plc v David Cully (2016) NI Master 11, where the Court granted a second charge lender permission to enforce the Possession Order against a property that was claimed by the borrower to be in negative equity.

The lender applied for a Possession Order as the borrower failed to make payments under an unregulated credit agreement dated 19 July 2007. The lender secured a Possession Order in January 2010.  At an advanced stage of enforcement of the Order, the borrower lodged a stay of enforcement application.  The stay was granted to “allow the Defendant an opportunity to explore issues which may have arisen for consideration by virtue of the provisions of the Consumer Credit Act 1974”.  In and around 12 November 2013, proceedings were stayed by way of a Tomlin Order.  A Tomlin Order is a Court Order under which an action is stayed on terms that have been agreed in advance between the parties which are included in a schedule to the order.  The lender was given permission by the Court to apply to enforce the Possession Order if the borrower failed to make payments as ordered.

The borrower failed to make all but one payment under the terms of the Order. Therefore the lender applied to the Court to enforce the Possession Order and permission to enforce was granted on 29 June 2015.  During enforcement of the Order the borrower made a further stay application on the grounds that the Tomlin Order simply provided a money judgment in favour of the lender and he did not envisage that his property could be repossessed.  He further argued that there was no equity available for the benefit of the second charge lender.

On the first point the Court found that his argument that the lender only holds a money judgment to be “simply plainly wrong”.

With regard to the equity point, the Court held that the equity position should not interfere with the lender’s right to possession. The Court considered the recent judgment McDonald v McDonald and others (2016) UKSE 28 which was delivered by the Supreme Court of the United Kingdom.  This supported the argument put forward on behalf of the lender in this matter that the Court “must not stray into the realms of interfering with normal contractual rights of parties in a private transaction so as to deprive one of the parties of an outcome to that transaction which was provided for when it was first entered into.”  The Court dismissed the borrowers stay application and the lender was given permission to enforce the Possession Order granted in 2010.

As there are a considerable number of properties currently in negative equity in Northern Ireland, in comparison with the rest of the UK, lenders that once were unable to seek possession of a property in negative equity may now succeed in their application following this Judgment. We may therefore see an increase in the number of second charge lender possession applications made to the Court.

The content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.

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