Cheltenham and Gloucester Plc v Krausz

The county court had no jurisdiction to suspend a warrant for a possession of mortgaged property in order to enable the borrower to apply to the High Court for an order for sale of the property under section 91(2) of the Law of Property Act 1925.

The Court of Appeal so held in allowing an appeal by the plaintiff, Cheltenham and Gloucester plc against an order of Judge Green in Shoreditch County Court staying execution on a warrant for possession of a property mortgaged to it by the defendants, Aaron Krausz and Rebecca Josephine Krausz, pending an application to the High Court under section 91(2).

Ms Kathryn Purkis for the plaintiff; Mr H J Smith for the second defendant; the first defendant was not represented and did not appear.

LORD JUSTICE PHILLIPS said that Palk v Mortgage Services Funding plcELR([1993] Ch 330) established for the first time that the court had power under section 91(2) to make an order for sale on the application of a borrower notwithstanding that the proceeds of sale would be insufficient to discharge the mortgage debt.

The lenders had obtained an order for possession with the intention, not of proceeding to sale, but of waiting in the hope that the market might improve. The borrower wanted the property sold so as to reduce the mortgage debt on which interest was accruing at an alarming rate.

The court held that, as the lenders could buy the property themselves if they wished to speculate on an increase in its value, the property should be sold.

In Barrett v Halifax Building Society ((1995) 28 HLR 634) the situation was one of negative equity. The lenders resisted the borrowers' application for an order for sale pursuant to section 91.

The lenders did not contend that they would be able to obtain a better price but urged that if the sale went ahead it would break their established policy not to permit borrowers with negative equity themselves to conduct the sale of their property without at the same time making proposals for the repayment of any resulting deficit.

The judge had held that that was not a material circumstance which he ought to take into account when exercising his discretion.

The consequences of the procedure followed in Barrett appeared to be far reaching. In any case in which there was negative equity it would be open to the borrower to resist an order for possession on the ground that he wished to obtain a better price by remaining in possession and selling the property himself.

In not every case would the primary motive for such an application be the wish to obtain a better price than that which the lender was likely to obtain on a forced sale. Often the borrower would be anxious to postpone the evil day when he had to leave his home.

There would be a danger, if the lender did not obtain possession, that the borrower would delay the realisation of the property by seeking too high a

price or deliberately procrastinating on completion.

At present there was a simple procedure for seeking possession in the county court and the issue tended to be whether there were arrears and whether the borrower was likely to be able to discharge those in reasonable time.

If possession was to be suspended whenever that appeared reasonable in order to give borrowers the opportunity to sell the property themselves, the courts were going to have to enter into an area of difficult factual inquiry in order to decide in the individual case whether or not that...