Limitation on mortgagee claims following a shortfall on sale of secured property; Simon Hill and Georgia Bedworth (a barrister at 10 Old Square) explain how to advise on mortgage shortfalls
[Update: see Bradford & Bingley Plc v Rashid  1 W.L.R. 2066]
The crash in the property market in the late 1980s and early 1990s saw many home owners fall in to negative equity. Great confidence in the market had led some borrowers to leave themselves vulnerable to interest rate increases. When the market turned sour, many borrowers were unable to keep up repayments. Over the period 1990 to 1994, there were 295,720 mortgage repossessions (source: Council of Mortgage Lenders). With many of those who lost their homes having been in negative equity, the result was that, following sale, many borrowers still owed a significant amount to the banks as mortgage shortfall.
A number of these debts have been left dormant, either because the borrowers had no money or they had simply disappeared.
Recently, banks have been asserting their rights to recover these mortgage shortfalls, most likely because: (1) some of these borrowers have got a foot back onto the property ladder and with the well documented increase in property values over the past few years, now appear to be good targets for banks keen to claw back some of the outstanding debt; (2) banks are conscious that if they don’t issue soon, they may find themselves statute-barred.
Many borrowers are surprised to find themselves faced with claims for many thousands of pounds after all this time, when they had considered that they had put their financial difficulties behind them. The best, often only, defence open to the borrowers faced with this situation is a defence that the claim is statute-barred.
Limitation: relevant period
The relevant limitation period in mortgage shortfall cases has been placed beyond doubt by the House of Lords in West Bromwich Building Society v Wilkinson  1 WLR 2303, affirming the decision in Bristol & West plc v Bartlett  1 WLR 284 that s 20 of the Limitation Act 1980 (sums secured by mortgage) applies. In respect of the principal sum, the lender has 12 years from the date upon which the right to receive the money accrued. In relation to interest, the bank must have issued within six years of the date upon which the interest became due. Section 20 applies despite the fact that, as the property has been sold, the debt is no longer secured.
When does time start to run?
There is usually a long delay between default by the borrower and the bank obtaining possession, selling the property and quantifying the shortfall. The House of Lords in Wilkinson held that time begins to run from date of default, not, as the banks had sought to argue, from the date when the shortfall was ascertained. This gives the borrower a head start when considering a limitation defence.
The first step is to analyse the history of the account. When was the last payment under the mortgage made? Add 12 years to that date, check the date of issue and you may find that the bank has issued outside of the limitation period. It is important to remember that neither the realisation of the property nor of any secondary security, such as an endowment policy, amounts to a payment under the mortgage for these purposes.
Extension of limitation period
Unfortunately the matter does not end here. Although there may be more than 12 years between issue of proceedings and the last payment under the mortgage, time may have begun to run afresh by an intervening acknowledgement or part payment.
The relevant part of LA 1980, s 29(5) provides as follows:
“Subject to subsection (6) below, where any right of action has accrued to recover –