Zinda v Bank of Scotland Plc

This appeal raises a short but important point of principle of great practical significance in relation to the standard form of suspended possession order used in mortgage cases and granted on a daily basis in hundreds of County Courts up and down the land. That is the reason why, although this is a second appeal, permission was granted by Rix LJ.

The facts lie within a short compass and are commonplace.

On 3 March 2003 the appellant, Mr Justin Oliver Zinda, executed a mortgage deed, charging his house in Northolt to the respondent bank to secure a loan from the bank of £133,000. The loan was repayable over a 25-year term with interest-only instalments. The mortgage was on the usual basis. So long as Mr Zinda paid the monthly instalments of interest the bank would not seek repayment of the capital or possession of the property, but if he fell into arrears the full amount of the secured indebtedness would become payable and the bank would be entitled to take possession. Clause 3 of the mortgage deed stated that “The mortgage secures further advances.”

Mr Zinda fell into arrears. In August 2005 the bank issued possession proceedings in Brentford County Court. On 24 October 2005 Deputy District Ryan made an order in the following terms:

“1

The defendant give the claimant possession of [the property] on or before 21 November 2005.

2

This order is not to be enforced so long as the defendant pays the claimant the unpaid instalments under the mortgage of £11046.50 by the payments set out below in addition to the current instalments under the mortgage.

…

Payments required

£96.02 per month the first payment being made on or before 21 November 2005.”

A simple calculation shows that payment off of the arrears of £11,046.50 at the rate of £96.02 per month would take about 9½ years. In the bottom left-hand corner of the order the following words appeared:

“To the defendant

The court has ordered that unless you pay the arrears under the mortgage at the rate set out above in addition to your normal payments, you must leave the premises …”

In the bottom right-hand corner there was the following:

“If you do not make the payments or leave the premises, the claimant can ask the court, without a further hearing, to authorise a bailiff or High Court Enforcement Officer to evict you. (In that case, you can apply to the court to stay the eviction; a judge will decide if there are grounds for doing so.)”

It is to be noted that this was not some special form of order, or an order in a form unique to Brentford County Court. The order was in the standard form set out in Form N31.

On 20 March 2008 the bank agreed to consolidate Mr Zinda’s remaining arrears of £16,887.83 with the outstanding balance of the loan. The new mortgage balance was £168,699.71. The revised monthly instalment payment was set at £1,070.42. Subsequently it was reduced. The term of the loan remained unchanged. This consolidation, I might add, was in accordance with a practice which the Council of Mortgage Lenders has long sanctioned: see Cheltenham and Gloucester Building Society v Norgan [1996] 1 WLR 343, 349.

Mr Zinda again fell into arrears. On 18 September 2009 he applied to suspend enforcement of the possession order. On 21 September 2009 the bank applied for a warrant of possession. Mr Zinda applied for execution of the warrant to be suspended. His applications were dismissed by District Judge Allen on 28 May 2010. By then the arrears amounted to £20,500.28. The total amount outstanding was £197,496.78. The current monthly instalment was £951.85. The last payment received by the bank had been the sum of £10 paid by Mr Zinda in January 2010. Before the District Judge Mr Zinda accepted that the property was in negative equity. Insofar as he was in a position to make any proposal, all he could offer was an amount significantly less than the amount of the monthly instalment.

Mr Zinda appealed. His appeal was heard by His Honour Judge Oppenheimer. On 14 September 2010 Judge Oppenheimer made an order dismissing the appeal.

Before the District Judge and again before Judge Oppenheimer Mr Zinda took a number of points. Given the limited basis upon which Rix LJ subsequently gave him permission to appeal to this court, I need refer to only one of these points. Mr Zinda contended that the effect of the arrangement in March 2008 had been to discharge the arrears which existed at the time of the suspended possession order and bring those arrears into a larger loan upon which a new interest rate was agreed; that even if only for a short time, until he fell again into arrears, there were therefore no arrears (the arrears at the time of the possession order having been paid up, albeit in the form of the new borrowing); and that the possession order had thereby been extinguished. Before the District Judge, as before us, the bank accepted that the effect of the consolidation was to clear the arrears on which the possession order was based. But it disputed, as it continues to dispute, that this has the consequence for which Mr Zinda contends.

Mr Zinda’s argument was rejected both by the District Judge and by Judge Oppenheimer. In her judgment the District Judge said this:

“There are sometimes orders that say “on payment of arrears this order should be discharged.” Yours says the opposite. Yours says unless you pay the current monthly instalments this order can be enforced.

… The terms of this order are quite clear, that the court can enforce the order if – whatever you do with regard to the original arrears – you do not pay your normal instalments and continue to do so.”

Judge Oppenheimer agreed. He said:

“There are really two separate questions that I have been able to identify. One is whether there is an ambiguity in the order. I hold there is not and that the district judge was right about that. But, secondly, whether, as a matter of law, the order was ever discharged either expressly or by implication, or by operation of law as a result of the fact that there came a time when there were no arrears because of the March 2008 consolidation. That is an interesting point of law on which no authority has been cited to me by counsel acting for the respondent; nor any authority cited by Mr Zinda to me. It is to be remembered that he is a third year law student. I have to say that this is an interesting and very important point of law, which one day ought to be considered by the Court of Appeal if it has not already been so considered.”

He continued:

“I hold that the order was indeed unambiguous in its terms and continues in accordance with its terms until discharged. I have no authority before me to suggest that the order automatically was discharged upon consolidation of the arrears. For my part I am not prepared to say that there is any such rule of law. This court is not to invent one. In my judgment, therefore, the district judge was not wrong when she held that the order was unambiguous.”

Mr Zinda sought permission to appeal. His application was considered on the papers and dismissed by Jacob LJ on 8 November 2010. So far as material his reasons were as follows:

“Mr Zinda argues that the effect of the consolidation was to discharge the [order]. I am unable to see why or how … The order suspends enforcement so long as two criteria are fulfilled: payment of the existing arrears and payment of current instalments. Whilst I accept that the effect of the consolidation was arguably to wipe out the existing arrears (instead adding them to the capital owing) the second criterion – payment of current instalments – cannot have been discharged.”

Mr Zinda renewed his application. It was heard by Rix LJ on 20 January 2011. He gave permission but limited to what in the order he made was described as “the construction and/or discharge of the possession order point”. In his judgment Rix LJ explained that he was giving permission because on this one issue the case raised an important point of law or practice which brought it within CPR 52.13(2)(a): Zinda v Bank of Scotland [2011] EWCA Civ 95. He identified the point, which he provisionally thought was ultimately a point of construction, as being whether the possession order continues to bite for the entire length of the mortgage, even if the arrears which led to it being made have been paid up. He spelt out the limited basis upon which he was giving permission to appeal:

“I do not extend my permission to the other points raised by Mr Zinda, such as a factual point about estoppel as to what he was told by the bank at the time of the consolidation of the mortgage, or an argument that he is entitled to rescind the consolidation of the mortgage, or an argument based on human rights. It seems to me that those arguments have no merit, and in any event do not on the facts of this case give rise to anything that could be described as an important point of principle or practice.”

The appeal came on before us on 8 June 2011. Before us, as below, Mr Zinda appeared in person. The bank was represented by Mr Thomas Grant, for whose lucid and compelling submissions I am grateful.

The initial skeleton argument filed by Mr Zinda was so skeletal as to give little indication of the nature of his arguments. Mr Grant accordingly, and most helpfully, sought in his skeleton argument to meet in advance a variety of points that he thought might be taken by Mr Zinda but which in the event were not. Mr Zinda, when he eventually came to file a detailed skeleton argument, sought to ventilate a variety of arguments some of which were simply not open to him, given the terms of the order made by Rix LJ, and some of which were so manifestly misconceived as not to warrant further consideration. I propose to focus on what, at the end of the day, really matters. Grateful as I am to Mr Grant for his very helpful submissions, he will I am sure understand why there is much in his skeleton argument which in the event there is no need for me to refer to.

Bearing in mind some of Mr Zinda’s submissions it may be useful to start with some elementary propositions of law which provide the context in which the possession order came to be made.

A mortgage is a charge on property to secure the repayment by a debtor to his creditor of monies lent. The word mortgage is used in a number of different senses. Colloquially it may be used to refer to the loan (as in “I have a mortgage from the bank”) or to the overall contractual arrangements (as in “I have a mortgage with the bank”). In law, however, the mortgage is neither the loan nor the contract. It is that element of the overall transaction constituting the charge on property which gives the lender his security. The effect of the Law of Property (Miscellaneous Provisions) Act 1989 is that the mortgage or charge can only be created by a written document complying with certain statutory formalities. Typically, as in the present case, the document is in the form of a deed.

From the point of view of the lender – the mortgagee – a mortgage has a number of advantages. In the first place it enables him, if the borrower defaults, to obtain possession of the mortgaged property and sell it in order to recoup the monies he has lent. The mortgagee does not need to obtain a money judgment and then a charging order; he can proceed immediately to obtain a possession order. Second, it gives him priority over the borrower’s unsecured creditors. Assuming there is adequate equity in the mortgaged property, the lender will recover his debt in full, even if the debtor is insolvent. But a mortgage also has a number of advantages from the point of view of the borrower – the mortgagor. Precisely because the debt will be secured, a lender is likely to be more willing to lend money to people whose credit would otherwise be thought inadequate and, crucially, more willing to lend larger amounts and at a lower rate of interest than he would be prepared to agree if the loan was unsecured. It is, after all, these commercial and economic realities which have enabled so many people to become the owner-occupiers of houses which they would otherwise never have been able to afford.

Absent a contractual fetter, the mortgagee is entitled to take possession of the mortgaged property whether or not the mortgagor has defaulted. As Harman J (as he then was) famously observed in Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317, 320, “The mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract express or by necessary implication, whereby he has contracted himself out of that right.” Typically the modern bank or building society mortgage does, as in the present case, contain just such a provision. And typically, as in the present case, the terms of an instalment mortgage (whether the instalments cover both principal and interest or, as in the present case, interest only) are, as I have said, that so long as the mortgagor pays the monthly instalments the mortgagee will not seek repayment of the capital or possession of the property, but if he falls into arrears the full amount of the secured indebtedness becomes payable and the mortgagee becomes entitled to take possession.

Now at common law the rule was, and remains, that once the mortgagee has become entitled to take possession the court has only a very limited power to grant the mortgagor any relief. As Russell J (as he then was) said in Birmingham Citizen’s Permanent Building Society v Caunt [1962] Ch 883, 912:

“where (as here) the legal mortgagee under an instalment mortgage under which by reason of default the whole money has become payable, is entitled to possession, the court has no jurisdiction to decline the order or to adjourn the hearing whether on terms of keeping up payments or paying arrears, if the mortgagee cannot be persuaded to agree to this course. To this the sole exception is that the application may be adjourned for a short time to afford to the mortgagor a chance of paying off the mortgagee in full or otherwise satisfying him; but this should not be done if there is no reasonable prospect of this occurring.”

It was in these circumstances that the legislature intervened with the enactment of section 36 of the Administration of Justice Act 1970. So far as is material, section 36 is in the following terms:

“(1)

Where the mortgagee under a mortgage of land which consists of or includes a dwelling house brings an action in which he claims possession of the mortgaged property, not being an action for foreclosure in which a claim for possession of the mortgaged property is also made, the court may exercise any of the powers conferred on it by subsection (2) below if it appears to the court that in the event of its exercising the power the mortgagor is likely to be able within a reasonable period to pay any sums due under the mortgage or to remedy a default consisting of a breach of any other obligation arising under or by virtue of the mortgage.

(2)

The court –

(a)

may adjourn the proceedings, or

(b)

on giving judgment, or making an order, for delivery of possession of the mortgaged property, or at any time before the execution of such judgment or order, may –

(i)

stay or suspend execution of the judgment or order, or

(ii)

postpone the date for delivery of possession, for such period or periods as the court thinks reasonable.

(3)

Any such adjournment, stay, suspension or postponement as is referred to in subsection (2) above may be made subject to such conditions with regard to payment by the mortgagor of any sum secured by the mortgage or the remedying of any default as the court thinks fit.

(4)

The court may from time to time vary or revoke any condition imposed by virtue of this section.”

The effect of the words “pay any sums due under the mortgage” in subsection (1), was that in order to satisfy the requirements for obtaining statutory relief the mortgagor had to be able to show that he was likely to be able to pay within the reasonable period referred to not only the arrears of instalments but also the principal sum due under the mortgage: Halifax Building Society v Clark [1973] Ch 307.

Following that decision there was further legislative intervention with the enactment of section 8 of the Administration of Justice Act 1973. So far as is material, section 8 is in the following terms:

“(1)

Where by a mortgage of land which consists of or includes a dwelling house, or by any agreement between the mortgagee under such a mortgage and the mortgagor, the mortgagor is entitled or is to be permitted to pay the principal sum secured by instalments or otherwise to defer payment of it in whole or in part, but provision is also made for earlier payment in the event of any default by the mortgagor or of a demand by the mortgagee or otherwise, then for purposes of section 36 of the Administration of Justice Act 1970 … a court may treat as due under the mortgage on account of the principal sum secured and of interest on it only such amounts as the mortgagor would have expected to be required to pay if there had been no such provision for earlier payment.

(2)

A court shall not exercise by virtue of subsection (1) above the powers conferred by section 36 of the Administration of Justice Act 1970 unless it appears to the court not only that the mortgagor is likely to be able within a reasonable period to pay any amounts regarded (in accordance with subsection (1) above) as due on account of the principal sum secured, together with the interest on those amounts, but also that he is likely to be able by the end of that period to pay any further amounts that he would have expected to be required to pay by then on account of that sum and of interest on it if there had been no such provision as is referred to in subsection (1) above for earlier payment.”

Now as Mr Grant correctly submitted, the effect of these provisions is two-fold. First, there is the jurisdictional gateway created by the requirement on the mortgagor to demonstrate that he is (section 36(1)) “likely to be able within a reasonable period to pay” both (section 8(1)) the “amounts [he] would have expected to be required to pay if there had been no … provision for earlier payment” – in other words, the arrears of the instalments due to date – and (section 8(2)) the “further amounts that he would have expected to be required to pay by then” – in other words, the future instalments accruing during the reasonable period. The power of suspension exercisable by the court under section 36 is conditional on its appearing to the court that in the event of the exercise of the power the mortgagor is likely to be able to pay the sums in question within a reasonable period. Absent such proof, the court has no jurisdiction to stay or suspend the order for possession: Royal Trust Co of Canada v Markham [1975] 1 WLR 1416, 1422B, 1423B, 1424E.

Second, and assuming that the mortgagor surmounts the jurisdictional hurdle, the court is given a wide discretion under sections 36(2) and (3). In particular, section 36(3) permits the court, if it decides to stay or suspend a possession order, to attach such “conditions with regard to payment by the mortgagor of any sum secured by the mortgage” (emphasis added) as the court thinks fit. This power is not confined to the arrears of the instalments due to date or to the future instalments accruing during the reasonable period referred to in section 36(1). It extends to “any” sum secured by the mortgage, including, for example, the totality of the future instalments accruing due throughout the remaining life of the mortgage. Section 36(3), in contrast to both section 36(1) and section 36(2), contains no reference to the “reasonable period”. The power to impose conditions is not qualified by reference to, nor is it confined to, the “reasonable period”.

Mr Grant understandably placed much emphasis upon this last point. And in my judgment he was right to do so. Whereas the existence of the court’s jurisdiction is focused upon an examination of what is likely to happen before the end of the reasonable period referred to in section 36(1), the exercise of the jurisdiction, once established, is not so limited. The terms of section 36(3) make clear that in deciding what conditions (if any) to attach, the court can have regard to events occurring at any stage during the remaining life of the mortgage.

I return to the appeal. In his skeleton argument Mr Zinda formulates the two points upon which he says he is entitled to succeed as follows:

Mr Zinda’s case is based upon a fundamental misapprehension as to what happened in March 2008. Even if the terms of the contract were varied (and the bank’s case is that there was no variation; it merely exercised a right it had under the existing contract), the mortgage, in the sense of the legal charge on the property created by the mortgage deed dated 3 March 2003, remained, and indeed still remains, in force.

The events of March 2008 involved the consolidation of the arrears with the outstanding capital, with the consequential substitution of a loan of £168,699.71 for the original loan of £133,000 and adjustment of the amount of the monthly instalment. But the original mortgage deed was neither replaced nor discharged. There was no need for a new mortgage deed. Even if the consolidation involved the making of a further advance (and the bank says it did not; it merely added the arrears to the debt), the original deed, as we have seen, was expressed as securing further advances. In other words the mortgage deed dated 3 March 2003 continued, and remains in force to this day, as a mortgage charging Mr Zinda’s property by way of security for the repayment by him of both the original advance of £133,000 and the consolidated arrears of £35,699.71.

The effect of what was done in March 2008 may have been, as Mr Zinda puts it, to create a new contract discharging the previous contract, or to vary the existing contract, though in my judgment it was probably neither. Be that as it may, what is quite clear – and this is decisive for present purposes – is that there was no discharge either of the mortgage deed dated 3 March 2003 or of the security created by the mortgage deed. In that sense, the mortgage created in March 2003 survived unchanged by anything that happened in March 2008. Indeed it survives unchanged today.

The one point on which Mr Zinda is correct, as the bank concedes, is that the effect of the consolidation was to clear the arrears. So what Mr Zinda can say is that, for a short period, and until he again defaulted, he was not in arrears.

That takes me conveniently to consideration of the meaning and effect of the possession order.

As I have explained, the immediate consequence when Mr Zinda first fell into arrears was that, in accordance with his contract with the bank, the full amount of the secured indebtedness became immediately repayable and the bank became entitled to take possession. So in the events which had happened by the time the bank began proceedings in August 2005, the bank had a contractual right to take possession. And at common law, the court was, for the reasons explained by Russell J in Caunt, unable to give Mr Zinda any protection against eviction. All that stood between him and immediate eviction was the hope that the court would exercise its powers under the 1970 and 1973 Acts in his favour.

Mr Zinda was able to persuade Deputy District Judge Ryan that he would be able to pay off the arrears within a period – some 9½ years – which the Deputy District Judge was prepared to accept was reasonable. So Mr Zinda was able to surmount what I have called the jurisdictional hurdle. The court then had to exercise its discretion under sections 36(2) and (3). It chose to do so by suspending the possession order which it granted the bank on the condition spelt out in paragraph 2 of the order, namely

“so long as [Mr Zinda] pays the [bank] the unpaid instalments under the mortgage of £11046.50 by the payments set out below in addition to the current instalments under the mortgage.”

Now in my judgment there are two things about the possession order which are clear beyond all sensible argument. In the first place, there can be no doubt at all that, whatever its precise meaning and effect, the condition set out in paragraph 2 of the order was one which the court had jurisdiction to impose. It is quite plainly a condition “with regard to payment by the mortgagor of … sum[s] secured by the mortgage” within the meaning of section 36(3). Deputy District Judge Ryan had jurisdiction to suspend the possession order. He had jurisdiction to impose the condition set out in paragraph 2 of the order. The order was properly made. It has never been challenged on appeal – as will be appreciated the order which is the subject of this appeal is not the order made by Deputy District Judge Ryan in October 2005 but the order made by His Honour Judge Oppenheimer in September 2010. The order was, and is, a valid and effective order, properly made and binding on the parties.

It follows that the only question is the order’s meaning and effect. This takes me on to the second point. It is quite clear that the condition set out in paragraph 2 of the possession order comprises two elements, imposing a double requirement on Mr Zinda. If he is to stave off eviction, if the possession order is to remain suspended, Mr Zinda has, as Jacob LJ pointed out, to do two things:

The central issue on this appeal therefore reduces itself to this: What, on the true construction of the order and in the events which have happened (including in particular the consolidation in March 2008), is the meaning and effect of the words requiring Mr Zinda to pay “in addition” what are described as “the current instalments under the mortgage”?

As to that there is, in my judgment, no real room for argument. The words mean what the bank says they mean and what District Judge Allen, His Honour Judge Oppenheimer and Jacob LJ have all held that they mean. Four factors, as it seems to me, all point in the same direction. First, the words are quite general and are not limited, whether in time or otherwise. Unlike an order in the form referred to by District Judge Allen, the order contains no provision allowing for proleptic discharge. The order refers to “the current instalments”, current here being used in contradistinction to the arrears. The “instalments under the mortgage” are, as a matter of fact and legal obligation, payable throughout the remaining life of the mortgage. So, as a matter of simple language, “the current instalments under the mortgage” means the future instalments payable “under the mortgage”, that is, payable until such time as the mortgage has been redeemed. Second, there is, as I have already explained, nothing in the statutory scheme to confine the conditions that can be imposed under section 36(3) to or by reference to the “reasonable period”. So there is nothing in the statutory scheme which by implication might have the effect of cutting down the otherwise unrestricted words used in the order. Third, all that this limb of the condition requires Mr Zinda to do is to perform his existing contractual obligations, namely to pay the instalments when and in the amounts he has contracted for. Fourth, and in a sense flowing on from the previous points, given that the ambit of such a condition is not confined to the “reasonable period”, and given that his contractual obligations extend to the end of the mortgage term, what rational basis can there be for asserting that the condition is by implication limited in time and, moreover, limited to the period of some 9½ years? As Mr Grant points out, and the observation seems to me to be unanswerable, what relevance can the period by the end of which it is reasonable to expect Mr Zinda to have paid off the arrears have when considering what the consequences ought to be if he defaults on his continuing and future obligations? Precisely so.

It follows, in my judgment, that District Judge Allen was fully entitled to decide as she did and that His Honour Judge Oppenheimer was right to dismiss Mr Zinda’s appeal. It likewise follows that his appeal to this court must be dismissed.

Mr Zinda complains that this result is unfair since, as he puts it, it is tantamount to an indefinite death sentence. He says that it amounts to a re-writing of his contract with the bank, interfering with the freedom of contract which, relying upon the controversial authority of Lochner v New York (1905) 198 US 45, he describes as the cornerstone of free market libertarianism. (The irony of Mr Zinda’s position here is exquisite, for he seeks to take the benefit of a statute which interferes with the bank’s freedom of contract and which for that very reason the majority in Lochner would probably have struck down as unconstitutional!) Be that as it may, and ignoring Mr Zinda’s inflated rhetoric, there is, for the reasons I have already given, nothing in any of these points. The order does not vary the terms of the contract at all so far as Mr Zinda is concerned. And the fact that he remains under the sword of Damocles – rather than simply having been evicted for default in 2005 – is merely the consequence of the contract he entered into with the bank (in which expression I include the consolidation), of his default and of his successful seeking of relief under the 1970 and 1973 Acts. Any ‘unfairness’ – in truth, there is none – is of his own making, the consequence of his own repeated defaults.

Moreover, as Mr Grant points out, it is not as if Mr Zinda is left wholly unprotected to face whatever steps the bank may take to enforce the possession order however far away in the future: in principle he can apply under section 36(4) to vary or revoke any of the conditions; in principle he can seek an order suspending any warrant of possession; and if six years have elapsed since the possession order was made it cannot be enforced without the permission of the court.

For these reasons this appeal must in my judgment be dismissed.

There is one final point I should make. Reference was made in the course of argument to the County Court decisions of His Honour Judge Hallam in Leeds County Court in Greyhound Guaranty v Caulfield [1981] CLY 1808 and of His Honour Judge Grenfell, also in Leeds County Court, in Bradford & Bingley plc v Harris (unreported, 6 November 2003). The second case is directly in point. Both cases, in my judgment, were correctly decided: cf, Halifax plc v Taffs [1999] EWCA Civ 698.

I agree.

I also agree.