knowledge | 13 March 2019 |
Code of Conduct on Mortgage Arrears Applied to Commercial Loan
Does the Central Bank of Ireland’s Code of Conduct on Mortgage Arrears apply to the enforcement of a commercial loan if the security includes the borrower’s primary residence?
This was the issue for decision before the High Court recently in Allied Irish plc v Buckley.1 In that case, the bank brought proceedings against a defaulting mortgagor seeking possession of certain registered land which included the defendant’s primary residence. The loan in question was provided for the defendant’s business and did not finance the purchase of the primary residence. The loan was, however, secured on that primary residence as the primary residence and surrounding farm were all included in the same Land Registry Folio number.
It was accepted that the bank had not complied with the enforcement moratorium provided for in the Code of Conduct on Mortgage Arrears (the “Code”) given that this was a commercial loan. (The Code is intended to ensure that a mortgagor has been given a reasonable chance to address loan arrears before the mortgagor’s principal residence can be repossessed.) However, in resisting the application, the defendant pointed out that the Code stipulates that it applied “to the mortgage loan of a borrower which is secured by his/her primary residence” and argued that the moratorium should have been applied.
Simons J agreed. He noted that the Code requires the moratorium to be applied in “legal proceedings for repossession of a borrower’s primary residence”. This language focusses on the target of the possession proceedings.
Simons J also added that the stated application of the Code (“to the mortgage loan of a borrower which is secured by his/her primary residence”) had the possibly unintended and anomalous consequence of requiring a commercial loan secured on (amongst other properties) a primary residence to be treated by the bank as subject to the Code’s requirements generally. This might include a requirement to comply with provisions of the Code such as offering an alternative payment arrangement in respect of the entire loan, notwithstanding that its principal purpose was commercial and that a bank might not be seeking possession of the primary residence itself. Simons J did not reach a particular conclusion on this point but did note that, in any event, the enforcement moratorium would only ever apply to a primary residence and that a bank would not be restricted by a court from taking enforcement against other secured property.
In this case, the bank’s special summons seeking possession made no distinction between that part of the folio lands which was the defendant’s primary residence, and the balance of the lands contained in the folio. While the bank did clarify that it was only seeking possession of the part of the secured property that did not comprise the primary residence in both the bank’s grounding affidavit (sworn in support of its special summons) and the preceding letter of demand, Simons J held that this was insufficient as the special summons established the parameters of the proceedings. Consequently, he dismissed the proceedings for failure to comply with the Code.
The decision in this case emphasises the need for lenders to be very careful when taking security over a person’s primary residence. The primary residence is given particular protection under Irish statute (such as the Consumer Credit Act 1995) and regulation (such as the Code) and, consequently, should only ever be taken as security for a commercial loan after very careful consideration (if at all). This case also underlines an important point of procedure; namely, that the plaintiff must ensure that its special summons correctly sets out its case as this is the pleading that the court will look to when determining what assistance a plaintiff is seeking.
-  IEHC 97.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.