Repaying Mortgage Arrears: Cheltenham & Gloucester V Norgan

Judges may give borrowers time to repay mortgage arrears before allowing a lender to repossess their property. The power comes from section 36 of the Administration of Justice Act (AJA) 1970 which states that a mortgage repossession claim may be adjourned or a suspended possession order granted if a borrower is likely to pay the sums due under the mortgage within a "reasonable period". This was subsequently clarified by section 8 of the AJA 1973. This stated that, for these purposes, "sums due" meant only the arrears of instalments or interest which had already fallen due. However, no definition was given for a "reasonable period".

In 1995, in the leading mortgage case of Cheltenham & Gloucester v Norgan, the Court of Appeal finally gave some guidance on what was meant by a “reasonable period”.

The Background of Cheltenham & Gloucester v Norgan

The appeal was brought by a mortgage borrower, Christina Norgan, who had applied unsuccessfully to a district judge to suspend a warrant of eviction over her property. Mrs Norgan then appealed to a circuit judge in the county court who dismissed her appeal. She had argued before both judges that a reasonable period in which to clear her mortgage arrears was the remaining term of the mortgage. This had been opposed by the mortgage lender which argued that a reasonable period was much shorter than this – closer to two years.

The argument that the whole of the remaining term was a reasonable period was not unprecedented, with some earlier cases having been decided on this basis. However, the appeal judge noted that the Judicial Studies Board had issued guidelines for mortgage repossession cases suggesting that two years was a reasonable period. He also took into account the practice of the courts, which was to allow a borrower two to four years to repay mortgage arrears. The judge pointed out that the cases which had said that the whole of the mortgage term was a reasonable period had been decided when a borrower had to repay the whole outstanding mortgage debt, and not just the arrears, to avoid repossession.

The Court of Appeal’s Decision

Mrs Norgan was allowed to take her case to the Court of Appeal. It decided that it was wrong to apply an arbitrary "reasonable period" of about four years, which bore no relation to the term of the mortgage. The judgment stated that the lower courts should no longer follow their practice of applying an arbitrary fixed period. Instead, when deciding whether to suspend a possession order, or a warrant of eviction, the starting point for repayment of the arrears should be the whole of the remaining term of the mortgage.

The Reasoning Behind the Court of Appeal’s Decision

It was argued on behalf of the lender that to allow the whole of the remaining term would make it very difficult for judges to calculate the likelihood that a borrower would maintain the required payments until the arrears were cleared. It was suggested that this would result in unacceptable delay in deciding mortgage repossession cases. The Court of Appeal disagreed and stated that district judges were adept at carrying out complex budgetary analysis.

The Norgan mortgage was effectively interest-only. Therefore, the capital balance would not have been repaid until the end of the term in any event. However, the Court said that the whole of the mortgage term could still be the reasonable period with repayment mortgages. Today this distinction is rarely made: the Norgan principle is applied equally to repayment and interest-only mortgages.

Impact of the Norgan Case

The judge who heard the appeal in the County Court decided that four years would be a reasonable period to clear the arrears in Mrs Norgan’s case. He considered this to be a relatively lengthy period, justified because the mortgage lender was well protected by the amount of equity in the property. This highlights the huge shift which the case of Cheltenham & Gloucester v Norgan represented - which effectively held that a reasonable period could be twenty years or more.

Mortgage Arrears – The Approach Today

In practice judges rarely conduct a detailed budgetary analysis before deciding whether to suspend a possession order. Inevitably, many lenders still take the view that arrears should be cleared much more quickly and will often argue for a period of one to five years. However, lenders have become more amenable to longer repayment periods since the financial crisis of 2008. They are more likely to consider what a borrower can actually afford to pay towards the arrears rather than simply stipulating a fixed period in which they must be cleared.

Now more than ever, communicating with a lender and providing them with income and expenditure information may mean that an agreement can be reached without the case having to go to court.