Cheltenham & Gloucester plc v Krausz [1997] 1 WLR 1558 (CA)

Facts

• Cheltenham & Gloucester plc, a mortgage lender, provided a loan to Mr. Krausz secured against his property.
• Mr. Krausz fell into arrears on his mortgage repayments, resulting in possession proceedings initiated by the lender.
• At the hearing, arrears amounted to approximately £10,000, and the property was in negative equity, insufficient to cover the total debt.
• Mr. Krausz argued he had a realistic prospect of clearing the arrears within a reasonable period, citing efforts to secure employment and repay the debt.
• He sought the court’s discretion under section 36 of the Administration of Justice Act 1970 to adjourn the proceedings or suspend the possession order.
• The lower court granted possession to the lender, finding Mr. Krausz's financial situation insufficient to justify delay.
• On appeal, the Court of Appeal reviewed whether the lower court properly exercised its discretion under section 36 in light of Mr. Krausz's circumstances.

Issues

1. Whether section 36 of the Administration of Justice Act 1970 permits courts to suspend possession orders even when the borrower has negative equity.
2. Whether Mr. Krausz demonstrated a realistic prospect of repaying arrears, justifying the exercise of judicial discretion to delay possession.
3. Whether the lower court erred in its application of the principles governing mortgage enforcement and borrower protection under the statutory regime.

Decision

• The Court of Appeal allowed Mr. Krausz’s appeal, finding the lower court misapplied section 36 of the Administration of Justice Act 1970.
• The appellate court held that the discretion to suspend or delay possession is not limited to cases of positive equity; it can apply even when the mortgaged property is in negative equity.
• The court recognized that Mr. Krausz provided sufficient evidence of his ability to repay arrears, including efforts to secure employment and a commitment to future repayments.
• The judgment emphasized the need to balance the lender's right to recover arrears against the borrower's interest in retaining possession, particularly where the borrower may realistically remedy the default.
• Forced sale should only be a last resort, only when repayment within a reasonable period is unlikely.

Legal Principles

• Section 36 of the Administration of Justice Act 1970 empowers courts to adjourn, suspend, or impose conditions on possession orders when borrowers show a realistic prospect of paying arrears within a reasonable period.
• The lender’s statutory right of possession under the Law of Property Act 1925 is subject to judicial discretion to ensure proportionality and fairness in enforcement.
• The existence of negative equity does not preclude the court's exercise of discretion to delay or suspend an order for possession.
• Courts must assess the borrower’s credible evidence and realistic plans to repay when determining whether to intervene.

Conclusion

Cheltenham & Gloucester plc v Krausz established that courts retain broad discretion to suspend or delay possession proceedings under section 36 of the Administration of Justice Act 1970, even when the mortgaged property has negative equity, provided the borrower demonstrates a realistic ability to clear arrears within a reasonable time. The decision emphasizes fairness and proportionality in mortgage enforcement, ensuring forced sales occur only as a last resort.