CAROLINE HAVERS, PARTNER AT SALANS
QUESTION: My client has just received a demand for a shortfall payment for a property that was repossessed. How should they deal with the situation?
ANSWER: With arrears and repossessions on the increase, the problem of mortgage shortfalls look set to grow in the coming months. If a lender has repossessed a property or your client has handed back their keys to the
property, how much they will actually owe to the mortgage lender will usually remain unclear until after the property has been sold.
The lender must be seen to obtain the best price for the property and to keep any potential loss to your client to a minimum. Once the property has been sold, the lender will take what is owed to them plus any costs they may have had to incur for solicitors and estate agents.
Having done this, they will then be required to pay any other lenders who may have second charges on the property.
In many cases, there is usually not enough money to pay for everything, so the lender may apply for enforcement of a judgement granted at the time of the repossession order.
The first thing that needs to be done is to establish the length of time which has elapsed before the demand for payment of a shortfall is made.
Where the shortfall includes an amount for the capital element of a mortgage – the secured element – then the lender has up to 12 years to pursue the claim.
Under the Limitations Act, where the money is not
secured, for example, for interest payments owed, then the time limit is six years.
In practice, although most lenders have up to 12 years to
contact your client and ask for payment, most will do so within the first six years and many lenders have now agreed to a policy of not taking further action after the first six years It is very important for the borrower to establish when the time limit runs from.
This can either be the date when the money was first owed.
This is the time when the lender could have taken action to recover the debt and is likely to be much earlier than the date of repossession, perhaps when your client was first in arrears with their mortgage.
Or it could be the last time a payment, no matter how small, was made.
Alternatively, it could be the last time the debt was acknowledged, usually in writing by your client. Any offer to pay off some of the debt would count as an acknowledgement.
If your client is satisfied that they do owe the money and the lender has contacted them within the correct time limit, then there are several ways they may be able to come to an agreement. Your client may be able to make a pro-rata agreement in which you may be able to make a reasonable offer of repayment on a monthly basis.
Alternatively, your client can offer a lump sum in full and final settlement. If the lender thinks the amount offered is reasonable and they are unlikely to receive more by pursuing the matter further then they may be willing to consider this further in order to put an end to the matter.
Your client must ensure that the lender has accepted this
amount in ‘full and final settlement’ and get the confirmation in writing. If your client’s circumstances are particularly extreme then some lenders may even consider writing off the loan completely.