Should Cayman follow UK’s lead on home foreclosures?

For the overwhelming majority of people, buying their own home and using mortgage finance facilities is the single biggest financial commitment during their lifetime. As such a loan is generally repayable over a long period, it is not surprising that for some people, their circumstances may change over time – whether it be through ill heath, unemployment, divorce, etc. – which causes them to have difficulties in making the repayments due under the terms of their mortgage.

Arrears in mortgage account payments are likely to lead to foreclosure unless the bank has been quickly informed of any financial difficulties and has come to an arrangement with the defaulting borrower. It should be noted that once a borrower falls into arrears, the bank’s right to foreclosure usually crystallizes and remains exercisable even upon any subsequent repayment of the arrears.

Although the Cayman Islands chief justice issued Grand Court Practice Directions in 2012 and 2014 in respect of the necessary procedures to be applied in foreclosure proceedings and the methods to be adopted by banks in selling “foreclosed property,” the reality is that there is little in the court’s discretion to prevent foreclosure and corresponding sale where those procedures have been followed. Consequently, where there are genuine personal circumstances, already anxious homeowners will have the additional worry and concern of losing their homes.

In the U.K., it was recognized that repossession of one’s home should be a last resort; wherever possible, lenders should be open to the idea of helping borrowers in temporary financial difficulty. Equally, it was acknowledged that lenders had a contractual right to enforce their security otherwise a stricter application of lending criteria would be applied which would affect the ability of prospective homeowners to obtain funding.

As a result, the U.K. enacted Section 36 of the Administration of Justice Act 1970 (as amended). In essence, this section provided the court with a range of statutory powers including the ability to suspend orders for possession and stay execution of warrants of possession. The section is most frequently relied upon by borrowers who may be in arrears with their mortgage installments but can reasonably offer to pay off those arrears over a period of time; in appropriate circumstances, the court would be invited to suspend any order for possession on the basis of “terms” as opposed to the defaulter suffering an immediate order for possession.

To succeed in such an application, it must appear to the court – based upon reliable evidence – that if it suspends the order on terms, the borrower is likely, within a reasonable period, to pay the balance on the arrears and correspondingly, the mortgage installments as they fall due.

In practice, the English courts will often gauge a reasonable period for payment of arrears over the balance of the mortgage term. However, the power to stay or suspend enforcement of an order for possession under Section 36 is cautiously exercised; each case will turn on its own facts and circumstances.

A typical order may be: Possession in 28 days suspended on payment of:
(a) the current monthly installments; and,
(b) a monthly ordered amount paid towards the arrears going forward.

Such an order serves the purpose of the legislation; firstly, it affords the appropriate borrower with an opportunity to keep their home and pay off any mortgage arrears; and, secondly, provides a degree of protection to the lender: if the arrears are cleared but there is subsequent default by the borrower, they will be in immediate breach of part (a) of the suspended order, and the lender should be able to proceed straight to enforcement in the normal way.

What must be acknowledged, is that there is a distinction between the provisions of the indigenous Registered Land Law and that of the position in the U.K.; in Cayman, the bank has a right to sell the property as opposed to taking possession of it. Consequently, any consideration of introducing similar Section 36 type legislation to Cayman would require some modification. However, extending the discretion of judges in the Grand Court may assist those defaulting borrowers in circumstances where they could demonstrate a likelihood in paying off their arrears over a reasonable period of time and, being capable of discharging their remaining borrowing in a conventional manner. It would not help everybody but for some, it may provide timely relief.

Kerrie Cox is a barrister and attorney at Diamond Law Attorneys in Cayman.