The Banfields had entered into an endowment mortgage with LBS in 1984. From 1990 their payments became erratic, and in 1995, LBS wrote to the Banfields and explained that it would be taking steps to surrender the two life policies which had been assigned to LBS by Mr Banfield to reduce the amount outstanding under the mortgage; and would thereafter convert the mortgage to a capital and interest repayment model.

The surrender of the first life policy was effected in May 1996, and the proceeds used to credit the Banfields' mortgage account. However, the second policy was not surrendered by LBS until February 2007, following the issue of the current set of possession proceedings.

Mr & Mrs Banfield appealed the Possession Order on various grounds, the most important being first, whether LBS had negligently failed to take advantage of a mortgage indemnity guarantee (MIG); and second, whether LBS had negligently failed to effect the surrender of the second life policy.

MIG

The Banfields claimed that there would not have been any arrears on their account had LBS utilised the MIG which covered the mortgage to mitigate its loss (an argument usually seen in mortgage shortfall proceedings). The Court of Appeal quickly rejected this argument and found that the mortgage debt would not be discharged by any payment under a MIG; and nor would the borrower be entitled to credit for any sum paid under a MIG. A MIG should simply be seen as a contract of insurance solely between the mortgage provider and the insurer.

Surrender of Life Policy

The Banfields also claimed that had LBS surrendered the second life policy earlier (and not as a consequence of a direction by the Court during the proceedings), there would not have been arrears on their mortgage account. At the time that the current set of possession proceedings were issued there were arrears of £2,428.06; but LBS had the benefit of a life policy with a surrender value in excess of £5,000.

LBS argued that this did not amount to any form of a defence. Under the terms of the mortgage, as soon as the Banfields had missed two monthly payments then the entire amount owed became due and payable – and not just the arrears. In addition to this, there was no obligation on LBS to surrender the life policies, either at a time convenient to the Banfields, or at all.

However, in addition to this, on a recalculation of the account to show the position had the second life policy been surrendered in 1996, the Banfields would still have been in arrears and LBS would therefore still have been entitled to issue the proceedings at the time that it did. As a consequence, the Banfields' appeal was dismissed and the Possession Order maintained.

An interesting case, which although ultimately successful for the lender, does illustrate the importance of making sure that accounts are dealt with in an expeditious manner; and also that all possible options available to improve a borrower's financial position are explored. This will be of increasing importance given the new regime of 'treating customers fairly'.

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For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Michelle Dolphin on +44 (0)121 213 2369

This published article may contain information of general interest about current legal issues, but does not give legal advice.