Usually, a mortgagee has 12 years from the date on which the right of action accrued to take action under its security; and after the expiry of that period, will be 'time barred' under the Limitation Act 1980 ("the Act") from taking steps to enforce its security.

In National Westminster Bank plc v Ashe, Mr & Mrs Babai had charged their property to the Bank as security for the business debts of Mr Babai. Under the terms of the legal charge, the Bank acquired an immediate right to possession of the secured property. The Bank made formal demand under the legal charge in 1992 and the last payment was received in 1993. However, no further steps were taken by the Bank to enforce its security.

Mr Babai was subsequently declared bankrupt in 1993, and in 2006 his Trustee in Bankruptcy, Mr Ashe, commenced proceedings for a declaration that the Bank's legal charge had been extinguished by operation of time, i.e. that as more than 12 years had passed since the last payment was made under the mortgage, the legal charge was now unenforceable. Although the Bank conceded that its contractual right to repayment was statute barred, in a novel way of attempting to defeat the Trustee's claim, it claimed that its right to possession of the property was not prevented through limitation as Mr & Mrs Babai's possession of the property was not 'adverse possession' as required by the Act, and therefore the time for commencement of the Bank's right of action had not yet accrued.

The Bank claimed that as the Babais had been in possession of the property with its consent, the property was not in the 'adverse possession' of persons in whose favour the period of limitation could start to run in accordance with the Act. On that basis, the Bank contended that although it may not have taken any action since 1993, time could not start to run against it as there was no adverse possession to kick start the running of the time period.

At first instance, the Court dismissed this argument, and found that there was no requirement for adverse possession in the case of a right of action by a mortgagee for recovery of land, given that the mortgagor would be the owner of the land itself and would therefore be in possession consensually.

However, the Court of Appeal reversed this decision and found that the requirement of adverse possession does apply to mortgaged land, with 'adverse' being given a far wider definition to include being in possession without the consent of the true owner or the person entitled to possession. As a consequence, and for the purposes of limitation, time started to run from the time when the last payment was made under the mortgage; and the Bank was statute barred from taking steps to take possession of the property. The Bank's legal charge was therefore extinguished.

An unusual case, which although not actually altering any of the established principals of time periods for limitation, did provide a rather tortuous route in reaching this conclusion. In particular, most mortgage providers would be surprised to find that their borrowers are in 'adverse possession' of the secured properties despite being the legal owners. However, regardless of the novel arguments raised by the Bank, the Court's finding does not alter the well known position that a mortgagee has 12 years from the last payment or acknowledgment of the mortgage debt in which to commence proceedings – an important matter to bear in mind when allowing borrowers extensive periods of time in which to make repayment.

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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 Amie Ryalls on +44 (0)121 213 2360

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