Limitation and shortfall
Many years ago the bank recovered possession of the house. Unfortunately much more was owed than was obtained on the sale and the bank has now come back to haunt the borrower. It wants the shortfall. More than six years have passed since the problems arose but 12 years have not. Is the bank's claim statute barred? The main statutory provisions are contained in the Limitation Act 1980. This page looks at those provisions and the key cases that have dealt with this topic. It also deals with a case where the lender lost the right to claim possession because it failed to enforce its right for more than 12 years after it became entitled to possessoin.
Limitation Act 1980
The time limit for an action founded on simple contract is six years (s5).
The time limit for an action "upon a specialty" is 12 years (s8). A mortgage deed being under seal is a specialty (Aiken v Stewart Wrightson Members Agency Ltd  1 WLR 1281).
There are however special provisions that apply to mortgages in s20 of the Act:
20(1) No action shall be brought to recover -
(a) any principal sum of money secured by a mortgage or other charge on property (whether real or personal) .. after the expiration of twelve years from the date on which the right to receive the money accrued.
(5) Subject to subsections (6) and (7) below, no action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of the land, or to recover damages in respect of such arrears shall be brought after the expiration of six years from the date on which the interest became due.
The leading case
 EWCA Civ 1181
When a person enters into a mortgage there are normally two key documents:
The offer letter: This is an offer to lend the money. The acceptance of that offer gives rise to a contract. The lender agrees to lend and the borrower agrees to repay.
The mortgage deed: This document secures repayment of the money loaned under the contract. If the borrower does not repay the lender uses the mortgage to take the home, sell it and recover the money that way.
The borrower's arguments
The principal argument of the borrowers in Bristol & West plc v Bartlett (and two other cases that were heard at the same time) was that once the mortgage had been discharged it was no longer possible to say that the shortfall monies were being claimed under the mortgage. There was simply an implied contract to repay, in respect of which the limitation period was six years. That argument was rejected by the Court of Appeal.
The true position, according to the court, is that the cause of action arises once there is a failure to make the payments due under the mortgage and that the accrued right is not taken away by the lender's subsequent exercise of the power of sale. "The right to sue for the mortgage debt arose at the time of that failure and, at that time, moneys were outstanding on the security of the mortgage". (See in particular paragraphs 14 and 20 of the judgment of Longmore LJ).
Capital and interest
Having rejected the borrowers' arguments the Court of Appeal went on to confirm that mortgage cases are governed by s20 (rather than s8). This is academic in the case of the principal sum, where the limitation period would be 12 years in either case, but is important in relation to interest.
- "We therefore conclude that, in other than exceptional cases (which we cannot, at present, envisage), claims for a mortgage debt will be governed by section 20 of the Limitation Act, even if the mortgagee has exercised its power of sale before it issues proceedings. That means that it has 12 years from the accrual of the cause of action to sue for the principal of the debt, but only six years to sue for interest." (Paragraph 35).
In dealing with interest the normal rules as to appropriation will apply, ie:
- "... in the absence of any appropriation by, first, the debtor, or, second the creditor, payments will go to discharge interest before they discharge capital".
Interest only mortgage
Scottish Equitable plc v Thompson [
2003] HLR 48;  07 EG 137.
The principal in Bartlett was applied even where the mortgage was an interest only mortgage and did not contain a covenant to repay the principal sum. It was held that the right to recover the principal sum accrued following default in repayment on demand.
West Bromwich v Wilkinson - HL
 UKHL 44
In this case West Bromwich Building Society sought to recover a mortgage shortfall debt. The key dates were as follows:
26 October 1988 - Legal Charge
January 1989 - Arrears accrued 2
5 July 1989 - Order for possession
31 July 1989 - Last mortgage payment made
9 October 1989 - Society took possession
14 November 1990 - Sale of mortgaged property leaving shortfall of £23,921.92
12 November 2002 - Society issues claim form for recovery of shortfall debt plus interest and costs
The Building Society claimed that s20(1) did not apply because, at the date when the action was brought, the money was no longer secured by a mortgage. It argued that since the mortgage was a deed, the relevant period of limitation was prescribed by s8, allowing them a period of 12 years from the date on which the cause of action accrued. They said that under the particular mortgage deed, the mortgage did not provide that in the event of default, the whole balance should become repayable. Default gave it neither a cause of action nor a right to receive the money. Such a right only arose when the property was sold and the shortfall quantified, which, they said, was just inside the 12-year period.
The appeal therefore raised two points:
- Does s 20 apply in a case where the advance is originally secured by a mortgage but the security is subsequently realised before proceedings are commenced?
- Whether, as a matter of construction of the particular mortgage deed, upon default, the Building Society has a cause of action (for the purposes of s8) or a right to receive the money (for the purposes of s20)?
On the first point, Lord Hoffmann held that Bartlett was rightly decided. If the cause of action when it arose was a claim to a debt secured on a mortgage, s20 did not cease to apply when the security was subsequently realised.
On the second point, the date on which the right to receive the money arose for the purposes of s20 turned on the construction of the particular provisions of the mortgage deed. The problem was that by clause 4(a) of the deed the borrower covenanted to repay the advance by the instalments which were defined as the monthly sums. By clause 5(c) the monies secured were deemed to become due after one calendar month, and by clause 5(d) the lender could exercise the powers (conferred by s 101 Law of Property Act 1925) upon the happening of certain events (including default in repayment for one month).
It was not disputed that when the Wilkinsons defaulted, the power of sale became exercisable. The problem was whether the advance became repayable. The Building Society argued that it did not and that the only claim it could make under the deed was for each monthly repayment as it fell due.
Lord Hoffmann said that this would produce a very odd result. The Society could sell but that the only debt which it could discharge out of the proceeds of sale would be the arrears of monthly instalments. He held that the power of sale became exercisable in accordance with the list of events in clause 5(d), including after giving a demand in writing, and that it would be a highly unreal construction to say that the demand did not operate in respect of all the mortgage moneys.
Lord Scott agreed. He said it was implicit in giving a notice in writing requiring payment forthwith of the moneys hereby secured that it included all the mortgage moneys outstanding and that they accordingly became due and payable by Mr and Mrs Wilkinson one month after they had made default in paying a monthly instalment.
It followed that time had begun to run more than 12 years before the Societys claim and that it was therefore statute barred.
It now seems reasonably clear that s 20 will, in most cases, be the applicable statutory limitation provision in respect of an action based on a mortgage deed, since the cause of action accrues at a time when the principal money is secured by the mortgage deed. The subsequent sale of the property makes no difference.
For the purposes of s 20(1) the limitation period in an action to recover any principal sum of money secured by a mortgage is twelve years from the date on which the right to receive the money accrued. The date on which the right to receive the money is in all cases a question of construction of the particular mortgage deed/conditions. In the usual case, it will be following two months default in repayments, or following a demand in writing.
Acknowledgement of debt
 EWCA Civ 223
Monthly payments in reduction of a mortgage shortfall debt made during the primary limitation period will invariably amount to a part payment for the purposes of s29 Limitation Act 1980 and therefore start time running afresh.
In 1990 A bought a house for £95,000 with a mortgage from B of £85,500. A failed to make any repayments and in 1991 B obtained an order for possession and in 1992 sold the property for £57,500 leaving a substantial shortfall. In 1995 B wrote to A asking for proposals for payment. Despite objecting to the delay and that the property had been sold at an undervalue, A made regular payments of £10 a month between 2000 and 2004, then stopped.
B finally issued the present proceedings in 2008 with A arguing the claim was statute-barred. The trial judge held that the claim was not statute-barred. A argued that he had only made the payments because his solicitor had advised him that it was “easier and cheaper…to pay £10 per month and continue to dispute liability rather than deal with the expense of litigation”. He claimed that according to Chitty (13th Ed, para 28-096 etc) part payment is merely a species of acknowledgment and that according to Surrendra Overseas Ltd v Government of Sri Lanka  2 All ER 481, where it had been made clear that part of the claim is disputed, any acknowledgment relates only to the undisputed balance.
The appeal was dismissed. Although part payment can be intelligibly regarded as a sub-species of acknowledgment, it was expressly separated from acknowledgment and given equal status to it by s29(5) Limitation Act 1980. There was therefore no need to re-analyse part payment or to gloss it in terms of acknowledgment: it was a freestanding mechanism for the computation of time.
In any event, there had been both part payment and acknowledgment within the 12 years before the issue of the proceedings. The only debt to which the series of monthly payments from 2000 onwards was referable was the mortgage debt to which the present claim related: no evidence was given of any other debt owed by A to B.
It did not matter how much the claimed undervalue was because the purpose of s29(5) was not to fix any particular sum: it was to enlarge the time for bringing proceedings in which that issue could be litigated if the defendant raised it. Sale at an undervalue had not been pursued. If the claimed undervalue had been such as to extinguish the mortgage debt, it might have been factually arguable that the only purpose of the £10 payments was to get B off A’s back; but A never advanced a valuation of his own so the contention was not a good one.
This case doesn’t really identify when the primary limitation period started running although it acknowledges that under s20 Limitation Act 1980 it runs from “the date on which the right to receive the money accrued”. The point is probably academic on the facts. The issue was as to the significance of the admitted payments between 2000 and 2004 which on any version started within the primary limitation period, and whether these started time running afresh as part payments or acknowledgments. The court clearly rejected any fine legal argument that the monthly payments could be anything other than part payments of the mortgage debt and therefore inevitably started time running.
It is worth noting (since it was a feature of Bradford & Bingley Building Society v Rashid  UKHL 37 (see immediately below) that between 1995 and 2000 A had also filled in and returned B’s income and expenditure forms, but interestingly, the court “did not find it helpful to pursue [B’s argument] that filling in the income and expenditure forms was a further acknowledgment of the indebtedness (or [A’s] response that the only purpose was to show [B] it was wasting its time)”.
Without prejudice correspondence
 UKHL 37
Successive payments may amount to an acknowledgement or part payment so as to give rise to a fresh accrual of action for the purposes of ss 29(5) and 30 Limitation Act 1980 so that time will run in respect of the balance of the mortgage monies accruing following the last default.
In this case a letter acknowledging a mortgage debt will not be regarded as being made "without prejudice" and therefore inadmissible, on the question of whether an acknowledgement has been made, merely because it seeks to negotiate the rate at which the debt is to be paid.
Take an example
- 1985 - Mr and Mrs buy a house on mortgage
- 1988-1990 - Arrears accrue on the mortgage
- 1990 - Last payment made
- 1992 - Lender repossesses the property
- 1994 - Lender sells at a shortfall
- 1994-2002 - Occasional correspondence from lender to Mr and Mrs seeking payment proposals
- 2005 - Lender sues for the shortfall debt
Question no. 1: Is the claim statute barred?
Answer: Yes. We know from Bristol & West plc v Bartlett and West Bromwich Building Society v Thompson (above) that the twelve year limitation period to recover any principal sum of money secured by a mortgage under s 20(1) Limitation Act 1980 runs from the date on which the right to receive the money accrued, which in this case is the date of the last payment and not the date of sale. The claim therefore became statute barred in 2002.
Question no. 2: Does it make any difference if in the period 1994-2002 Mr and Mrs had corresponded with the lender and filled in an income and expenditure questionnaire?
Answer: It may well do. A lot will turn on the precise construction of the correspondence and whether the borrowers' replies amount to an acknowledgement for the purposes of ss 29-31 Limitation Act 1980 so as to start time running again.
In many cases, the borrowers, who will inevitably be unrepresented at the time, will be completely unaware of the significance of acknowledging the debt and the importance of marking their proposals "without prejudice". In July 2005, the Court of Appeal came to their rescue. In Bradford & Bingley plc v Rashid  EWCA Civ 1080, the primary twelve year limitation period in an action to recover a mortgage shortfall debt had expired, but the lender sought to rely on two letters written in the interim on behalf of the borrowers one of which enclosed a financial statement and the other made proposals to pay. Neither were expressly marked "without prejudice" yet the Court of Appeal held that the without prejudice rule was founded partly on public policy, the underlying objective of which was to give protection to the parties and encourage them to reach agreement. Accordingly the letters could not be looked at; and thus could not be relied upon to show that the borrowers had acknowledged the debt.
The decision was a triumph for the litigant in person - unacquainted with archaic principles of law, since it enabled them to correspond freely and openly and without fear of prejudice. Unfortunately, Bradford & Bingley appealed.
House of Lords decision
In a lengthy decision, in which all five Law-Lords contributed separate opinions, the decision of the Court of Appeal was reversed, and the principles restated. There were two main issues:
- (1) Did the letters relied upon amount to an acknowledgement of the debt?
- (2) Were the letters inadmissible as having been impliedly written "without prejudice"
Was there an acknowledgement?
The relevant letters were as follows (emphasis added):
Letter dated 26 September 2001 from Advice Centre to Bradford & Bingley:"Please find attached Mr Rashid's financial statement, which clearly indicates that at present he is not in a position to repay the outstanding balance owed to you. However my client requests that once his financial situation is stable he will start to repay. This could be in the year 2003/04. Please could you take the above into consideration and reassess this matter and of course his financial situation."
Bradford & Bingley responded by stating they were not prepared to hold the matter without payment, and asked for proposals.
Letter dated 4 October 2001 from Advice Centre to Bradford & Bingley:"I have informed my client Mr M Rashid of the contents of your letter. He is willing to pay approximately £500 towards the outstanding amount as a final settlement. He is only able to afford this amount by borrowing from friends and family."
It was argued that neither letter admitted that the debt was a good one or identified the actual debt alleged to be due. However, the HL held that acknowledgements are not confined to admissions of debts which are indisputable as to quantum as well as liability and that the letters clearly amounted to acknowledgements of the debt (see Lord Hope at para 21; Lord Brown at paras 44-60; Lord Mance at para 79).
The second, and more significant issue, was whether the letters were inadmissible as having been impliedly written "without prejudice". According to Lord Hoffmann, the Court of Appeal took a rather one-sided view of things:
- "They looked only at encouraging the debtor to be open with his creditor without fear of what he said being used against him. But it takes two to negotiate and there is also a public policy in encouraging the creditor not to initiate legal proceedings. The acknowledgement rule plays an important part in furthering this policy because it means that a creditor, negotiating on the basis that his debt has been acknowledged, can proceed with the negotiations and give time to pay without being distracted by the sound of time's winged chariot behind him. It is also unfair that a debtor who does not dispute his indebtedness should be able to ask for time and use that indulgence to rely on the statute...
- The policy of encouraging negotiation therefore requires that the law should give effect to two objectives: first, the objective furthered by the normal without prejudice rule, which allows the parties to speak freely without fear that their statements will be relied upon as admissions if negotiations should break down, and secondly, the objective of the special acknowledgement rule in the Limitation Act, which allows a creditor to give time to negotiate for the payment of an admitted indebtedness without fear that the claim will become statute barred.
- It is therefore necessary to find a principle which would preserve the acknowledgement rule without doing damage to the without prejudice rule"
What was the principle? There was some divergence of opinion.
Lord Hoffmann's solution (para 16) was that the without prejudice rule, so far as it was based upon general public policy and not upon some agreement of the parties, does not apply at all to the use of a statement as an acknowledgement for the purposes of s29(5). He said that when a statement is used as an acknowledgement for the purposes of s29(5) it is not being used as evidence of anything. The statement is not evidence of an acknowledgement. It is the acknowledgement. All that an acknowledgement does under s29(5) is to allow the creditor to proceed with his case. It lifts the procedural bar on bringing the action. Questions of evidence to prove the debt will arise later. Accordingly he held that the letters were admissible.
Lord Walker and Lord Brown expressed some misgivings about this approach. Lord Brown affirmed the without prejudice rule as stated by Lord Griffiths in Rush & Tompkins Ltd v Greater London Council  AC 1280 at p 1299 and by Oliver LJ in Cutts v Head  Ch 290 at 306 - that the "without prejudice" rule was not dependent upon the use of the phrase "without prejudice" and that if it was clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of the negotiations would, as a general rule, not be admissible at the trial and could not be used to establish an admission or partial admission. Accordingly, where the communications were not expressly marked "without prejudice" the critical question was whether "it is clear from the surrounding circumstances that the parties were seeking to compromise the action" or whether "there is an attempt to compromise actual or impending litigation". On the facts, he held that the exchanges in question did not constitute negotiations genuinely aimed at settlement or an attempt to compromise actual or impending litigation. Since the debt was admitted, there was no dispute. The letters were admissible as acknowledgements.
Lord Mance agreed that the existence of a dispute and of an attempt to compromise it were at the heart of the without prejudice rule as cited in Rush & Tompkins. Here he held that Mr Rashid was not offering any concession but seeking one in respect of an admitted debt (para 83).
In accordance with Scottish authority, Lord Hope preferred a "solution less radical" - essentially that the without prejudice rule should not apply to unqualified admissions, even if made in the course of negotiations for a settlement.
In most case involving acknowledgements made in shortfall debt recovery claims, there is a two-stage approach: (1) Does the letter or document in question amount to an acknowledgement for the purposes of ss 29-31 Limitation Act 1980? (2) If so, is it admissible?
The first question is a question of construction of the document in question. The second involves questions of public policy. The consensus view of the House of Lords is that open letters which acknowledge the debt and do not therefore amount to a genuine attempt to negotiate or compromise an actual or impending claim, are admissible.
It is difficult to offer any definitive practical advice to litigants. It may be too simplistic simply to suggest that all correspondence or proposals should be marked "without prejudice". Litigants will need to weigh three things: (1) Whether they are or might ever be in a position to negotiate or compromise an actual or impending claim? (2) Whether it may be more beneficial simply to negotiate an admitted debt? (3) Whether they can realistically take a limitation point?
West Bromwich BS v Crammer
 EWHC 2618
This was a bit of a complicated case on the facts but the effect of it is that the usual rules as to appropriation of payments apply to mortgage repayments. The likely effect is that payments will be applied to clear interest first unless the borrower appropriates the payments to capital. The practical advice to a borrower when making a payment in a limitation case is probably therefore that he should make it clear that the payment that is being made is in respect of capital (in respect of which the 12 year limitation period has not yet passed) and not interest (in respect of which the 6 year limitation has passed). Although the mortgage deed may prevent this.
Lender's right to recover possession extinguished
 EWCA Civ 55
A bank can lose its right to possession by reason of adverse possession. In this case the failure by the bank to enforce its right to possession for more than 12 years, in circumstances where the borrowers made no repayments in that time (which meant there was no acknowledgement - see s29 of the Limitation Act 1980 and above in relation to shortfall debts), meant that its right to claim possession became statute barred and its security extinguished.