• In the case of Cheltenham and Gloucester PLC v Krausz 1997 I wlr 1558, it is established that where there is “negative equity” the court cannot suspend possession as detailed under s.36 of the Administration of Justice Act 1970 (AJA) to allow the mortgagor to make an application for court-ordered sale under s.91 of the Law of Property Act 1925 (LPA).
  • A mortgagor or borrower has positive equity in their property if, the market value of the property is > (greater than) the outstanding debt;
  • Alternatively, a mortgagor has negative equity in a property if the market price of the property is < (less than) the outstanding debt.

Facts of the Case

  • The defendant (D), Mr. Krausz, defaulted on a loan (failed to meet the legal obligations of a loan) from the claimants (C), Cheltenham and Gloucester PLC, building society which was secured by a mortgage in their home.
  • Mr. Krausz (the defendant) had fallen into arrears on their mortgage payments, and a warrant for possession was issued by the claimants to the defendant, but the order had yet to be executed since under the current market conditions the house price, would have been less than the debt owed to Cheltenham and Gloucester PLC.
  • The claimant sued, intending to gain permission to sell the house themselves under s.36 of the Administration of Justice Act 1970 and terminate Mr. Krausz’s possession under s.91(2) of the Law of Property Act 1925. 

Issues in Cheltenham and Gloucester PLC v Krausz 1997 I wlr 1558

  • In actuality, It was made clear that s.36 only postponed possession to allow the mortgagor (Mr. Krausz) to repay debts from sources other than selling the property, or where the sale is proposed, the court had to be satisfied that it would be enough to eliminate the whole debt owed.
  • S. 36 (AJA) did not grant the court the ability to suspend possession in order to permit the mortgagor to sell the mortgaged premises where the proceeds from the sale do not suffice in discharging the mortgaged debt unless other funds were available to make up for the remaining debt.

Held by the Court of Appeal

  • The order for suspension was not granted because the defendant, Mr. Krausz had negative equity in the property, therefore the court could not suspend the warrant for possession or allow Cheltenham and Gloucester PLC to sell the property.

Lord Justice Millet

  • The relevant case of Palk v Mortgage Services funding PLC [1993] Ch 330 was referenced by Lord Justice Phillips, because in this case, it made clear the absence in support of, making a sales order where the mortgagee is taking active steps to obtain possession and sale.
  • Additionally, no support is had in giving the power of sale to the mortgagor in cases where there’s negative equity. It is more likely that where there is negative equity, the mortgagee is to have the greater incentive to obtain the best price and quickest sale.

Lord Justice Phillips

  • Until Palk’s case, it had been practised by the Chancery Court only to entertain applications for sale by the mortgagor if the property had positive equity.
  • Palk’s case helped in establishing that the court had power under s.91(2) LPA 1925 to make an order for sale on the application of a mortgagor, even when there is negative equity.
  • S.36 AJA did not empower the court to suspend possession to permit the mortgagor to sell the mortgaged premises where there is negative equity, they may only do so where there is positive equity.

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