The limitation period that applies on mortgage repossessions and claims for interest is set out in s20(5) LA 1980. This says that mortgagees have 12 years in which to sue for the principal debt, but only six years to sue for interest.

Time runs from the date of breach by the borrower, rather than the date of sale. This is because time runs from the date when the cause of action arises (and that is not affected by the date when the security is subsequently realised by the sale of the property – since that is something within the control of the lender). The end result of all of this, is that because of the different limitation periods that apply to the recovery of the principal debt and the interest, when bringing a claim a mortgagee must show how much of the shortfall represents the principal and how much relates to interest. In order to recover the interest, after expiry of the six-year limitation period, the mortgagee needs to show that the proceeds of sale are sufficient to pay off all the interest which remained unpaid at the date of sale.

If there is a shortfall that is time barred under s20(5) then a mortgagee may (occasionally) be able to rely on s29 LA 1980. This provides for the fresh accrual of an action once there has been (i) an acknowledgement or (ii) a part-payment by the borrower. This can cover letters sent by financial advisers which contain partial offers to pay money so it may be necessary to look back over the old correspondence. In general terms, however, the courts are usually reluctant to find that acknowledgements have been made in this way, and the normal approach is to regard such correspondence as inadmissible (as having been impliedly without prejudice). Points to note:

• if making an offer on behalf of a lender then always mark it ‘without prejudice’. But, the absence of those words will not prevent the correspondence being privileged (if it was a genuine attempt to settle a disputed liability);
• any grounds for disputing liability should be set out in writing. If no dispute is raised then any offer of payment may be taken as an implicit admission that the full debt is due.

Source: Charles Russell. See also [2007] SJ 1486. © Practical Lawyer