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New Clause—(Adjustments Between Borrower And Lender In Respect Of Property Damaged By Enemy Action)

Volume 380: debated on Wednesday 3 June 1942

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Where property which is the subject of a mortgage, floating charge or debenture for securing a loan or advance of money is damaged by enemy action, and is the subject

of claim against the War Damage Commission, then—

  • (1) the rate of interest on such portion of the mortgage as is equal to the money due by the War Damage Commission shall be reduced or raised to two and a half per cent. per annum, being at the same rate as is paid by the Commission calculated from the time of the occurrence of the war damage;
  • (2) the War Damage Commission shall, at the request of the borrower, pay—
  • (a) such sums not greater than the amount of the claim to the lender and such payments so made shall be brought into account when final payment is made by the War Damage Commission, provided that such payments shall in no way relieve the owner of a property in respect of which a cost of works payment is made to expend the amount of such payment upon the property; or
  • (b) pay the interest calculated in accordance with subsection (1) of this section to the lender until such time as the capital payment is paid by the War Damage Commission to the borrower, in which case the interest payable by the War Damage Commission shall be reduced by the amount so paid—[Lieutenant Butcher.]
  • Brought up, and read the First time.

    I beg to move, "That the. Clause be read a Second time."

    The Clause is designed to alter the relations between borrowers and lenders, but only in cases where the property which is the subject of the loan has been injured by enemy action and is the subject of a claim under the principal Act and the amending Bill. There is already some widespread feeling that, even in the case of property which is not damaged, the scales are unfairly weighted against the borrower, but where the property is damaged the position of the borrower is still more unfortunate. I think the Chancellor of the Exchequer will realise the implications behind the matter, because the war has now continued for some time, damage has been sustained and payments' are due to borrowers. There is no sign of their receiving it at the moment, quite rightly, but what is happening at present? Take the case of property which' was damaged two years ago. Already the poor borrower has had to continue his payments at the rate of five per cent., knowing that he is only going to get from the War Damage Commission two and a half per cent., and the result is that sooner or later an increasing share of the equity of redemption is being transferred from the owner to the person who lent the money on the security of the property. The purpose of the new Clause is to give the right hon. Gentleman an opportunity of recognising the injustice of it and putting it right in whatever way he thinks suitable. I think the two ways of doing it are, first, to make the rate of interest payable on the mortgage equal, by reduction or increase, to the rate that the War Damage Commission will itself pay, and then to operate the second Sub-section of the Clause to give the War Damage Commission such sums as they think fit, not greater than the amount of the claim to the lender, so that he can pay off the mortgage or, alternatively, to leave things as they are but make interest payments from time to time so that the interest can be transferred by the borrower to the lender and the equity of redemption is not steadily being faded away during the period between the date of the damage and the date of the assessment and payment of the claim by the War Damage Commission.

    I think my hon. and gallant Friend has made the matter as clear as could possibly be done, and I have said what I had to say on the Second Reading. I only wish to say now that I approve of everything my hon. and gallant Friend has said, and I trust that the Chancellor of the Exchequer will consider accepting the new Clause.

    I am in full agreement with the principle of equity which lies behind the proposed new Clause, and so stated in my Speech on the Second Reading of the original Bill. But there are two points which I should like to mention in connection with it. One is that, however equitable it is, I can see great difficulties in putting it into -practice. There is the general principle that the Government do not wish the money payable to the owner of a building in respect of a value payment to be available for present spending. Therefore, if the money was to be paid over, there would have to be an estoppel in some kind of way. The second point is that great difficulties arise where the damaged property is one of a parcel of properties which form the security for a mortgage debenture. The difficulty of apportioning the reduction of interest or the repayment of capital among the various holders of a debenture issue secured on a whole number of properties will be extremely great. I mention those two out of many of the practical difficulties, without attacking the general equity of what the hon. and gallant Gentleman proposes.

    But there is another point which should be borne in mind. I should say, on examination of the proposed new Clause, that Sub-section (2, a) is sound in principle but Sub-section (1) and Sub-section (2, b) are relatively unsound. The Government admit in principle, at the time the damage occurs that they owe the money, because they allow interest to accrue at two and a half per cent. from that date. Therefore the owner of the property is in the position that he has lost his property and its earning power and has instead the promise of the Government to pay a certain amount at some future date and two and a half per cent. interest thereon meanwhile. Meanwhile he himself has to go on paying interest to the mortgagee at a higher rate. But that does not in itself alter the obligation of the borrower to the lender, and in case I should be accused of doing what Humpty-Dumpty did, which was to make a word mean exactly what he wanted, I have looked up the dictionaries to see exactly what a mortgage is. Funk and Wagnalls dictionary tells me that it is a conditional lien upon property as security for the payment of money. That is to say, a mortgagee is not an investor in the property but a lender of money for which he has a conditional lien on the property in case the money is not repaid. I found, moreover, in the Oxford Dictionary, that a mortgage is a conveyance of a property by a debtor to a creditor as security for a debt, with the proviso that it shall be re-conveyed on payment of the debt within a certain period. The implication from all this is that the Government should put the owner of the property, the debtor, in a position to repay his debt at once. That is why I think that Sub-section (2, a) is the sound part of the hon. and gallant Gentleman's suggestion. I can see great difficulties arising if that were attempted, but there could be no warrant for interfering with the nature of the contract between the borrower and the lender. On the other hand, it is a well known principle of finance that difficulties should never be placed in the way of a debtor discharging his debt. For that reason I would like my right hon. Friend to enable the debtor to pay off his debt and so save him from having to pay out interest at say 5 per cent. while receiving only at 2½ per cent.

    This proposed new Clause, like many other proposals, raises two questions—first, whether it is workable in practice, and, second, whether it is right in principle. I shall suggest that it is unworkable in practice, and I shall give grounds for thinking that it is not right in principle. Sub-section (2, a), which is the whole starting point of the new Clause, assumes that you can ascertain the amount of the claim. That is precisely what you cannot do under this scheme. In the majority of cases the claim will be what is called a cost of works payment. Nobody can tell how much that will be until the works are done because it will depend on the cost at that time. Indeed, until you actually get to the stage when the work can be done it will be difficult to ascertain the exact amount of damage that is to be repaired. There is the initial difficulty in working this scheme. It also, as my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) said, -cuts across to a considerable extent the general policy to which my right hon. Friend the Chancellor and, I am sure, the Committee attach great importance, namely, that the sums to be paid under this scheme should be held up until they can be expended on the reconstruction and rebuilding for which the scheme is designed to assist financially as and when it is practicable. If these sums were put into the market by payments to lenders, it would release purchasing power in a way which I am sure the Committee feel would be undesirable. My hon. friends who moved the new Clause were good enough to say that they realised that the actual form of it might be unworkable. It goes rather deeper than that, however, in that it is difficult to think of a workable form that could embody this scheme.

    There is the more debatable question, whether it is right in principle. I suggest that it is not. Here is a man who has borrowed money on security. He may have used it for all sorts of purposes. He has agreed to pay, say, 4½ per cent. interest; money on mortgage is generally got at fairly cheap rates. It is a great mistake to assume that all borrowers are poor and all lenders are rich. It is easy to find a rich borrower, either an individual or a company, and it is easy to find a poor lender. In fact, there are a great many small people who have invested their savings in mortgages. It has been a very popular form of investment for comparatively small sums of savings. One does not, therefore, get much help from that angle. Assume that the borrower is able to pay whatever is the agreed rate of interest, it seems to me right and proper and to his advantage that he should pay it. He has had the money to spend it on whatever he chooses to spend it on and there is the agreed rate. Why should he get out of his agreement because the security is damaged? He may have spent the money on business which may be earning money as well, although the security on which he borrowed it may have been damaged. There are, of course, hard cases where the property secured was being looked to by the borrower as the source from which he could obtain the money to pay his interest, but that raises an entirely different problem. That is a problem which the House has dealt with under other pieces of legislation, such as the Courts (Emergency Powers) Act and the War-time Liabilities Adjustment Act. These are Acts which deal with cases where there is inability to pay owing to war circumstances. If there is ability to pay I do not see any real force behind the principle of the new Clause.

    Whether hon. Members agree with that or not, the scheme suggested would, I think, for reasons I have given, be quite unworkable and would certainly cut across the policy, to which great importance is attached, of not putting this purchasing power on the market until it can be expended on what the House intended that it should be spent on. Let me take the case of the cost of works payment, which will apply in the majority of cases. This new Clause proposes that somebody shall make a calculation of what that payment shall be. That will be difficult to start with. Then it proposes that instead of, as under the Act, the payment being made when the work is done to the person who pays for the work, it shall be paid to a lender who will do what he likes with it. The borrower will still be left with the liability to repair the, house without having the money available from the Commission to pay for the repairs. I really think that that is a scheme which the Committee would not consider introducing into the Bill.

    The Attorney-General has made a strong case against the new Clause, but he has only made it on the basis that the injustices should continue. He has not faced that point. The real trouble with which we are faced is the continuous refusal of the Chancellor to agree to compensation for loss of rent. If that were done, these difficulties would vanish and three-quarters of the Amendments on the Order Paper would disappear. The cost would depend on the length of the war, but it would not be overwhelming. Nine-tenths of the difficulties between mortgagee and mortgagor would disappear, and that is the argument which will run through most of the Amendments we are to consider on this Bill. The other problem is the fraudulent 2½ per cent. which is being allowed. A man borrows at 4½ to 5 Per cent. I am certain that the Chancellor when he was practising advised many people to lend money on mortgage at that rate. When he has his property destroyed he is not to get his payment, but when the amount of the payment is calculated he is to get only 2½ per cent. simple interest. The Attorney-General himself said that many of these people are poor, but he is not proposing any device whereby the mortgagor will be in a position to pay these poor lenders except in those cases where everything is all right. Although I understand the reason why he asks the Committee to reject the new Clause, I would point out that he leaves the problem totally unsolved.

    I do not support the new Clause, for I think that parts of it are not right in principle and that the whole of it might not be easily workable. What induces me to intervene in the discussion is my complete incapacity to understand the Attorney-General's argument. Here is a case where somebody is going to lose money by enemy action. He is to lose his security and his capacity to earn anything out of his security. Presumably he would not have borrowed money upon it unless he felt it was available to him to produce income out of which he could discharge his debt to those who lent him the money. He loses that completely, and the legislation we are dealing with proceeds upon the principle that when a citizen has lost something by enemy action he shall not be left to bear the burden himself but that the burden shall be equitably shared among all those who run a like risk. The Government come along and say, "We will not pay at once. There are a variety of reasons why we should not pay at once, but we will pay interest until the time comes when we can liquidate the debt which we acknowledge, and that interest will be at the rate of 2½ per cent." He cannot pay 4½per cent. out of 2½ per cent., and if he is made to pay 4½ per cent. he has to find 2 per cent. himself.

    The Government say that he himself ought to pay and that the burden ought not to be shared by those who lent him the money, because of the claims of sanctity of contract. Because the man has entered into that contract, the Government say that he ought to pay while he has a penny in the world with which to pay, even if the difficulties which confront him arise from no fault of his own. If the Government believe in the sanctity of contracts to that extent, then they ought to pay. If they think that a contract is so sacrosanct that even enemy action does not invalidate it, then they ought so to frame their Measure as to put the man in possession of sufficient means with which to pay his debt. The Government say they will not. Surely, then, the mover of the' Motion is right to say that if there is a resultant loss which the Government will not meet, the borrower ought not to be left to bear the whole burden which ought to be shared with those who lent the money on the property and who therefore have an interest in that property. There may be something wrong with that principle, but if there is I cannot see it and nobody has troubled to explain it. It is all very well for an hon. Member to read definitions out of a dictionary. I do not know that they shed much light on the problem. The lender has acknowledged that the property is a security for his debt, and so he has an interest in that property. I do not think anything in the definitions which were read is inconsistent with that view, and if there is there must be something wrong with the definitions. The reason the lender takes security is that he wants something beyond the personal covenant of the man to whom he has lent the money. Through no fault of either the lender or the borrower the security has disappeared. If the Government are not prepared to pay the loss I do not know why it should not be shared between the borrower and the lender, and I hope the Government will reconsider their attitude.

    I should like to remind the learned Attorney-General that this matter is going to affect millions of people; whether it is common to individuals or to groups or societies is neither here nor there. The position as I see it is that a man has borrowed money upon a house, and that is his security. As everybody who describes himself as a man of the world knows, there are hundreds of thousands of people who have acquired property with borrowed money and hope, from the profits they obtain through letting and sub-letting, to recoup themselves and to pay the lender. If this source of income has gone, and if it is equitable that at this time we should share burdens, it is only right and proper that both sides should share the loss, and that is what the new Clause seeks. There is one point in the Clause which I think the mover of it overlooked. It says that the War Damage Commission should pay. As things exist, the War Damage Commission pay nothing at all. A case is dealt with under rules and regulations made by the Treasury, and before the war Damage Commission can make a payment the matter has been referred to another Department altogether. The War Damage Commission cannot pay without consulting the Ministry of Works and Buildings. I hope that position will be considered by the hon. and gallant Member, because it is no good moving a new Clause which it is not possible to carry out, and the Committee ought to realise what is the real situation with regard to payments. I agree that eventually the cheque comes through the War Damage Commission, but it is not the act of the War Damage Commission.

    I should like to deal with one or two of the remarks which have been made in the course of the discussion. It has been suggested that if this new Clause were acted upon, a great deal of money would be set loose, and that would have the effect of increasing the purchasing power of the country, which is the very thing we want to avoid. To meet that point we could easily move an amendment to this new Clause to provide that the money should be invested in War Loan, unless the claimant could show very good reason for requiring the immediate use of it; but we are not prepared to go as far as that to-day. Then my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) gave us a definition of a mortgage. I do not agree with that definition at all. That definition has grown with the growth of financial operations as we know them in the world today. The meaning he put upon it is quite different from the definition of the word mortgage as "dead money put out to gain."

    I give my hon. Friend that point. He has looked to somebody else for his definition, and has gone to an American dictionary, and probably my argument has been thereby reinforced. The only point made by the Attorney-General was that because this money was originally lent at a high rate of interest, 4 or 5 per cent., it would be unfair to reduce the interest to 2½ per cent. But the Government's idea of the value of money at the present time is 2½ per cent. When they offer War Loans, they give 2½ per cent. interest, and on war damage payments they allow 2½ per cent. interest. That suggests to me that 2½ per cent. is what the Treasury consider money to be worth, and why anybody else, according to the Treasury, should get more I cannot see. The Attorney-General suggested that when the borrower took the loan he knew well what he was in for, but no borrower anticipated that his house would be knocked to bits by a German bomb. I certainly should not borrow money to buy or build a house if I thought it would be exposed in two or three years' time to enemy attack. Some people have drawn a comparison between this position and fire insurances on property, but fire insurance is not inherent in a mortgage but an extra covenant, and many people would not have paid war damage insurance unless the Government had made them pay.

    In view of the statement made by the Attorney-General, I beg to ask leave to withdraw the new Clause. In so doing, I must say that I feel that if the Government had been a little more forthcoming on the question of allowing the rent or at least the amount of the Schedule A assessment to be payable, we could have saved many of these difficulties to which they have referred.

    Motion, and Clause, by leave, withdrawn.