Home » Laws & Taxes » The Legal Stumbling Blocks Towards Affordable Housing
By Zeeshaan Zafar Hashmi
Zeeshaan Zafar Hashmi is an Advocate of the High Courts of Pakistan with a Masters in Constitutional Law from Harvard Law School. He is a partner at the law firm Shujra, Farooq & Hashmi (SFH) which is a full-service law firm with offices in Lahore, Islamabad, and Multan.
SFH is working in collaboration with Zameen.com to conduct research and advocacy on Pakistan’s property and banking laws in relation to affordable housing such as the Naya Pakistan Housing Scheme.
Straight from its inception, the present government led by the Pakistan Tehreek-e-Insaf has declared its laudable intention to provide affordable housing for the people of Pakistan. It is in this vein that the government set up the Naya Pakistan Housing and Development Authority in May of this year under the Naya Pakistan Housing and Development Authority Ordinance, 2019.
There was, however, one major niggle in the affordable housing scheme of the government: How would it be financed? The world over, such housing schemes are financed by banks through mortgage finance. The system of mortgage finance has not taken root in Pakistan, though, because until recently, banks were not entitled to foreclose on mortgages without the intervention of a Banking Court.
This purportedly changed on 22nd July 2019, when the President of Pakistan promulgated the Recovery of Mortgage-backed Security Ordinance, 2019 (the “New Ordinance”), which empowers banks to foreclose on mortgages without the intervention of a Banking Court.
This is not the first time that such a law has been made in Pakistan. In the past, laws on non-judicial foreclosure have been struck down by the Supreme Court and High Courts for being in derogation of the fundamental rights guaranteed by the Constitution of Pakistan.
The first part of this article will discuss the recent history of mortgage foreclosure laws in Pakistan and the second part will discuss whether the New Ordinance can pass constitutional muster before the Courts.
Section 15 and SAF Textiles
The Financial Institutions (Recovery of Finances) Ordinance, 2001 (“FIO”) was promulgated primarily for efficacious disposal of cases related to the recovery of banking finance filed before specialized Banking Courts.
According to the State Bank of Pakistan, however, this objective has not been achieved because cases before Banking Courts are lingering on and pending for years.
As determined by the State Bank of Pakistan, 19,866 suits for recovery worth Rs.264,474.22 million had been filed before the Banking Courts and the High Courts under the FIO as on 30th June 2016.
By the same date, 30,959 execution applications had been filed as well. Any suit brought before the Banking Courts or the High Courts in banking jurisdiction is defeating the primary purpose of the FIO, which was to provide for the speedy recovery of finances.
Section 15 of the FIO was a very contentious provision. Section 15 provided for a bank to recover mortgage money without the intervention of a Court after issuing three notices to the mortgagor. The first two notices had to provide fourteen days’ time for compliance by the mortgagor, and the final (third) notice had to provide thirty days.
In particular, sub-section 4 of section 15 provided, “Where a mortgagor fails to pay the amount as demanded within the period prescribed in sub-section (2), and after the due date is given in the final notice has expired, the financial institution may, without intervention of any Court, sell the mortgaged property or any part thereof by public auction and appropriate the proceeds thereof towards total or partial satisfaction of the outstanding mortgage money ” (emphasis supplied).
The High Courts are vested with the power to strike down laws if they curtail the fundamental rights guaranteed in the Constitution under Article 8 read with Article 199 of the Constitution. Many mortgagors challenged the constitutionality of section 15 before the High Courts of Lahore and Baluchistan, and both High Courts struck down section 15 as unconstitutional.
By the time the case was brought before the Supreme Court in appeal in the form of National Bank of Pakistan v. SAF Textile Mills (PLD 2014 Supreme Court 283), the 18th Amendment to the Constitution added Article 10A to the Constitution, which provided specific protection to the rights of fair trial and due process.
It was this right to due process that the Supreme Court focused on in upholding the judgements of the High Courts and declaring that section 15 was indeed unconstitutional.
After the sale of the mortgaged property took place through public auction as stated in section 15(4), the Supreme Court noted that any objections to such sale would be fruitless as the property would have come to rightfully vest with the auction purchaser.
Thus, the Supreme Court held that section 15 effectively denuded mortgagors of the right to agitate their grievances and get their day in Court, which is essentially what the fundamental right to due process provides for.
Moreover, section 15 did not provide for the concept of a reserve price in the auctions for sale of the mortgaged property, which the Supreme Court held to be essential to prevent walkover auction sales. Section 15 also provided for the bank itself to buy the mortgaged property, which the Supreme Court stated effectively put the banks in the position of judge, jury, and executioner, which in turn provides for an exploitative environment which the State is under a constitutional duty to prevent under Article 3 of the Constitution.
In summary, the Supreme Court struck down non-judicial foreclosures under section 15, FIO because of the mortgagor’s lack of access to courts, the lack of reserve price, and the ability of the bank to acquire the property itself without the reserve price.
In the end, however, the Supreme Court did not completely close the door on non-judicial foreclosures, stating that “…the contentions… that a sale of mortgaged property without the intervention of the Court is per se unconstitutional is not sustainable.” The question, then, is how exactly can non-judicial foreclosures be enacted without offending the holding in the SAF Textiles case?
Stay tuned for Part 2 of this series.
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