By Anis Waiz – Knights Professional Services Limited. This article will consider this key Court of Appeal decision as to mortgage terms and incorporation. The decision is likely to have much wider ramifications for lenders and indeed borrowers.
“For the Lender to have the right to require repayment on one month’s notice at will would give him the right to turn the Borrower’s contemplated business arrangements on their head. In many, if not most, cases the Borrower would be required to terminate the letting arrangements and sell the property in order to make the repayment. A property which was to be bought so it could be let could, at the Lender’s whim, be required to be unlet and sold. Buy to let becomes sell unlet”.
As per Lord Justice Hamblen in Alexander (“Property118 Action Group”) v West Bromwich Mortgage Company [2016] EWCA Civ 496 (08 June 2016)
By way of context and brief background;
a) In 2013 the lender West Bromwich made a decision to vary interest rate margins charged for certain multi-property landlords.
b) That affected 6,250 borrowers raising their interest rate by approximately 2 %.
c) Mr Alexander represented a number of affected borrowers. Property 118 Action Group was formed to challenge the lender’s decision.
d) West Bromwich’s statement 8 June 2016 following the decision noted in effect that the case cost their business approximately £27.5m.
Overview of Topic
1. The case raised the issue of the proper construction of contractual documentation relating to a “buy to let” interest only mortgage and the lender’s right to vary the interest. The borrower contended certain conditions were inconsistent with the terms of a mortgage offer and accordingly were not incorporated into the contract.
2. The mortgage offer stated that the term of the mortgage would be 25 years, the interest rate would be fixed at 6.29% until June 2010 and thereafter it would be at a variable rate of 1.99% above the Bank of England Base Rate. In other words a “tracker” mortgage.
3. However the Lender’s Mortgage Conditions stated that the rate of interest specified in the mortgage offer (other than a fixed rate) may be varied by the Lender. It also stated that the loan may be repayable in full on the giving of one month’s notice by the Lender
4. At first instance the Judge held the terms were not inconsistent with the conditions, were incorporated and could be relied upon by the Lender. The Borrower appealed against that decision.
5. Key facts of the case
a) The Lender sent the Borrower various documents including an Offer of Loan Letter, Offer Document, which set out “the costs, features, terms and conditions of the Loan” and a Lender’s Mortgage Booklet which included General Information at Section A, Standard Conditions of Offer Section B and Mortgage Conditions at Section C.
b) Box 3 of the Offer Document stated the amount of the loan and the term which was 25 years.
c) Box 4 was headed “Description of the Mortgage”. It stated the “Product Description” to be “Buy To Let 6.29% fixed until 30.06.2010 (115% cover). Any applicable change in the Bank of England Base Rate will be applied to your account on the first day of the month following the change…”
d) Box 4 also added that after June 2010 the loan reverted to a variable rate which was the same as the Bank of England Base Rate, then currently 5%, with a premium of 1.99%, until the term end, giving a current rate payable of 6.99%. Any applicable change in the Bank of England Base Rate would be applied to the account on the first day of the month following the change.
e) Clause 1 of the conditions noted the Mortgage Conditions incorporated the terms contained in the Offer of Loan. As is standard the clause noted if there were any inconsistencies between the terms in the Mortgage Conditions and those contained in the Offer of Loan then the terms contained in the Offer of Loan would prevail.
6. Interest rate variation (“the Variation Clauses”)
a) As to the lenders alleged rights to vary the interest there were two key clauses in issue between the parties:
Clause 5.1 of the conditions which provided that “Interest is payable by you…at the rate or rates specified in your Offer of Loan Letter which, except during any period in which interest is expressed to be at a fixed rate, may be varied by the [Lender] at any time for any of the following reasons…” . A number of grounds were set out including if investment interest rates have increased or decreased.
b) Clause 5.2 provided a further alleged right to vary interest rates ( except during any period in which interest was expressed to be at a fixed) for any valid reason other than those set out in condition 5.1 if the lender gave at least two months’ notice in writing of the variation in interest rate.
7. Repayment
Clause 14 of the conditions (the “Repayment Clause”) required the borrower to repay the Loan in full together with any accrued interest and unpaid Charges. The lender was entitled to exercise all the powers conferred under Condition 15 immediately if a number of events occurred (breach of mortgage conditions and any payment remained outstanding) including the lender giving the borrower one month’s notice requiring such repayment
8. The Issues
In effect there were two issues.
a) The Variation Clauses. Was clause 5 of the Mortgage Conditions a term of the mortgage contract?
b) The Repayment Clause. Was clause 14 of the Mortgage Conditions a term of the mortgage contract. If so, did it permit the Lender to require the Borrower to repay the Loan in full together merely by giving one month’s notice, absent any default by the Borrower?
9. The Variation Clauses.
The borrower contended the Variation Clauses were inconsistent with the terms of the mortgage offer and accordingly were not incorporated into the contract.
The Court noted the following facts:
a) There was no hint in the Offer Document that the rate could be different to the Bank of England Base Rate plus 1.99%. Neither was there any hint that the rate to be paid would or could ever, be raised (or lowered) other than by reason of, and strictly in accordance with, a change to the Bank of England Base Rate.
b) The firm indication was that the rate would only be varied in accordance with changes in the Bank of England Base rate, which would be entirely consistent with reasonable parties’ general understanding of a tracker mortgage.
c) Clause 5 was drawn in very wide terms. Under clause 5.1 the interest rate may be varied for a broad range of reasons.
d) As to the lenders powers to vary, the lender conceded that such power or discretion to vary interest rates would be subject to an implied term not to do so for an improper purpose, capriciously, arbitrarily or in a way which no reasonable lender acting reasonably would do. That was in accordance with clear authority see Paragon Finance plc v Nash [2002] 1 WLR 685. It should be noted that Paragon makes clear there is no breach where a lender’s decision is motivated by commercial considerations.
10. The Court found 3 grounds upon which it may be said that the Variation Clauses were inconsistent with the Product Description:
a) First, the mortgage product box 4 defines how the rate was to be variable. It was to be variable in accordance with changes in the Bank of England Base Rate.
b) Secondly in Box 4 the parties agreed a Product Description in clear, absolute and unqualified terms.
c) Thirdly, the Product Description set out in Box 4 the main purpose or object of the contract, namely to provide a mortgage product of that description. Therefore a printed standard term which entitles the Lender to substitute a different product is inconsistent with that purpose or object.
11. The Repayment Clause
As to the Repayment Clause the Court noted this set out various “events” which may result in the Borrower being obliged by the Lender to repay the loan in full. In other words various breaches. So for example and as is standard in a legal charge. if any payment remained unpaid or the borrower breaching any of the obligations or conditions contained in the Mortgage Conditions. However crucially here the Lender also had the right to require repayment simply by giving one month’s notice, effectively making the mortgage contract terminable at the Lender’s will.
12. The Court held that :
a) The right to require repayment on one month’s notice was unqualified.
b) The clause did not involve the exercise of a discretion or decision making power conferred under the contract. It was not suggested that it would be subject to an implied terms as in the Paragon case.
c) It could be exercised whenever the Lender so chooses and for any reason it so chooses.
d) For the Borrower it means being required to make repayment on virtually no notice at any time during the 25 year term. Unless alternative finance can immediately be found, that meant seeking to unravel the letting arrangements and property purchase made.
e) There was an inconsistency between the mortgage specially agreed to in the Offer Document and the Lender’s right under clause 14 to terminate and require repayment on one month’s notice. The existence of that right deprived the borrower of the obligations set out in the Offer Document. They were as far as the Lender is concerned, optional.
13. The Inconsistency point.
As is noted above Clause 1 of the conditions contained an inconsistency clause. Thus if there was any inconsistencies between the terms in the Mortgage Conditions and those contained in the Offer of Loan, then the terms contained in the Offer of Loan would prevail.
Whilst not actually affecting the decision the Court looked the correct approach where there is an inconsistency clause. In essence :
a) Where there is an inconsistency between specially agreed terms and the printed standard terms of a contract and the contract contains an inconsistency clause, the guidance and proper approach is as set out by the Court of Appeal in Pagnan SpA v Tradax [1987] 3 All ER 565.
b) As to what amounts to inconsistency see Bingham LJ in the Pagnan case (at p575a-b)”….”.it is not enough if one term qualifies or modifies the effect of an-other; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses”.
c) Bingham LJ at p574h noted “ Where there is an inconsistency clause, one should therefore approach the question of inconsistency without any pre-conceived as-sumptions. One should not strive to avoid or to find inconsistency. Rather one should approach the documents in a cool and objective spirit to see whether there is inconsistency or not”.
d) As Pagnan v Tradax makes clear, it extends to cases where clauses cannot “fairly” or “sensibly” be read together; not merely cases where they cannot literally be read together.
e) The reader is also referred to Cobelfret Bulk Carriers v Swissmarine [2009] EWHC 2883 (Comm), [2010] 1 Lloyd’s Rep 317 and Public Company Rise v Nibulon SA [2015] EWHC 684 (Comm), [2015] 2 Lloyd’s Rep. 108.
14. The Decision
The Borrower succeeded on both grounds. Clause 5 was inconsistent with the Product Description and the rate variation set out in Box 4 in the Offer Document was not incorporated.
As to the Repayment Clause there was an inconsistency between the mortgage specially agreed to in the Offer Document and the Lender’s right to terminate and require repayment on one month’s notice. The existence of the lender’s right weakened the obligation set out in the Offer Document.
Anis Waiz
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