Lender Beware

Alexander v West Bromwich Mortgage Company Ltd [2016] EWCA Civ 496

In the Spring 2015 edition of The Advocator [“Buyer-to-let beware”] I wrote about the abortive attempt of Mark Alexander – representative of Property118 - to obtain a declaration that the terms of an offer made to buy-to-let mortgagors prevailed over standard written terms which were inconsistent with that offer.

At first instance the Claimant pleaded that a standard term of the mortgage, allowing variation of an interest rate for various reasons of commerciality, was inconsistent with the term under the particular mortgage offer providing for an interest rate which could be varied solely by “tracking” the Bank of England base rate. It was further claimed that another standard term, that the mortgagee could require repayment of the loan upon giving one month’s notice, was inconsistent with the 25-year term provided for by the mortgage. The High Court rejected the claim, finding that standard written terms of the mortgage merely qualified the terms accepted as part of the mortgage offer. 

When I wrote about this claim shortly after judgment was handed down, I opined that it was the lender that looked as though it had the least to worry about: a well-reasoned judgment had been given by Teare J, and the Claimants had the potential fallback position of a claim in negligence against any advisors who failed to advise of the risks of such clauses. The Claimants no longer need that fallback position following a successful appeal to the Court of Appeal.

There were two issues which fell to be determined on appeal:

(1) Was Clause 5 under the standard conditions of offer, providing for the ability of the lender to vary the interest rate at any time, a term of the contract?

(2) Was Clause 14 under the standard conditions of offer, providing for the ability for the lender to require repayment in full upon giving one month’s notice, a term of the contract; and, if so, did it permit the lender to call in the loan in the absence of any default by the borrower?

(1)   Was Clause 5 a term of the contract?

On the first issue, the Court of Appeal unanimously held that Clause 5 was inconsistent with the product description and specially agreed terms in the offer document and was accordingly not incorporated into the contract.

A brief but detailed analysis of the law regarding inconsistent contracts was conducted by Hamblen LJ. His Lordship held that the authority provided by the case of Pagnan SpA v Tradax [1987] 3 All ER 565 is the proper approach to be adopted where a contract contains an inconsistency clause. His Lordship cited Dillon LJ in Tradax, who stated that inconsistency arises only where provisions “cannot sensibly be read together”; and Bingham LJ, who stated “it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to it”.

His Lordship rejected the submission that a wider interpretation of inconsistency ought to have been applied because of the inconsistency clause and its effect that the offer prevails over standard conditions if there are any inconsistencies [emphasis added].

Hamblen LJ found three ways in which Clause 5 could be held to be inconsistent.

Firstly, his Lordship found that the special terms of the mortgage product provided that the interest rate would vary to reflect changes in the base rate, so it would be inconsistent for a standard term outside the product description to provide for a different method of variation.

Secondly, agreement between the parties to a particular product description amounted to agreement in “clear, absolute and unqualified terms”, and the wide terms of Clause 5 permitting the lender to unilaterally change the product by changing the interest rate was inconsistent because it was not mere qualification, but “a matter of transformation and indeed negation”.

Thirdly, his Lordship found that where the product description sets out that the purpose of a contract is to provide a product of a certain description, a standard printed term entitling the lender to substitute a different product is inconsistent with that purpose. 

In reaching his findings, Hamblen LJ stated that one test to establish whether clauses could be “fairly” or “sensibly” read together would be to put them together in a single clause. His Lordship found that doing this in respect of the agreed terms and the standard terms would reach the conclusion that the agreed product was only being offered until the lender decided to vary it. His Lordship found that this amounted to negation and not mere qualification.

(2)   Was Clause 14 a term of the contract, and did it permit the early calling in of the loan?

Hamblen LJ again found that Clause 14 was inconsistent with the mortgage offer and was therefore not incorporated into the contract.

His Lordship placed significant importance on the fact that this was a buy-to-let mortgage, under which the parties would reasonably contemplate that the mortgage would be serviced by the letting of the property. If Clause 14 did permit the lender to require repayment in full without default then the borrower’s business arrangements would be in serious jeopardy. For this reason his Lordship found that there was inconsistency which, if not struck down, would “emasculate the obligations” agreed under the mortgage offer.

Hamblen LJ again followed the same exercise of attempting to read the two clauses together in order to establish whether there was inconsistency. His Lordship found that the outcome would be an agreement to a 25-year term unless the lender decided to require early repayment, subsequently finding that this was also negation rather than mere qualification.

Further observations

The outcome of this case was specific to the facts and particularly specific to the construction of the contract between the parties. Sir Brian Leveson, with whom the rest of the Court agreed, stated that if the standard written terms had been incorporated into the offer document instead then each of the two clauses in dispute was capable of enforcement. This, taken with the earlier finding of Hamblen LJ that a “tracker” mortgage is not a term of art but dependent on the terms agreed pursuant to that description, leads to the conclusion that not every term in a tracker mortgage providing for a wider power of variation of interest rate is capable of being struck down for inconsistency. 

This judgment has both immediate and wider implications. The West Bromwich Building Society has reported on its website that it expects to pay £27.5 million arising out of this matter; a significant sum which is sufficient to project a loss for the financial year ending March 2017. The Building Society has resolved to contact all affected borrowers, believed to be at least 360, in order to reimburse them as appropriate.

There are wider implications for other lenders. Mark Alexander’s activist group, Property 118, is currently two-thirds of the way to fulfilling a crowd-funding round of £60,000 on CrowdFunder.co.uk, with funds set to be used to fund litigation against other lenders. Although potential claimants should be live to the fact that the judgment in the Property 118 Case is by no means a boilerplate for all such claims, lenders in the firing line will no doubt wish to review their legal position in anticipation of the next wave of challenges by Property 118.

Gareth-Lee Smith
Advocate (Midlands Circuit)