Consumer Credit Act – some relief for lenders from unfair relationships

Greenlands Trading Limited v Pontearso [2019] EWHC 278 (Ch)

In this case, the borrower took out a six month bridging loan secured by a second charge on residential property. At the time loans secured by second charges on residential property were not regulated mortgage contracts but could be regulated under the Consumer Credit Act 1974.

The borrower refinanced the first bridging loan with a second six month bridging loan from a different lender. The interest rate was 1.45% per month rising to 3% per month in the event of default, and the loan also provided for a default administration fee of £1,995 in the event of failure to make a payment when due.

The borrower was unable to repay the second bridging loan on maturity, and the lenders issued a claim for possession and a money judgment in the County Court.

The case

The borrower defended the claim by arguing that the relationship between her and the lenders was unfair, because:

• the interest rate of 3% per month and the default fee were a penalty, because they imposed a detriment out of all proportion to any legitimate interest of the lenders
• the lenders had not assessed the borrower’s ability to repay the second bridging loan within six months, making it inevitable that she would pay default interest and the default fee
• the ability of the borrower to repay was assessed on the basis of the equity in the property, which would only be available to the lenders by obtaining on order for possession
• there was no strategy for obtaining repayment of the bridging loan, other than by obtaining possession of the property.

Sections 140A and 140B of the Consumer Credit Act give the courts wide powers to protect borrowers from unfair relationships with lenders under fully regulated and most exempt credit agreements.

These powers can be invoked if the relationship is unfair by reason of:

(a) any of the terms of the agreement or of any related agreement (b) the way in which the lender has exercised or enforced any of its rights under the agreement or any related agreement (c) any other thing done (or not done) by, or on behalf of, the lender (either before or after the making of the agreement or any related agreement).

The court must have regard to all matters it thinks relevant (including matters relating to the lender and matters relating to the borrower).

The Supreme Court considered these provisions in Plevin v Paragon Personal Finance [2014] UKSC 61. The judgment in Plevin establishes that there is no precise or universal test for their application which must depend on the court’s judgment of all the relevant facts.

However, the following general points were made in the judgment of Lord Sumption which are summarised as follows:

• Firstly, what must be unfair is the relationship between the borrower and the lender. Where the terms themselves are not intrinsically unfair, unfairness may arise because the relationship is so one-sided as substantially to limit the borrower’s ability to choose.
• Secondly, although the court is concerned with hardship to the borrower, the legislation envisages that matters relating to either party may also be relevant. Features of a transaction which operate harshly against the borrower may be justified if they protect a legitimate interest of the creditor
• Thirdly, the alleged unfairness must arise from one of the three categories of cause listed at sub-paragraphs (a) to (c) above.
• Fourthly, while relations between commercial lenders and ordinary borrowers are usually inherently unequal, such relationships should not be reopened for that reason alone.

The trial judge found that the default interest rate followed the industry standard on the basis of evidence from the lenders themselves and, while high, was not penal.

However, no attempt was made to justify the default administration fee, which the judge held to be both penal and unfair. The trial judge altered the terms of the second bridging loan by discharging the liability to pay the default fee, but made no other alteration to the terms and made an order for possession.

On appeal to the High Court, the borrower’s counsel argued that the trial judge should neither have allowed the lenders to give evidence that the default rate was an industry standard, nor made a finding of fact on the basis of this evidence.

Mr Justice Nugee declined to disturb the trial judge’s judgment in either respect, on the basis that appellate courts will not usually disturb case management decisions or findings of fact made by trial judges.

Nugee J went on to consider arguments that the trial judge had based his finding that the interest rate was not unfair on Chubb and Bruce v Dean & Anor [2013] EWHC 1282 (Ch), which predated the Supreme Court decision in Plevin.

In Chubb, an interest rate of 1.85% plus a facility fee of 1.25% per month were held to be a stiff bargain but not an unfair one.

The issue seems to be that the earlier case confused the test for unfairness under the Unfair Terms in Consumer Contracts Regulations 1999 (now part 2 of the Consumer Rights Act 2015) with the test for unfairness.

Nugee J accepted that the exercise of determining whether a relationship is unfair for the purposes of section 140A of the CCA is not identical to the exercise of determining whether a term is unfair for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999. The question is whether the relationship is unfair rather than whether a particular term is unfair.

Although the tests are different, the factors that were relied on in Chubb were held to foreshadow the tests laid down by the Supreme Court in Plevin.

The fact that in Chubb the rate was clear and not buried in small print, that the borrowers knew what they were doing and were legally advised, that they were intelligent consumers and not misled, seemed to Nugee J to be precisely the sort of considerations that were likely, among other things, to be relevant to the assessment of whether a particular term of a loan agreement makes the relationship of lender and borrower unfair.

Nugee J was not persuaded to disturb any of the trial judge’s findings of fact that were adverse to the remaining grounds of appeal.

However, he commented that if a lender sets out to deliberately trap a borrower into an unequal credit agreement in the expectation that the borrower will default and trigger very high default charges, that could be something that could be characterised as unfair.

Takeaways

The case turns very much on the trial judge's findings of fact, but:

• it is interesting to note that evidence of standard practice in the bridge lending space was accepted from the lenders themselves
• it explores the relationship between part 2 of the Consumer Rights Act (which replaced the 1999 regulations), and confirms that while there is some overlap the tests are not identical.

The unfair relationships provisions of the CCA are applicable to most exempt credit agreements (for example, those for business purposes and with high net worth borrowers) as well as to fully regulated agreements.