Consumer credit regulation and compliance Home | News & events | Legal updates | Court of Appeal decision is 'encouraging' for lenders

Court of Appeal decision is 'encouraging' for lenders

12 November 2009

The long-awaited decision of the Court of Appeal in Southern Pacific Mortgage Limited v Jayne Elizabeth Heath has for the first time provided Court of Appeal authority on correct interpretation of Section 18 of the Consumer Credit Act 1974.

The facts

The Heath case concerned a claim for possession by Southern Pacific Mortgages Limited (the lender) against Mrs Heath for possession of her home, which had been used to secure a £28,000 debt.

Mrs Heath wanted to raise £9,000 equity against her property. The lender agreed, but as a condition of the loan required a first mortgage over the property. £28,000 was advanced to Mrs Heath to include £19,000 to redeem the existing charge.

At the time of the transaction, credit agreements for more than £25,000 were not regulated by the Act, and so Mrs Heath’s loan was treated as unregulated.

Mrs Heath subsequently fell into arrears with her normal monthly repayments, and possession proceedings were issued. A Possession Order was granted in favour of the lender, but Mrs Heath subsequently sought to avoid her property being repossessed by arguing that her loan agreement should have been treated as a regulated agreement under the Act.

She argued that the agreement to lend her £28,000 was in fact an agreement in two parts:

Since each part of the agreement was for a sum less than £25,000, Mrs Heath argued both parts should have been treated as a regulated agreement. Since the correct procedures had not been followed for a regulated agreement, the loan agreement – and as such the charge securing the loan – were unenforceable.

The law

Multiple agreements are defined in Section 18 of the Act, and any agreements falling within the definition of Section 18(1) (a) must be treated as separate agreements for the purposes of the Act, i.e. the agreement must be treated as regulated and the procedural requirements of the Act must be followed.

Applying the facts to the law

The Court of Appeal rejected Mrs Heath’s line of defence and held that the loan agreement was not to be treated as two separate agreements.

The total credit advanced exceeded the £25,000 limit and as such the loan agreement had been correctly treated as an unregulated loan.

The starting point to determine whether a loan agreement is a multiple agreement is the actual terms of the loan agreement itself. It was particularly significant that it was not possible to ascertain from the loan documentation the precise amount to be used to redeem the first mortgage (the restricted use credit), and the amount to be paid to Mrs Heath personally (the unrestricted use credit). It was not possible for Mrs Heath to draw down the loan in tranches. On the contrary, it could only be drawn down as a whole amount.

It would also have serious practical consequences for a lender if such agreements were treated as multiple agreements.

In this particular case, in order to comply with the procedural requirements of the Act the advance copy of the loan agreement would have to state separately the amount of credit which was restricted use (i.e. the redemption amount required by the first mortgagee), and the amount to be retained by Mrs Heath personally.

Redemption amounts vary according to the date of redemption and difficulties could be encountered if completion could not occur on the anticipated redemption date or, indeed, items of unforeseen expenditure had been incurred by the lender, which now had to be included in the redemption figure.

Conclusion

The Court of Appeal’s decision is significant in that it provides assistance with the interpretation of Section 18(1) (a) and (b) for the first time.

Had the case been decided in Mrs Heath’s favour, it would have had huge ramifications for lenders in relation to enforcing their existing security. It is also encouraging to note that the practical consequences for lenders are a legitimate consideration for the court when faced with decisions regarding interpretation of the Act.

It remains to be seen whether practical consequences will play a part in the other eagerly awaited Court of Appeal decision regarding the treatment of arrangement fees (South Pacific Mortgage Limited v Michael and Jane Walker).

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Are any of the issues in this article giving you a headache? If so, we want to know

Name *

Comments*

The information you provide here will be used solely for the purposes of responding to your query for more information see our privacy policy.
 

Get in touch

Julie Peel

Solicitor
T: 03700 86 4121
I: +44 (0)121 625 4121
E: julie.peel@shoosmiths.co.uk