Court of Appeal victory for a borrower of a Buy-to-Let tracker mortgage

A warning for lenders to review their standard conditions and offer documents following a recent Court of Appeal victory for a borrower of a Buy-to-Let tracker mortgage

Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, is a recent Court of Appeal case in which the Court considered an Appeal by a borrower of a 25-year Buy-to-Let (BTL) tracker mortgage, against a decision whereby the lender was entitled to increase the variable rate charged and to require repayment of the loan, upon giving one month’s notice.

This case has significant implications for borrowers and lenders of commercial BTL tracker mortgages, setting a precedent in relation to the interpretation of inconsistent terms contained within the mortgage conditions (standard conditions) and the offer document (express conditions).

Facts:

In this case, the provisions in the mortgage conditions (standard conditions) and the offer document (express conditions) were inconsistent. The provisions could not be read together sensibly and one could not qualify or modify the other.

Inconsistency arises where a term contradicts another term or is in conflict with it, such that effect cannot fairly be given to both clauses. There was an established principle that where there is an inconsistency between a specially agreed term and the printed standard terms, the specially agreed terms will prevail (Glynn v Margaretson & Co [1893] AC 351). Additionally, where the contract contains an inconsistency clause, guidance was provided in Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All E.R. 565.

In Alexander v West Bromwich, the mortgage offer stated that the mortgage term was 25 years and that the interest rate would be fixed for the first two years, after which it would be at a variable rate of 1.99% above the Bank of England base rate.

Clause 5 of the lender’s standard mortgage conditions stated that the variable rate could be changed for a number of reasons, including to reflect market conditions generally and to ensure that the lender’s business was carried out prudently. Clause 14 provided that the borrower might be obliged to repay the loan after the giving of one month’s notice by the lender.

After the fixed-rate period had expired, the lender informed the borrower that it had decided to increase the margin over base rate from 1.99% to 3.99%.

The borrower claimed that the mortgage conditions were inconsistent with the offer and were therefore not incorporated into the contract. The judge held at first instance that they were not inconsistent and had been incorporated.

The issues before the Court of Appeal were whether:

(1) clause 5 of the mortgage conditions was a term of the mortgage contract; and
(2) clause 14 was a term of the mortgage contract.

The Mortgage conditions contained an inconsistency provision that “if there are any inconsistencies between the terms of the Mortgage Conditions and those contained in the Offer of Loan then the terms contained in the Offer of Loan will prevail.”

Although the ‘tracker’ label of the loan was relevant, its meaning depended on its particular terms of the loan. The Court considered that the interest rates to be charged were integral to the product description and the fact that the variable element of the interest rate was to be the Bank of England base rate was borne out by other provisions in the offer document. 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.

Clause 5 of the standard conditions was inconsistent with the product description set out in the offer document. It conferred on the lender a right to unilaterally change the product, as described in the specially agreed terms, to something else entirely. If the lender had that right, there was effectively no enforceable obligation to provide the specially agreed product. Therefore, the Court found that if the lender wished to have a further right to vary the interest rate, that should have been spelt out in the offer document.

The clauses could not be ‘fairly’ or ‘sensibly’ read together. Clause 5 was inconsistent with the product description and the method of rate variation set out in the offer document. Accordingly, it was not incorporated into the contract.

The provision in clause 14, giving the lender the right to require repayment simply by giving one month’s notice, effectively made the mortgage contract terminable at the lender’s will. Once repayment was required, various draconian powers and remedies could be triggered immediately, at the borrower’s expense, even though there had been no event similar to default and there were no concerns as to the borrower’s ability to repay.

Further, the product description made clear that the product was a ‘BTL’ interest-only mortgage. Rental income would be used to meet the interest payments and the repayment of the principal loan would be funded by the sale of the property at the end of the agreed term, or earlier if the borrower chose. The term of an interest-only mortgage was also of importance. The borrower would be expected to arrange his affairs on the basis that, absent some default on his part, he would have 25 years before repayment was required. The right to require repayment on one month’s notice under clause 14 was unqualified, with no restriction on its exercise. There was an inconsistency between the mortgage specifically 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 conflicted with the obligations seemingly being entered into by the offer document. It was also inconsistent with the purpose of the contract, namely to provide a mortgage product with a 25-year term. The lender’s obligation to provide a mortgage for a 25-year term could not fairly and sensibly be read together with a right for the lender to require repayment on one month’s notice.

Conclusion

The Appeal was allowed. The terms of the contract were set out in the mortgage offer. Certain terms in the lender’s standard mortgage conditions were inconsistent with those terms and had not been incorporated into the contract. The lender was therefore not entitled to rely on its standard conditions to increase the variable interest rate or to require repayment on one month’s notice.

In light of the number of different types of documents which can collectively comprise a mortgage loan offer (especially in the context of a commercial secured loan), it is unsurprising that the Court has been called upon to construe the meaning of unclear and contradictory clauses in such legal documents. Usually the Court considers the documents as a whole to resolve apparent inconsistencies. It is only where there is a clear and irreconcilable difference that the Court will resort to any clause dealing with inconsistency in the documents.

This case highlights that standard printed terms cannot always be relied upon to provide a remedy to a lender where there are contradictory specifically negotiated terms of the loan. Therefore, it would be prudent for lenders to carefully review their special agreed terms and standard documents to ensure there is no inconsistency between those documents and to re-write the same where necessary.

Following this case, judges have warned that if a lender requires an ability to terminate the agreement other than following a breach or event similar to an event of default by the borrower, under the loan agreement, it would be prudent to set this out and for such a right to be clearly mentioned in the specifically negotiated offer, otherwise there is a risk that the borrower will be deprived of the benefit of the bargain reached.

For further information regarding this topic or any other property and construction matter, please contact Stephen Brower – Head of Property, Hayley Cloherty – Associate, or any member of Edwin Coe Property team.

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