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January 2019

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Pontearso v Greenlands Trading Ltd (Unrep) Ch D Nugee J 16 January 2019 Short term lending – interest rates – unfair relationship Pilgrim Rock Ltd v Iwaniuk (Unrep) Ch D Fancourt J 17 January 2019 Unfair relationship – terms and enforcement – variation of agreement TFG Security Ltd v Shade (Unrep) Ch D HHJ Kramer 22 January 2019 Unregulated business lending – exemption – estoppel - penalty - unfair contract terms – unfair relationship Unregulated business lending – exemption – estoppel - penalty - unfair contract terms – unfair relationship
Case name Neutral citation Legal points Case summary Facts Held Comment Pontearso v Greenlands Trading Ltd (Unrep) Ch D Nugee J 16 January 2019 Short term lending – interest rates – unfair relationship The High Court dismissed an appeal against an order for possession and money judgment, in which the judge had accepted the lender’s evidence about industry standard default rates of interest and rejected a defence of unfair relationship. Borrower obtained a 6-month bridging loan secured on a residential property with a default interest rate of 3% per month. Her exit strategy was to refinance a separate commercial property to repay the loan. Following default, borrower accepted a further bridging loan, also for 6-months with a default interest rate of 3% per month, with a similar exit strategy. Following further default, lender sued for possession and a money judgment. Borrower defended on the basis of an unfair relationship. At trial, there was no expert evidence about industry standard rates, but the judge accepted the lender’s evidence and made the orders sought. Borrower appealed, contending the judge had erred (1) in accepting that 3% was an industry standard rate, and was fair, (2) relying on Chubb v Dean [2013] EWHC 1282 (Ch) which used an unrelated test for unfairness, and (3) finding that the borrower had a workable exit strategy when taking out the second loan. (1) Allowing non-expert evidence about default interest rates was a case management decision which was open to the judge. The judge’s decision to accept 3% was a factual finding which was difficult to overturn. It was not plainly wrong. The judge’s finding that the rate was not penal or unfair was an evaluative judgment and it was not possible to interfere with it. (2) The exercise for determining whether a relationship was unfair under s 140A Consumer Credit Act 1974 was not identical to that for determining if a term was unfair under the Unfair Terms in Consumer Contracts Regulations 1999. S 140A involved a wide breadth of relevant considerations (Plevin v Paragon Personal Finance Ltd [2014] 1 WLR 4222) whereas the Regulations involved a specific list. The judge should have followed the test in Plevin. Even if the judge considered that Chubb supported his decision, that was permissible judicial thinking. Judgments should not be construed too harshly, especially if given shortly after the hearing. (3) The court should not substitute its own view of the likelihood of an exit strategy working. The judge’s conclusion that the borrower had a possible exit strategy was not wrong. Overall, the question of whether a relationship was unfair was not limited by the borrower’s perception, otherwise, the less a borrower understood, the more difficult it would be to establish an unfair relationship. Unfairness is for the court’s objective assessment. Appeal dismissed. All lenders, particularly those involved in unregulated, short-term, secured lending, will need to anticipate the risk of challenge of an unfair relationship when things go wrong. If a point is taken about the rates of default interest and other charges, lenders may need to adduce admissible evidence about industry standards (bearing in mind that under s 140B(9) CCA 1974, the burden is upon the lender to prove that the relationship is not unfair). In this case, it was open to the trial judge to accept evidence from the lender. It is understood that a 3% per month default rate is accepted as an industry standard by the Association of Short Term Lenders. Note that the Unfair Terms in Consumer Contracts Regulations 1999 were revoked in respect of contracts entered into from 1st October 2015, and (largely) replaced by the Consumer Rights Act 2015.
Case name Neutral citation Legal points Case summary Facts Held Comment Pilgrim Rock Ltd v Iwaniuk (Unrep) Ch D Fancourt J 17 January 2019 Unfair relationship – terms and enforcement – variation of agreement The High Court dismissed an appeal against a first instance finding of an unfair relationship in a case involving expensive terms and a delay in enforcement. Borrower defaulted in repayment of a £1.2M loan to fund an informal joint venture with the lender. The contractual rate of interest was 6% compounded quarterly, rising to 9% on default. The judge found that the lender had failed to discharge the burden of proving that the relationship was not unfair under s 140A Consumer Credit Act 1974. Lender had done nothing to enforce the loan but had allowed default interest to accrue for four years. The judge gave judgment for the principal sum with interest reduced by compounding annually rather than quarterly, and by lengthening the term. Lender appealed, contending the judge had erred in his findings about the joint venture, and that even if the relationship was unfair, he had erred in the exercise of his discretion to vary the terms of the loan. ‘Unfairness’ could arise in any one of the three ways listed in s 140A(1), (a) the terms of the agreement, (b) the way in which the creditor had enforced its rights under the agreement, (c) any other thing done or not done by or on behalf of the creditor. Further, the court could take into account all matters it thinks relevant under s 140A(2). The judge found that the relationship was unfair because of (a) the terms of the loan, and (b) the way in which the lender sought to enforce its rights. This was as a result of the escalation of the interest rate at the end of the fixed term and because the interest rate provisions were more onerous than terms obtainable on the open market, and also because interest was compounded quarterly and the lender had done nothing for four years to notify the borrower of the debt or to enforce the loan. In view of the reasons he had given about unfairness, the judge’s variations to the loan agreement were not unreasonable and were within the scope of s 140B. Appeal dismissed. This may be a slightly unusual case involving ‘connected parties’ and some sort of joint venture. What the court clearly did not like was the combination of expensive charges, exacerbated by a delay in enforcement which was sufficient to give rise (both individually and collectively) to an unfair relationship. Once the court has made a finding of unfair relationship, it has fairly extensive powers under s 140B to make a range of orders, including (as here) altering the terms of the agreement under s 140B(1)(f).
Case name Neutral citation Legal points Case summary Facts Held Comment TFG Security Ltd v Shade (Unrep) Ch D HHJ Kramer 22 January 2019 Unregulated business lending – exemption – estoppel - penalty - unfair contract terms – unfair relationship The court allowed an unregulated lender to enforce a second charge business loan in the face of arguments about regulatory compliance, penalties, unfair contract terms and unfairness generally. In 2014, T, an unregulated, short-term lender, advanced a total of £209,400 to Mr & Mrs S on the security of a second legal charge over their home. It was common ground that this was not a regulated mortgage contract at the time it was entered into, and in order to exempt the agreement from being a regulated credit agreement, T relied on a form of declaration for business use, which was signed by Mr & Mrs S separately following receipt of independent legal advice. Following default in repayment, T commenced proceedings for possession and a money judgment, with default interest running at 4% per month. Despite initially conceding the claim, subject to seeking time to refinance, Mr & Mrs S instructed solicitors and counsel who settled a highly detailed and technical defence, taking a number of points about regulatory and statutory compliance, penalties, unfair contract terms and an unfair relationship under s 140A etc Consumer Credit Act 1974. They subsequently attended trial as litigants in person. (1) As to regulatory compliance, the declaration for exemption relating to business in CONC App 1.4.8 was not strictly in the proper form and T could not therefore rely on the presumption for business borrowing in Art 60C(5) Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. However, having regard to all the evidence, the court was satisfied that T had established on a balance of probabilities that the agreement was being entered into by both borrowers wholly for the purposes of a business carried on by them. In addition, Mr & Mrs S were estopped by their clear representation, made in the form of the declarations, to the same effect, which they acknowledged they understood and had willingly signed following receipt of independent legal advice (applying Fortwell Finance Ltd v Halstead [2018] EWCA Civ 676 and Waterside Finance Ltd v Karim [2012] EWHC 2999 (Ch)). (2) As to penalties, this principally concerned the default interest rate of 4% per month, as to which TFG conceded that it was charged partly as an incentive to secure payment and avoid default. Applying Makdessi v Cavendish Square Holdings BV [2016] AC 1172, the interest rate provision imposed primary obligations and were not susceptible to challenge. In any event, the rates charged secured the legitimate interest of securing performance. (3) As to unfair contract terms, whether considered under the Unfair Terms in Consumer Contracts Regulations 1999 or the Consumer Rights Act 2015, Mr & Mrs S did not enter into the agreement as a ‘consumer’ for the purposes of the statutory provisions, and in any event, the interest rate provision specified the main subject matter of the contract and was not susceptible to assessment for unfairness. (4) As to unfair relationship, having regard to all the evidence, there was no imbalance in the respective bargaining powers of the parties (Mr & Mrs S acted through their own solicitors and brokers) and the terms for repayment were clear and had been clearly understood. Indeed Mr & Mrs S’s complaint was not that TFG’s terms for repayment were unfair, but that they had been let down by their broker and had been unable to refinance at the end of the term. However, the court recognised that the accumulation of default interest at 4% when set against the Association of Short Term Lender’s standard default rate of 3%, added substantially to the cost of refinance, so the rate would be reduced to 3% per month, together with a slight reduction in an additional exit fee (from £4,000 to £1276). Order for possession in 28 days (subject to TFG’s concession to delay enforcement for a further 28 days subject to terms). Money judgment adjourned generally with permission to restore (reserved to the trial judge). This case is significant in two main respects: (1) it recognises the scope for estoppel arguments in the face of strict regulatory compliance, and (2) it significantly reduces the scope for challenge about interest rates and charges as giving rise to common law penalties, unfair contract terms or creating an unfair relationship generally.