Oct 11 - www.legalmortgage.co.uk
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October 2011
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| Case name | Paragon Mortgages Ltd v McEwan-Peters |
| Neutral citation | [2011] EWHC 2491 (Comm) |
| Legal points | Mortgages/Guarantees - enforcement - estoppel - unfair relationship |
| Summary | An estoppel defence – that a lender would not enforce unless there was at least three months arrears – was not established on the evidence. There was no unfair relationship between the borrower/guarantor and the lender either. There was nothing unfair in enforcing a personal loan, and a guarantee was not a credit agreement. |
| Facts | MP operated a buy to let business funded by P. MP’s accounts were in arrears. P made formal demands and sued to recover the arrears (1) from MP in respect of mortgage loans made to him personally, and (2) from MP as guarantor in respect of a number of guarantees given for loans advanced to MP’s company. MP raised as number of points by way of defence, the two main points being (1) that P had promised not to enforce its legal rights under the mortgages and guarantees unless the arrears amounted to three months, and was therefore estopped from doing so, and (2) that the relationship between him and P was unfair under s 140A etc Consumer Credit Act 1974. |
| Held | As to (1) the estoppel claim, this was an issue of fact and the court had to weigh the conflicting evidence having regard to the observations of Goff LJ in The Ocean Frost [1985] Lloyd’s Rep 1 that “where there is a conflict of evidence…reference to the objective facts and the documents, to the witnesses’ motives and to the overall probabilities can be of very great assistance to a judge in ascertaining the truth”: (a) MP’s evidence as to when and in what circumstances any such promise was given was wholly obscure. (b) Such an assurance was inconsistent with the probabilities. P’s company policy was to threaten enforcement action when any account was 2 months in arrears. There was no reason to accord MP greater flexibility. (c) The most that could be said was that P made it plain that if arrears exceeded 3 months enforcement would occur. This is a quite different matter from undertaking not to take enforcement action if the arrears were less than 3 months. (d) Even if some unequivocal assurance had been given it remained wholly unclear on what basis MP asserted an alteration of position (let along a detriment) flowing from such reliance on it. (e) Any promise was merely suspensive. As to (2) the unfair relationship defence, the point cannot arise under the guarantees as they do not constitute credit agreements: Paragon Mortgages Ltdv Hyah (unrep) 29 Nov 2010 per HHJ Pelling QC, applied. The demands on the personal loans were not unfair: (a) The mere fact the mortgages were repayable on demand is not unfair. (b) The demands were not prompted by some improper motive. (c) The accounts had been substantially in arrears. (d) The whole of the business was in ‘terminal trouble’. Judgment for P. |
| Case name | British Arab Commercial Bank Plc v Ahmad Hamad Algosaibi |
| Neutral citation | [2011] EWHC 2444 (Comm) |
| Legal points | Charging Orders - priority between competing creditors - "first past the post principle" |
| Summary | Although the court has a discretion in s 1(1) Charging Orders Act 1979 and CPR 73.4(2), CPR 73.8(2) to make a charging order, this case confirms that a judgment creditor can normally expect the court to make an order unless there are exceptional circumstances. The mere fact that other creditors will be prejudiced will not per se be sufficient. There has to be undue prejudice. In relation to competing creditors, the “first past the post” principle applies. |
| Facts | HSBC and a number of other claimant banks obtained substantial money judgments against the defendants. HSBC was first off the mark in applying for and obtaining interim charging orders against five properties and the shareholding in a company which owned the freehold in one of them, and in which the defendants had beneficial interests. Following service of the interim charging orders, the other banks were prompted to apply for their own charging orders, and interim orders were duly made. HSBC applied for final orders which the other banks resisted on the basis that it would give priority to HSBC in enforcing its judgment which would be unfair and prejudicial. HSBC argued that where there is no compulsory statutory regime of insolvency or bankruptcy applicable which requires an apportionment, the historic “first past the post” rule applies on enforcement of judgments. The other banks argued that notwithstanding the existence of such a compulsory statutory regime, the court had a discretion in CPR 73.8(2) and should adopt a solution which apportioned any recovery pari passu. |
| Held | Following an extensive review of the authorities, the court affirmed the decision of Cooke J in F G Hemisphere v Republic of Congo [2005] EWHC 3103 (Comm) that in non-statutory insolvency regime cases, the “first past the post” principle applies. This is the general rule, to which there may be exceptions when it is appropriate in the exercise of the court’s discretion under s 1 Charging orders Act 1979 and CPR 73.8 not to make a charging order final. However, the discretion is not a general one at large. Section 1(5) talks of creditors being “unduly prejudiced” by the making of a charging order. The prejudice can only be said to be “undue” if there is something about the judgment creditor’s conduct which would cause undue prejudice if there was a final charging order or if there are some other exceptional circumstances, which mean that other creditors will suffer some prejudice over and above the prejudice they would inevitably suffer if an order were made in favour of the judgment creditor. Some examples were given in Burston Finance v Godfrey [1976] 1 WLR 719 per Megaw LJ and Shaw LJ – these involved what may be described as “sharp conduct”. On the facts, HSBC’s was entitled to priority. There was nothing inequitable in HSBC’s conduct to disapply that the general rule that the charging orders should be made final. (The court adjourned the hearing to make the charging orders final pending a hearing to determine the beneficial interests of the defendants). The decision is reviewed in the New Law Journal for 7 Oct 2011 (NLJ 2011 161 (7484) 1370). |
| Case name | Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley |
| Neutral citation | [2011] EWHC 1380 (QB) |
| Legal points | Guarantee - non est factum - undue influence/misrepresentation |
| Summary | On the facts, a guarantee was set aside on the grounds of non est factum and undue influence. |
| Facts | The claimant trustees of a retirement benefit scheme were the freehold owners of commercial premises in Nottingham. They entered into a lease of the premises with a tenant company. The defendant signed a guarantee for the rent and other obligations of the company. The tenant company went into liquidation. The claimants sued on the guarantee for arrears of rent and damages for breach of repairing covenant. The defendant sought to defend the claim on a number of grounds including non est factum and undue influence. |
| Held | Both defences were made out. In respect of non est factum, applying the principles in Saunders v Anglia Building Society [1971] AC 1004, a person would not be bound by a deed he has signed if he made a fundamental mistake as to the nature of the transaction and had taken all reasonable precautions available to him before signing to ascertain the nature and purpose of the deed being signed. Here, the defendant genuinely believed that he was simply witnessing other signatures on a legal document. He had been induced to sign it as a result of the misrepresentations conveyed to him by a director of the tenant company. In respect of undue influence, applying Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773 all the ingredients had been made out. The court noted that in an appropriate case, a misrepresentation that procures a signature to a guarantee can amount to undue influence. Further, this was a transaction upon which the defendant should have been advised to take independent legal advice. |
| Comment | This is not a mortgage case, but it provides an example of the application of the principles of non est factum and undue influence, which occasionally arise in mortgage cases. Unusually, the non est factum defence succeeded, although both this and the undue influence defence, were substantially supported by misrepresentations. |
| Case name | Mortgage Express v Iqbal Hafeez Solicitors |
| Neutral citation | (unrep) Chancery Division 10 Oct 2011 |
| Legal points | Solicitors - liability for release of mortgage advance |
| Summary | A firm of solicitors had acted in breach of the Council of Mortgage Lenders’ Handbook and the Solicitors Practice Rules 1990 in disbursing a mortgage advance to a fictitious firm of solicitors. |
| Facts | IH solicitors acted on behalf of X who had purportedly purchased three properties, subject to contract. X arranged mortgage finance through brokers with ME. ME duly instructed IH in accordance with the CML Handbook for England and Wales and the Solicitors Practice Rules 1990 and subsequently transferred the mortgage advance to IH who in turn transferred it to solicitors who purported to act for the vendors. The transaction was a fraud. The properties were not for sale and the solicitors who purported to act for the vendors did not exist. ME claimed the return of the monies from IH. |
| Held | ME was entitled to judgment. Lloyds TSB Bank Plc v Markandan & Uddin [2010] EWHC 2517 (Ch) applied. IH’s principal was incompetent. He was naïve and had not maintained good professional standards. In breach of the CML Handbook or the Solicitors Practice Rules he was not familiar with the solicitors who purported to act on behalf of the vendors and had failed to carry out the necessary checks. He held the monies he received from ME on trust and by disposing of the monies he had clearly acted in breach of trust. The solicitor was not entitled to relief under s 61 Trustee Act 1925 either. |
| Comment | For the professional conduct of solicitors see now the SRA Handbook which came into force on 6th October 2011. |
| Case name | Harrison v Black Horse Ltd |
| Neutral citation | [2011] EWCA Civ 1128 |
| Legal points | Payment Protection Insurance - commission - unfair relationship |
| Summary | Non-disclosure of the extent of commission on the sale of a PPI policy did not create an unfair relationship for the purposes of s 140A etc Consumer Credit Act 1974. The court was guided by the regulatory framework in ICOB which did not contain a duty of disclosure. |
| Facts | Borrowers sought to recover the cost of payment protection insurance purchased in 2006 at the same time as they negotiated a loan. The claim was based on the unfair relationship provisions in s 140A etc Consumer Credit Act 1974 and relied in particular on the failure by the lender to disclose to the borrower that it would receive commission from the insurer on the sale of the PPI. What was said to give rise to unfairness was that the commission was disproportionate to the actual cost of the insurance. The premium was £10,200 of which 87% was retained by the lender. In other words, the commission was 677% of the cost of the insurance. The trial judge dismissed the borrowers’ claim. The borrowers appealed, principally having regard to the lender’s compliance with the Insurance Conduct of Business Rules (ICOB). |
| Held | In respect of the unfair relationship provisions: (1) It is the relationship between the parties which must be determined to be unfair, not their agreement, although it is envisaged that the terms of the agreement may themselves give rise to an unfair relationship. (2) Although s.140A is directed at determining unfairness to the debtor, in reaching that determination the court must have regard to matters relating to the creditor as well as matters relating to the debtor. (3) Unlike provisions such as the Unfair Contract Terms Act 1977, which offers in Schedule 2 “Guidelines for Application of Reasonableness Test” or The Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999 No 2083), Schedule 2 of which is an “Indicative and Non-Exhaustive List of Terms which may be regarded as unfair”, s.140A of the Act offers no guidance in respect of factors which either may or must be regarded as rendering a relationship unfair to the debtor. However, the advice and information published by the Office of Fair Trading (OFT 854: “Unfair Relationships – Enforcement action under Part 8 of the Enterprise Act 2002) points the court in the direction of the regulatory framework. The ICOB Rules contain no general requirement to disclose either the receipt of commission or its extent. Whilst the size of the commission was on any view quite startling and there would be many who regard it as unacceptable conduct on the part of as lending institution to have profited in this way, it was difficult to spell out of the mere size of the undisclosed commission an unfairness in the relationship between lender and borrower. It would be an anomalous result if a lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness under s 140A of the Act but yet not be obliged to disclose it pursuant to the statutorily imposed framework under which it operates. There is also a difficult issue as to where the line should be drawn. How large must the commission be before there is held to be a conflict of duty and interest? Finally, a seller is not ordinarily obliged to warn his buyer that his product is expensive. The lender was not obliged to warn its borrower that the same cover could be obtained more cheaply elsewhere. It was irrelevant to the borrowers that the high price they were paying contained a substantial element of reward for the lender. The court was also fortified in its conclusions by two FSA reports which concluded that rates of commission did not generate a duty of disclosure which, if not discharged, would be productive of unfairness in the relationship between lender and borrower. Appeal dismissed. |
| Publication | CML NEW GUIDANCE ON ARREARS AND POSSESSIONS |
| The Council of Mortgage Lenders has published new guidance on arrears and possessions to help lenders comply with their obligations under the Mortgage Conduct of Business Rules (MCOB) and the principles for treating customers fairly (TCF). A summary of the new guidance, and a link to the detailed guidance itself, is available on the CML website. The guidance contains comment and recommendations on policies and procedures on some key topics including: • Allowing the customer to remain in possession for a reasonable period to effect a sale – recommending the use of assisted voluntary sales • Not to repossess the property unless all other reasonable attempts to resolve the position have failed • Capitalising payment shortfalls • Using Government forbearance initiatives • How to pursue payment shortfalls • Avoiding undue pressure on customers • Selling the property and pursuing shortfall debts • The use of field agents (debt counsellors/debt collection agents) • Having a clear policy to deal with mortgage payment protection insurance claims • Good practice in relation to court proceedings |
| Publication | OFT UPDATED GUIDANCE ON DEBT COLLECTION |
| The Office of Fair Trading has published updated guidance for all businesses engaged in the recovery of consumer credit debts. It also identifies conduct that, in the OFT’s view, may constitute an unfair or improper practice for the purposes of s 25(2A)(e) of the Consumer Credit Act 1974 and provides some illustrative examples. The guidance is set out as follows: Chapter 1: Introduction – sets out the section 25 ‘fitness test’ under the Act and the purpose and scope of the guidance. Chapter 2: Overarching principles of fair business practice – sets out overarching principles of consumer protection and fair business practice which, in the OFT’s view, apply to all businesses engaged in the pursuance of the repayment of consumer credit debts. Chapter 3: Unfair or improper business practices – sets out behaviours the OFT considers may fall within the category of ‘unfair or improper’ business practices and which, if engaged in, may call into question a person’s fitness to retain, or be granted, a consumer credit licence. Chapter 4: Regulatory compliance and enforcement – outlines the OFT’s approach to securing compliance and provides further information on the regulatory options available to them. |
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