Alleged ‘unfair relationships’ considered by High Court

• United Kingdom

• Financial services disputes and investigations

21-05-2019

Summary

In two recent decisions, the High Court has examined alleged unfair relationships under s140A of the Consumer Credit Act 1974 (‘the Act’)  in the context of secured lending. Greenlands illustrates the approach taken by the court in considering whether default rates of interest were penalties that gave rise to an unfair relationship and underlines the importance for lenders of adducing evidence to support the fairness of practices albeit that need not necessarily be ‘expert’ evidence. Pilgrim demonstrates that the acts and omissions of third parties can be relevant matters under s140A(2) of the Act, when the court is considering the fairness of the terms of the credit agreement or a related agreement under s140A(1)(a) of the Act.

Greenlands Trading Ltd & Anor v Girolama Pontearso^[1]  (‘Greenlands’)

This case concerned a repossession claim by a lender under a short term unregulated second charge bridging loan which provided for a monthly rate of interest of 1.45%, increasing to 3% on default together with a Default Administration Fee of £1,995.

The borrower sought relief under section 140B of the Act alleging that the relationship with the lender was unfair because (1) the default rate of interest and Default Administration Fee were penalties as they imposed a detriment on the borrower out of proportion to any legitimate interest of the lender in the enforcement of repayment and (2) the lender had failed to make any, or any adequate assessment of the borrower’s ability to repay the mortgage at the end of its term, with the borrower having no clear exit strategy.

At first instance, the Judge found that the default rate of interest was not a penalty having accepted oral evidence from the mortgage broker that it followed the industry standard and from a director of the lender that whilst it was partly a deterrent it also reflected a change to the risk to the lender in the event of default. No evidence had been provided in relation to the Default Administration Fee and it was found to be a penalty, giving rise to an unfair relationship, warranting the amendment of the terms of the loan to discharge the borrower’s liability to pay the fee.  The Judge accepted on the evidence that the borrower had a clear exit strategy, being the intention to re-mortgage one or more properties and found for the lender on the affordability issue.

The borrower’s appeal was dismissed.  The court rejected the argument that the Judge had erred in allowing non-expert evidence on the default rate, in circumstances where the borrower did not have an opportunity to counter the same and, in finding that 3% per month was an industry standard default rate which was not a penalty or unfair, because it was within the Judge’s discretion to allow the evidence and the Judge’s finding on the rate and its fairness would not be interfered. The court also rejected the argument that when considering the test for unfairness under the Act, the Judge had erred following the decision in Chubb v Dean[2] (‘Chubb’), which appeared to articulate the test for unfairness based upon the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”). Chubb pre-dates Plevin v Paragon Personal Finance Ltd^[3] (‘Plevin’)which specifies the test to be followed when considering whether an unfair relationship arises and the considerations under Plevin are far broader than the test under the UTCCR. The court held that it was not apparent that the Judge had placed particular reliance on Chubb over Plevin. The court also held that it would not interfere with the Judge’s finding on the question of the customer’s exit strategy, the Judge having had the benefit of being immersed in all of the facts in much more depth than the appellate court.

The borrower had not stated in evidence that she considered the default rate to be unfair, either at the time of entering into the loan or with the benefit of hindsight and the court commented (obiter) that the question of whether a relationship is unfair is not limited by the perception of the borrower as it is a question for the court’s objective assessment.

Pilgrim Rock Ltd v Mr Iwaniuk^[4]  (‘Pilgrim’)

Pilgrim Rock Limited (‘Pilgrim’) had taken an assignment of a loan made by Brooke Investments Limited (“Brooke”) to Mr Iwaniuk.  Pilgrim and Brooke were found to be “alter-egos” for the business interests of Mr Semka.  A £1.2m loan had been advanced to Mr Iwaniuk for the purpose of an informal joint venture between Mr Iwaniuk and Mr Semka to renovate some real estate. The loan was repayable at the end of a 4 year term on 31 October 2010 and provided for a rate of interest of 6% per annum up to the end of the term and a default rate of interest of 9% after the end of the term with interest compounded on a quarterly basis. The loan was not repaid at the end of the term and, when repayment was demanded 4 years after the end of the term, £2.74m was owing.

At first instance, the court had found that there was an unfair relationship under the Act due to (1) the terms of the loan, specifically the compounding of interest, which was found to be a non-standard provision and more onerous than terms that could have been obtained on the open market (s140A(1)(a) of the Act) and (2) the way in which the creditor had enforced its rights under the agreement, specifically, the manner in which the creditor had taken no action to recover the debt for many years, allowing the debt to accumulate to such an extent that Mr Iwaniuk could not reasonably expect to repay the same, which no reasonable lender would do (s140A(1)(b) of the Act).

The court therefore varied the terms of the agreement to provide for a rate of interest of 1.25% per annum over the Bank of England base rate with compounding on an annual basis. Pilgrim appealed, stating that the Judge had wrongly relied upon matters pertaining to the relationship between Mr Semka and Mr Iwaniuk, when there had been no finding by the Judge that Mr Semka was Pilgrim’s agent (for the purposes of s140A(1)(c) of the Act) or associate (for the purposes of s140A(3) of the Act).

The appeal was dismissed. The Judge had not concluded that Mr Semka, had done anything, or failed to do something, that made the relationship unfair. He had held that the terms of the loan agreement made the relationship unfair, and that Pilgrim's own conduct after the date of the expiry of the term had made the relationship unfair. Furthermore, pursuant to s140A(2) "The court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor)". This meant that the court's enquiry was not limited to matters legally attributable to the creditor. The Judge also found that the terms of the loan agreement and Pilgrim's enforcement should be assessed in the context of it not being a commercial loan at arm's length but a means of Mr Semka funding a joint venture agreed between him and his friend, the defendant, and in that context, the terms of the loan agreement and the method of enforcement by Pilgrim, made the creditor-debtor relationship unfair to the defendant. Finally, Pilgrim’s basis for appeal was flawed in that it had failed to “distinguish between two separate matters material to the assessment of unfairness under s.140A. On the one hand, there are questions of attributing to the creditor acts or omissions of other persons, where acts or omissions are relied upon for the contention that the relationship arising out of the credit agreement is unfair. On the other hand, there are matters relating to the circumstances of the creditor and debtor, and the background to, and true nature of the transaction between the creditor and the debtor, including whether or not it is commercial or quasi-commercial in nature. These are two quite different things.”

Pilgrim had also sought, in the alternative, to challenge the amendment of the interest rate and compounding provisions on the basis that they were unreasonable.  The court found that the amendments were within the scope of the Judge’s discretion and were not unreasonable such that no judge could have reached the same decision.  

[1] [2019] EWHC 278 (Ch)        

[2] [2013] EWHC 1282 (Ch)       

[3]  [2014] UKSC 61

[4] [2019] EWHC 203 (Ch)