Unfair Relationship- The Gift that Keeps Giving to Borrowers?

The High Court has recently looked at alleged unfair relationships under s140A of the Consumer Credit Act 1974 (‘the Act’) in the context of mortgaged lending

Greenlands Trading Ltd & Anor v Girolama Pontearso

This case concerned a repossession claim by a lender under an 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 on a number of grounds: primarily on the basis that 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 seeking enforcement and repayment) and further that 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 in circumstances where the borrower had no clear exit strategy.

While on the facts the trial judge held that the default rate of interest was not a penalty as it was an industry standard rate (and found for the lender on the affordability issue) it was determined that  the Default Administration Fee was  a penalty charge giving rise to an unfair relationship. This led the amendment of the terms of the loan to relieve the borrower’s liability to pay the fee.

There was no attempt to justify the default administration fee of £1,995. This was considered to be both penal and unfair, imposing a detriment on the borrower out of all proportion to any legitimate interest of the lender in circumstances where the lender was protected by the costs provisions in the loan agreement, in any event.

Pilgrim Rock Ltd v Mr Iwaniuk

A £1.2m loan had been provided by Brooke Investments Limited to  Mr Iwaniuk  for the purpose of an enterprise between Mr Iwaniuk and Mr Semka to renovate a land site for property development purposes.

The loan was repayable at the end of a 4 year term expiring 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.

Pilgrim Rock Limited took an assignment of the loan.  Pilgrim and Brooke were found to be “alter-egos” for the business interests of Mr Semka.

The loan was not repaid at the end of the term and, when repayment was demanded by Pilgrim  4 years after the end of the term, some £2.74m was owing.

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

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.

The lender’s appeal was dismissed.

The Court held that in determining whether the relationship was unfair under s.140A (2) of the Act it is entitled to have regard to all matters it thinks relevant in determining whether or not a relationship is unfair and such matters are not restricted to matters that can be ascribed as a matter of law to the lender. In this case, the judge had considered the involvement of another individual (Mr Semka) who was the ultimate source of funds behind the lender. The High Court determined that this was an entirely reasonable action for the judge to have taken given that this was not a usual commercial loan “at arm’s length” but a means of Mr Semka funding a venture between him and Mr Iwaniuk.

Hope for Borrowers?

  • In the context of interest rate charges (especially default interest) and fees, lenders may be required to adduce evidence to demonstrate compliance with industry standards. Failure to do so (or to adduce any evidence at all) may render a relationship unfair for the purposes of the Act.
  • The Pilgrim case allows greater scope for the Court to consider the relationship between creditors and borrowers in broader circumstances and allow a consideration of any matter it thinks relevant, including the actions of third parties.
  • The lender’s conduct is important. Undue delay and/or silence in the face of ongoing default and compounded interest will be viewed dimly by the Courts.
  • When an allegation of unfair relationship is raised it is for the lender to rebut it and to prove that the relationship was fair which may prove to be difficult.
  • When an unfair relationship has been determined, the powers of the Court under s.140B of the Act to remedy the position are extensive: this may include requiring the lender to repay any sum paid by the borrower; reducing or discharging any sum payable by the borrower and/or altering the terms of the agreement.

If you feel you have been unfairly charged an interest rate (especially default interest or compound interest) or a fee by a lender or have suffered as a result of the lender’s poor conduct or the possible actions of a third party undertaken on behalf of the lender please get in touch.

JCLM will be happy to review whether such actions may give rise to an unfair relationship for the purposes of the Act.

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