Summary of ‘PAG 118 v West Bromwich’

June 9, 2016

The Court of Appeal has handed down its judgment in Alexander (as representative of Property 118 Action Group) v West Bromwich Mortgage Company Ltd [2016] EWCA Civ 496. The lead judgment was by Hamblen L.J. Full judgment text available here: PAG118 v West Bromwich.

The product was a buy-to-let interest-only tracker mortgage, with a term of 25 years. The Court of Appeal allowed the borrower’s appeal and held that two of the terms in the lender’s standard conditions (“the Conditions”) were inconsistent with the special terms in the Offer Letter (“the Offer”). For this reason, the relevant terms in the Conditions were not incorporated into the mortgage contract.

General Approach to Inconsistent Terms

The Conditions in this case included an inconsistency clause, providing that in the event of any inconsistency, the special terms in the Offer would prevail.

[35]-[36]: Where the contract includes an inconsistency clause, the general approach that the Court should be reluctant to find inconsistency does not apply; one should not strive either to avoid or to find inconsistency.

[41]: inconsistency “extends to cases where clauses cannot ‘fairly’ or ‘sensibly’ be read together; not merely cases where they cannot literally be read together”; the Court must also have due regard to considerations of “reasonableness and business common sense”.

[47]: Another relevant consideration is the “importance or centrality” of the specially agreed term (i.e. here the terms in the Offer); if the specially agreed term sets out the “main purpose” of the contract, then a standard term which is inconsistent with that purpose is likely to be found a term which cannot “fairly” or “sensibly” be read together with it.

[47]: A standard term which confers a “wide ranging right or liberty” may also be inconsistent; it is no answer to say the right or liberty is only likely to be exercised in certain circumstances.

Interest Variation

The Offer provided that the interest rate would be fixed at 6.29% until a certain date, and thereafter at a variable rate of 1.99% above BoE base rate: “After 30th June 2010 your loan reverts to a variable rate which is the same as the Bank of England Base Rate, currently 5%, with a premium of   1.99%, until the term end, giving a current rate payable of 6.99%. Any applicable change in the Bank of England Base Rate will be applied to your account on [dates]” [emphasis added]

However, clause 5 of the Conditions provided: “The rate of interest charged may be varied by us from time to time, except during periods when the Loan is expressed to be at a fixed rate of interest”, with an obligation to notify the borrower of any variations and specified grounds for discretionary variation.

[29]: the CA finds it would be the “starting assumption of reasonable parties negotiating and agreeing a tracker mortgage” that it would involve a rate which tracks, and therefore only varies in accordance with, the specified base rate. However, the CA also accepts that “tracker mortgage” is not a term of art, and all depends on the particular terms.

[52]: the reference to interest rates in the Offer is “integral” to the product description; [60] to provide such a product was the “main purpose” of the contract.

[54]: there is “no hint” in the Offer that the rate would ever be varied otherwise than in accordance with the base rate; this would be entirely consistent with the reasonable parties’ general understanding of a tracker mortgage.

[59]: the clause 5 grounds of variation  were an “entirely different method of varying the rate” than that referred to in the Offer.

[60]: The wide terms of clause 5 enable the lender to change the product described in the Offer to “something else entirely”, and not provide the product contracted for.

[62]: The two terms (clause 5 and that in the Offer) could not be “fairly” or “sensibly” read together: the lender would only be agreeing to provide the product tracking the base rate “unless and until he decides to vary the rate” and accordingly “he is effectively under no obligation to provide it”; that is “negation, not modification or qualification”.

[71]: The CA concludes clause 5 is inconsistent with the special terms in the Offer and therefore not incorporated.

Repayable on One Month’s Notice

In the Offer, the repayment method was described as “interest-only” and the tern as 25 years; the emphasis was on the need to ensure the borrower could repay the capital at the end of the term.

However, clause 14 of the Conditions provided that the loan was also repayable in full upon 1 month’s notice (without any requirement for default).

[77]: It was of “considerable importance” that this was a “buy-to-let” mortgage; the parties would reasonably contemplate that the rental income would be used to meet the mortgage interest payments and repayment of the principal would be funded by sale of the property at the end of the term.

[78]: the 25 year term was also of “central importance”; the borrower would be expected to arrange his affairs on the basis that, absent default, he had 25 years until repayment was required.

[79]-[80]: the right to call in the loan on 1 month’s notice was “unqualified” and would entitle the lender to “turn the borrower’s contemplated business arrangements on their head”.

[81]-[83]: clause 14 is inconsistent with the main purpose of the mortgage contract, viz to provide a product of the specified description; it “emasculates” the lender’s obligations in the Offer and renders them “optional”; the obligation to provide the product for the 25 year term is effectively negated.

[85] and [87]: although 25 years was a long time and circumstances could change, this was not comparable to the borrower’s right to effect early repayment; there is a “world of difference” between the consequences of early repayment for the lender and the borrower.

[92]: Sir Brian Leveson P, in a short supporting judgment does not rule out the possibility that a lender might be able to specify circumstances other than default entitling it to terminate early, but such circumstances would have to be “clear on the face” of the Offer and “carefully circumscribed so as not to deprive the Borrower of the benefit of the bargain”.

Summary by Ruth Bala