The High Court in this case has held that the capitalisation of mortgage arrears was not liable to regulation by the Consumer Credit Act 1974 where it did not amount to "credit in the form of a cash loan" within the Consumer Credit Act 2006 (Commencement No. 4 and Transitional Provisions) Order 2008 art. 4(1) but instead was the mere restructuring of an existing agreement by allowing more time to pay without making new funds available.
Santander UK plc (the “Bank”) made a loan of £500,000 to Mr and Mrs Harrison (the “Borrowers”) in 2006 and secured the amount by way of a charge over their property (then worth £900,000). By June 2008 they were in arrears to the extent of £8,968.92. The Bank agreed with the Borrowers to capitalise the arrears by adding them to the outstanding balance of the mortgage account. The Borrowers’ monthly repayments were increased accordingly and the Borrowers failed to make payments in accordance with these revised terms.
The Bank brought possession proceedings against the Borrowers and obtained an Order for Possession. The Bank’s Claim, described by The Hon. Justice Males as “apparently straightforward”, was defended by the Borrowers on a number of grounds and the Borrowers subsequently applied for permission to appeal in the High Court.
The Borrowers argued that the agreement to capitalise the arrears brought the loan agreement within the scope of the Consumer Credit Act 1974 (the “CCA 1974”). Their reasoning for this was that the agreement to capitalise the arrears was a "modifying agreement" within the meaning of section 82(2) of the CCA 1974.
From 6 April 2008, section 2 of the Consumer Credit Act 2006 (the “CCA 2006”) removed the £25,000.00 limit on regulated credit under CCA 1974. Transitional provisions in the Consumer Credit Act 2006 (Commencement No. 4 and Transitional Provisions) Order 2008 (the “Transitional Provisions”) also provided that the removal of the limit did not apply to variations to existing agreements unless "credit in the form of a cash loan” was provided. The Borrowers argued that the effect of the capitalisation agreement was to provide credit in the form of a cash loan.
Therefore, they argued, the loan agreement was regulated by the CCA 1974 and the Bank should have served default notices before enforcement. The Borrowers stated that these failures were not capable of being remedied, with the consequence that the loan agreement was unenforceable and the security over their property was worthless.
The Borrowers also raised an issue regarding the Bank’s ability to bring the possession proceedings in the first place. They submitted that they had discovered by means of the Data Protection Act 1998 that the Bank's rights under the loan agreement had been assigned to a third party under a securitisation agreement. Further, they argued that their discovery of this fact constituted the necessary express notice needed under section 136 of the Law of Property Act 1925 for the right to sue to have been legally assigned from the Bank to the third party. This argument was raised as an alternative ground should the Court find that the loan was not regulated by the CCA 1974 (as the Bank’s right to sue would not be affected if the loan was regulated).
The Hon. Justice Males (the “Judge”) heard the Borrowers’ application and granted permission to appeal (in part) but dismissed the appeal.
He held that the mere restructuring of an existing agreement by allowing more time to pay without making new funds available did not constitute a "cash loan" for the purpose of the Transitional Provisions. The extension of time constituted the giving of a form of financial accommodation. He held that dealing with the variation as a financial accommodation correlated with the natural meaning of the words and gave effect to the distinction between providing credit in the form of a cash loan and providing other types of credit.
The Judge was not convinced by the Borrowers’ argument that the arrears being added to the outstanding capital amount would necessarily be the making of a cash loan. He stated that, unless arrears were written off altogether, to allow further time to pay only meant that such arrears had to be added to the amount the borrower had to pay; the timing of the repayment obligations changed, but the overall effect was neutral. Furthermore, he stated that it would be “startling” and a “trap” to the Bank if a routine deferral of an instalment under an unregulated credit agreement, even if valid and enforceable when made, could cause the whole agreement to become unenforceable.
As there was no authority on the meaning of "credit in the form of a cash loan", the Court was prepared to give permission to appeal on the capitalisation issue. However, no cash loan was provided, so the appeal was dismissed.
The Borrowers’ second ground for appeal (regarding the Bank’s assignment of rights to a third party) was also dismissed. The Judge outlined that Banks commonly assigned their rights under loan agreements while remaining entitled to receive payments and being the registered holders of legal charges. The loan agreement was not regulated under the CCA 1974 so permission to appeal on that issue was refused.
It is worth noting that the Bank may not have been successful if, for example, it had offered to capitalise arrears on a second charge to a third party lender that ranked behind the Bank’s first charge. This would not have been classed as a restructure but would potentially have been a further cash loan.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.