Heath v Southern Pacific Mortgage Ltd; [2009] EWCA Civ 1135; [2009] WLR (D) 320

FAIR TRADING — Consumer credit — Agreement — Mortgage agreement between claimant mortgagee and defendant discharging prior mortgage from advance and using remainder for own purposes — Defendant contending mortgage constituting “multiple agreement” in two “parts” providing restricted-use and unrestricted-use credit — Whether mortgage in two categories forming separate consumer credit agreements — Whether enforceable — Consumer Credit Act 1974 (c 39), s 18

Heath v Southern Pacific Mortgage Ltd

[2009] EWCA Civ 1135; [2009] WLR (D) 320

CA: Waller, Dyson, Lloyd LJJ: 5 November 2009

A consumer credit agreement which provided for the redemption of an existing smaller mortgage loan and left the remainder as credit comprised one agreement for the purposes of the Consumer Credit Act 1974.

The Court of Appeal so stated when dismissing the appeal of the defendant, Jayne Elizabeth Heath, against a decision of Judge Purle QC sitting as a judge of the Chancery Division [2009] EWHC 103( Ch); [2009] Bus LR 984, that an agreement made with the claimant, Southern Pacific Mortgage Ltd, exceeding the limit for regulation under the Consumer Credit Act 1974 was not a “multiple agreement” in two “parts” within section 18(1)(a) of the Act so that each part was regulated. The defendant, who had a mortgage advance on which some £19,000 was outstanding and wished to obtain further credit on the security of her house, had obtained an offer from a different lender of a loan of almost £29,000 gross to be secured on a first legal mortgage of the house. In order to ensure that the new lender obtained a first legal mortgage, the previous mortgage had to be redeemed, and it was a term of the offer that that should happen. In 2002 the transaction had been completed, the first mortgage had been redeemed, and about £9,000 had been released. The benefit of the mortgage had been assigned by the lender to the claimant. At the time of the transaction, an agreement providing for credit of more than £25,000 had not been regulated by the Consumer Credit Act 1974. Thus the formal requirements of the Act regarding the content of the documents and procedures for execution had not been followed. The defendant had subsequently fallen into arrears and a district judge had granted the claimant a possession order. The defendant had appealed on the ground that the agreement had to be treated, for the purposes of the Act, as if it comprised two separate agreements, one relating to the amount which was used to repay the previous mortgage, and the other for the rest, with the result that the Act applied to each agreement and, because it had not been complied with, no part of the agreement would be enforceable.

LLOYD LJ said that the appeal raised a question as to the correct interpretation of s 18 of the Consumer Credit Act 1974 which had serious consequences for transactions of a commonplace nature, and which had not previously arisen for decision in the Court of Appeal and had been the subject of strongly divergent academic comment. The 1974 Act sought to protect consumers by imposing a number of distinct requirements regarding the documentation of transactions to which it applied. What requirements applied to any given transaction or proposed transaction depended on its nature. For that purpose the 1974 Act had a number of definitions of different types of transaction, some of which were or might be cumulative while others were mutually exclusive. The particular problem with which the present case was concerned was a transaction which fell within more than one "category of agreement", at least one of those categories being one mentioned in the 1974 Act. Such a transaction would give rise to several concerns regarding consumer protection. One was to ensure that all appropriate formalities were observed, having regard to the nature of the transaction. Another was to avoid the possibility of evasion of the statutory regime, by the aggregation or combination into one transaction of what were really two or more separate transactions, if, taken separately, they would be subject to the 1974 Act’s controls whereas as one larger transaction they would escape it, for example because the amount of the credit exceeded the monetary limits relevant under the 1974 Act. One would also expect the legislation to be framed in a way which made it clear, both for consumers and for providers of credit, what was the regulatory regime and when and how it applied to any given transaction. Otherwise it would be unfair and inappropriate to one or both parties In the present case, the defendant had the offer of a single facility, which could only be drawn down as a whole. It was to be secured by a first mortgage on the property, which was at the time subject to the existing mortgage. It was a term of the loan agreement that any existing mortgage was to be paid off out of the loan. Assuming, in the defendant’s favour, that that meant that the part of the credit which would be used to redeem the existing mortgage was restricted-use credit, there was nothing in the terms of the agreement which permitted a conclusion that part of the agreement was to be placed in one category (restricted-use) and part in another (unrestricted-use). It was a single agreement which could not be dissected into separate parts. The whole credit facility had to be drawn together or not at all. The agreement was one whose terms placed the whole of the agreement in two relevant and disparate categories under the 1974 Act, so that s18(1)(b) applied. It was not one whose terms placed part of the agreement in one category and another part in another. The agreement could not be taken apart in that way. Accordingly it was not to be treated as two separate agreements, and because the amount of the credit provided exceeded £25,000 it was not a regulated agreement. The judge had been correct in his decision.

WALLER and DYSON LJJ agreed.

Appearances: Bradley Say (instructed by Burton & Co LLP) for the defendant; Malcolm Waters QC and Jonathan Hough (instructed by Glenisters) for the claimant.

Reported by: Alison Sylvester, Barrister