Alexander v West Bromwich Building Society - a cautionary tale

The well-publicised fight between West Bromwich Building Society and a consortium of 400 buy-to-let landlords (represented by Mr Alexander) reached the Court of Appeal in April this year, and judgment was handed down on 08 June ([2016] EWCA Civ 496). The consortium - the Property118 Action Group - was successful in its appeal. The claimant objected to the West Bromwich’s standard mortgage conditions which stated that the lender had discretion to increase the interest rates on a tracker mortgage and to require early repayment of the loan. These conditions were not included in the mortgage offer. The Court of Appeal ruled that the conditions were not incorporated into the mortgage contract, leaving West Bromwich with a liability of £27.5m in refunds to borrowers.

The Court of Appeal judgment highlights the dangers for mortgage lenders in trying to rely on the small print in their mortgage conditions when the offer letter says something different. It serves to reinforce the importance of ensuring that offer documents and mortgage are consistent in the way they approach different mortgage products and a reminder that lenders can’t necessarily rely on standard conditions if the other mortgage documentation contradicts what is in them.

The right to vary the interest rate

The lender's standard printed mortgage conditions which were incorporated into the mortgage deed stated that the rate of interest specified in the mortgage offer (other than a fixed rate) could be varied by the lender for any of a number of stated reasons. These were very broad and included (amongst others) a change in the Bank of England Base Rate or in interest levels generally, increases or decreases in investment rates, changes in market conditions or to make sure that the lender could meet its obligations to third parties. There was also a residual right to vary the rate for any other valid reason by giving the borrower two months’ notice and a three month window in which to the repay the mortgage without any early repayment charge.

However the mortgage offer stated that the interest rate would be fixed at 6.29% until 30 June 2010 and that thereafter it would be at a variable rate of 1.99% above the Bank of England Base Rate, ie what is commonly known as a "tracker" mortgage. There was no hint in the offer document that the rate could ever be different to the Bank of England Base Rate plus 1.99% or indeed that the rate to be paid could ever be raised (or lowered) other than by reason of, and strictly in accordance with, a change to the Bank of England Base Rate. The firm indication was that the rate could only ever be varied in accordance with changes in the Bank of England Base rate, which (as the judge put it) “would be entirely consistent with reasonable parties' general understanding of a tracker mortgage.” The standard mortgage conditions also included a clause which expressly stated that if there are any inconsistencies between the terms in the mortgage conditions and those contained in the offer document the terms contained in the latter would prevail.

At first instance, the judge had decided that there was no inconsistency and so the lender could rely on the wider right to vary the rate in the printed mortgage conditions.

However, in the Court of Appeal, Lord Justice Hamblen concluded that there was an inconsistency and that the offer letter should prevail.

He did so on three grounds:

1. The lender was promising in the offer document that the interest rate would be varied in accordance with and so as to reflect changes in the Bank of England Base Rate. It was inconsistent with that specially agreed term to incorporate a printed standard term which provides for an entirely different method of varying the rate. A right to vary the interest rates at the lender’s discretion would be appropriate when the mortgage conditions supplement a standard variable rate or similar mortgage product but it is not appropriate where the method of variation has been agreed in the offer document.
2. The parties had agreed the mortgage product in clear, absolute and unqualified terms. The wide terms of the right to vary in the standard conditions conferred on the lender the right unilaterally to change that product to something else entirely. A printed standard term which confers such a right is inconsistent with the specially agreed product description which went beyond qualification or modification and operated as a matter of transformation and negation. In the judge’s view, if the lender has the right or liberty to replace the mortgage product as described in the specially agreed terms with some other product, then there is effectively no enforceable obligation to provide that product.
3. The offer document set out the product description and therefore the main purpose or object of the contract, to provide a mortgage product of that description. A printed standard term which entitles the lender to substitute a different product is inconsistent with that purpose or object.

The right to require early repayment

The mortgage conditions also stated that the loan would be repayable early in certain circumstances. All of these bar one were in the nature of the sort of events of default one would expect to see in usual mortgage documents (non-payment, breach of obligation, bankruptcy etc). However, one of the circumstances gave the lender the right to require the borrower to repay on the giving of one month's notice by the lender. This effectively made the mortgage repayable at the lender’s discretion.

The offer document stated that it was a term loan for 25 years and gave no hint that the loan could be accelerated by the lender in the absence of any default by the borrower. Also, and, importantly in the judge’s eyes, the product was marketed as a buy to-let-product because “the parties would reasonably contemplate that the rental income would then be used to meet the mortgage interest payments and the repayment of the principal loan would be funded by the sale of the property at the end of the agreed term, or earlier if the borrower so chose.”

For similar reasons to those given above, Lord Justice Hamblen concluded that there was an inconsistency and the offer document should prevail.

Does this affect marketing documents?

In this case, the decision was made by reference to the contractual documentation, ie the offer document and the mortgage conditions incorporated into them. The borrower tried to rely also on advertising produced by the lender but the Court decided that this was not relevant to the factual matrix. Lenders should however be wary of what they put in their marketing materials, particularly if they contradict what is in their standard mortgage conditions because they may find themselves at risk of effectively incorporating them into the legal documentation and creating an inconsistency within the contract.

Wider implications and the Consumer Rights Act 2015

In this instance, the borrowers were all buy-to-let landlords, but this fact is not critical to the decision (excepting its consideration in the early repayment clause question). The judgment may be capable of application to other commercial loans where there is a discrepancy between the offer document and standard terms and conditions (dependent, of course, on the specific wording employed).

Paragraph 11 of the earlier High Court decision ([2015] EWHC 135 (Comm)) noted that both parties considered that the borrowers were not “consumers”. If they had been, it is worth noting that the litigation might have headed in a different direction. In some circumstances, it is likely that buy-to-let borrowers would be treated as consumers. Although the principles regarding the wording of the offer and the standard terms would have remained the same, the claimant might have headed West Bromwich off at an earlier pass, via the Unfair Terms in Consumer Contract Regulations 1999. Had the contract been entered into after 01 October 2015, the Consumer Rights Act 2015 would have applied. This modified the Unfair Terms in Consumer Contract Regulations to some extent, and provides that contractual terms and contractual notices are to be fair, and if not, they are not binding on the consumer. Of particular relevance is paragraph 68 of the Act, which requires a written consumer contract term or consumer notice to be transparent, meaning that it is in plain and intelligible language and legible. However, this is not enough to be compliant. Recent cases in the CJEU* have established that transparency also means enabling the consumer to make an informed choice, and this includes understanding the reason for the term and its relationship with other terms. It is not difficult to see how for any post 01 October 2015 contracts similar to that in the West Bromwich case (had the parties not conceded that the borrower was not a consumer) a case could have been built on the Consumer Rights Act.

*For example, Case C-26/13 Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt., Case C-143/13 Bogdan Matei and Ioana Ofelia Matei v SC Volksbank România SA and Case C-96/14 Jean-Claude Van Hove v CNP Assurances SA, at paragraphs 40–49.