In the recent case of Alexander v West Bromwich Mortgage Co Ltd, the Court of Appeal considered:

  • inconsistencies between the terms of the mortgage offer and the lender’s general conditions; and
  • whether the lender was contractually entitled to increase the interest rate payable on a “tracker” mortgage, and to require early repayment in the absence of any breach.

We consider the implications for lenders.

Background

In September 2013, the lender informed a number of its commercial customers that the rate payable in respect of their buy-to-let tracker mortgages would increase by 2%.

The lender’s mortgage offer letter (the “Offer”) stated that, following an initial two year fixed rate period, interest would be payable at 1.99% above base rate until term end.

However Clause 5 of the standard mortgage conditions accompanying the offer provided that the lender may vary the interest rate “at any time… to reflect market conditions generally”, or to make sure that the lender’s business was carried out “prudently, efficiently and competitively” (the “Condition”). The mortgage conditions also provided that, in the event of any inconsistency, the terms of the Offer would prevail.

The borrower, together with a consortium of buy-to-let landlords, argued that the Condition was inconsistent with the terms of the Offer, that it was not properly incorporated into the borrower’s mortgage contract and that the lender was not, therefore, entitled to vary the applicable interest rate other than by reference to base rate.

The Court was also asked to consider whether, pursuant to another of the standard mortgage conditions, the lender was permitted to require the early repayment of the mortgage upon providing one month’s notice to the borrower.

At first instance…

The Court decided that there was “no clear and irreconcilable discrepancy” between the Offer and the Condition. The Condition simply qualified the Offer so as to permit the lender to vary the applicable interest rate in certain pre-defined circumstances. The Condition was incorporated into the contract and the revised interest rate was permissible.

The lender was also permitted to require early repayment. While the Offer specified that the borrower’s mortgage term would be 25 years, it nonetheless envisaged the possibility of early termination. The standard mortgage conditions therefore “complemented”, rather than contradicted, the Offer by outlining the circumstances in which early termination may occur.

The Court also considered whether the rate of interest payable in relation to what was specified to be a “tracker mortgage” was capable of variation pursuant to any factor other than a movement in base rate. The Court determined that it was, noting that the construction of a contract is “not dependent on a label”, but rather “the words used by the parties”.

The appeal…

The Court of Appeal unanimously allowed the borrower’s appeal, observing that there was “no hint” in the Offer that the applicable interest rate would be varied for any reason other than a movement in base rate. This was, the Court determined, “entirely consistent” with what a reasonable party’s understanding of a tracker mortgage was likely to be.

Inconsistency between Offers and General Conditions

The Court also considered whether, as a matter of construction, the Condition was inconsistent with the terms of the Offer (and, specifically, the Product Description detailed therein). It determined that:

  1. The Condition provided for an entirely different method for varying the interest rate. While this method was “appropriate” for a standard variable rate mortgage, it was not consistent with the method specified in the Product Description for determining the applicable rate. 
  2. The Product Description of the borrower’s mortgage was “clear, absolute and unqualified”; however, the Condition allowed the lender to transform the mortgage into “something else entirely”. It could not, therefore, be said that the Condition merely served to “qualify” the terms of the Offer. 
  3. The “main purpose or object” of the mortgage was set out in the Product Description. The Condition essentially allowed the lender to substitute the mortgage with an entirely different product. The Condition was, therefore, inconsistent with this.

In light of the above, the Condition was not incorporated into the lender’s mortgage contract with the borrower. The lender was not, therefore, contractually entitled to vary the interest rate payable other than by reference to base rate fluctuations.

The Court also observed that the lender’s right to require the early repayment of the mortgage was unqualified and, therefore, entirely at the lender’s discretion. This was inconsistent with the “main purpose or object” of the mortgage as described in the Offer; namely, to provide a mortgage to the borrower with a term of 25 years. The relevant standard condition was not, therefore, incorporated into the contract.

Comment

In this instance, the mortgage conditions were clear; in the event of any inconsistency, the terms of the Offer would prevail. And so they did. It should be noted that this approach is consistent with the Supreme Court’s determination that, even in the absence of such a provision, greater weight is to be given to bespoke terms negotiated between the parties than to pre-printed standard conditions. As for lessons learned, lenders should be careful to ensure that their standard terms are appropriately tailored to their products and lenders may also wish to draw their customers’ attention not only to key terms but also to qualifications to those key terms by including them within the offer letter, rather than just the pre-printed standard terms and conditions.