In order to avoid enforcement, it is not uncommon for a debtor to argue that a loan entered into pre 6 April 2007 in excess of £25,000 can still be subjected to a challenge under the provisions of the Consumer Credit Act 1974 (Act) on the basis that it falls to be considered as a multiple agreement. The effects of a successful challenge can be serious, leading to the unenforceability of the loan. Lenders faced with arguments from debtors along these lines should be aware of an important judgment handed down yesterday by HHJ Purle QC in Heath v Southern Pacific Mortgage Limited.
The lender advanced £28,932.50 to Heath under a mortgage dated 7 May 2002, which was secured on her home. Heath fell into arrears and two possession orders were subsequently made against her. Heath appealed those orders contending that the mortgage was unenforceable. The mortgage appeared on its face to escape the consumer protection provisions of the Act as it exceeded the then limit of £25,000. The advance included charges for credit but, even with those stripped out, still exceeded £25,000.
Heath argued that the mortgage was a multiple agreement in two parts and so fell within section 18(1)(a) of the Act. The first part was an advance of approximately £19,000. This was in the category of restricted-use credit (falling within section 11(1)(c) of the Act) as the advance was to refinance her existing indebtedness to her previous mortgagee. The rest was in the different category of unrestricted-use credit (falling within section 11(2) of the Act) as she was free to do whatever she wanted with it.
Section 18(1) of the Act provides:
1. This section applies to an agreement (a 'multiple agreement') if its terms are such as-
a. to place a part of it within one category of agreement mentioned in this Act, and another part of it within a different category of agreement so mentioned, or within a category of agreement not so mentioned, or
b. to place it, or a part of it, within two or more categories of agreement so mentioned.
2. Where a part of an agreement falls within subsection (1), that part shall be treated for the purposes of this Act as a separate agreement.
3. Where an agreement falls within subsection (1)(b), it shall be treated as an agreement in each of the categories in question, and this Act shall apply to it accordingly.
If Heath was right, subsection (2) applied and the two parts would be regarded as separate consumer credit agreements regulated by the Act. Separated out, the two agreements were each for less than £25,000. Her argument followed that the mortgage was not properly executed (under section 61 of the Act) and the court had no power to enforce it under section 65, as no document containing all the prescribed terms was signed by her.
HHJ Purle QC stated that the first thing to note about section 18 is that in deciding whether the section applies regard must be had to the "terms" of the agreement itself, which have to be construed in light of the admissible surrounding circumstances. The section does not entitle the court to embark upon an investigation of the subjective intention of the parties to get to the substance of the agreement. The substance, so far as relevant, has to be objectively ascertained.
The relevant mortgage condition provided: "If the Property is mortgaged to another lender when the Company makes the Loan, the other lender's mortgage must be paid off out of the Loan." The judge noted that "The Loan" was, however, the total advance. There was one loan, not two. It was merely a term that the existing mortgage should be paid off out of the total advance, not that it should be paid out of any particular part of it. The borrower did not have the option to draw down a defined part only of the loan. It was difficult to see how the terms of the mortgage could be split into parts at all.
The distinction between an agreement in parts and an agreement in more than one category was of critical importance in this case. If the agreement was not in parts but still fell within more than one category (restricted-use and unrestricted-use credit), subsection (3) applied. The agreement is treated as an agreement in each of the categories and the Act applies accordingly. It is not necessary to consider which is the predominant category. Subsection (3) does not require the categories to be treated as separate agreements or for there to be any apportionment of the advance. What it meant in this case was that even if the mortgage was properly regarded as falling within more than one category, it was not regulated by the Act as the advance was for more than £25,000. For apportionment to happen, the agreement needs to be in parts.
HHJ Purle QC, having considered the language of section 18 and the mortgage document, did not regard Heath's mortgage as an agreement in parts. It was therefore enforceable. The judge noted that a previous Court of Appeal judgment referred, with apparent approval, to an Office of Fair Trading discussion paper suggesting that an agreement was not in parts if the categories were so interwoven that they could not be separated without affecting the nature of the agreement as a whole. HHJ Purle QC thought this was right and that in this case the mortgage could not be separated into parts without affecting its essential character, which was to make one advance, not two.
The mortgage was outside the ambit of section 18(1) and was enforceable.
This is an important decision by the High Court given the other cases borrowers have been relying upon were decided by County Court judges. The judge did not merely distinguish the often cited County Court decisions in this area, such as Ocwen v Coxall and Coxall and London North Securities Ltd v Williams and Williams from this case, but went so far as to say that in his opinion they were "wrongly decided so far as concerns the proper construction of section 18".
This case will be a very useful tool for lenders to deploy when faced with the "multiple agreement" arguments in future. In any such cases, however, the starting point will still be an objective consideration of the wording of the particular agreement involved in the light of the admissible surrounding circumstances of the particular case.