Overturning the Commercial Court decision, the Court of Appeal held that the terms of the mortgage conditions and the offer document were inconsistent on both the lender’s ability to vary the interest rate and its ability to require early repayment. That meant that the inconsistent terms were not incorporated and could not be relied upon by the lender.
The terms of the tracker mortgage
This case concerned a buy to let interest only mortgage provided to Mr Alexander, the representative of the Property 118 Action Group. In September 2013, West Bromwich Mortgage Company (the 'lender') informed Mr Alexander that it had decided to increase the margin over base rate by 2%, from 1.99% to 3.99%.
Mr Alexander argued that box 4 of the offer document provided for rates to vary in accordance with the Bank of England base rate (after an original fixed period) but not otherwise. However, clause 5 of the mortgage conditions appeared to enable the lender to vary the interest rate for a number of reasons, which included not only a change in the Bank of England base rate but as well, for example, changes in the law or the need to ensure that the business of the lender is carried out prudently, efficiently and competitively. Mr Alexander argued that the two provisions were inconsistent and in the event of inconsistency, the mortgage conditions provided that the offer document should prevail.
The Commercial Court rejected Mr Alexander’s arguments. Mr Alexander appealed. Our summary of the first instance decision is available on our website: Possible appeal in Alexander v West Bromwich Mortgage Company.
The impact of the tracker label
Mr Alexander placed significant emphasis on the label, ‘tracker’ mortgage referring to definitions of that term from a variety of sources, including the Council of Mortgage Lenders and the Financial Conduct Authority. Lord Justice Hamblen accepted those sources demonstrated that it would reasonably be understood that a tracker mortgage involves a rate which tracks and only varies in accordance with a specified base rate. But held that the term ‘tracker’ is not a term of art and depends on the specific terms agreed.
What matters is the terms agreed, not the label attached. However the label informs the “starting assumption of reasonable parties negotiating and agreeing a tracker mortgage, which is how this mortgage would be commonly known”.
Contractual interpretation of inconsistent terms
Where there is potential inconsistency and the contract contains an inconsistency clause which provides that special conditions shall prevail over the printed standard terms in so far as they may be inconsistent, the court should approach the documents in a "cool and objective spirit to see whether there is any inconsistency or not”1.
The Court of Appeal held that there is inconsistency where clauses cannot be "fairly or sensibly read together". In making that decision, the court must have due regard to reasonableness and business common sense.
Lord Justice Hamblen referred to House of Lords authority that a court must reject words that are inconsistent with the main purpose of the contract2 .The judgment provides that a printed standard term which confers a wide ranging right or liberty may have that effect.
The right to vary interest rates
The offer document did not contain any hint that the mortgage rate would ever be any different to base rate plus 1.99%, so the Court of Appeal found that Mr Alexander’s interpretation of the contract, being that the rate would not be varied, apart from in accordance with the base rate, was entirely consistent with reasonable parties’ general understanding of a tracker mortgage.
Clause 5 was held to be drawn in wide terms. It provided that the interest rate may be varied for a broad range of reasons including "to make sure our business is carried out prudently, efficiently and competitively".
The Court of Appeal found there were three grounds upon which clause 5 of the mortgage conditions was inconsistent with the offer document, and would therefore not be deemed incorporated in the mortgage contract:
- to incorporate a printed standard term which provides for an entirely different method of varying the rate is inconsistent with the specially agreed terms in the offer document
- clause 5 allowed the lender to unilaterally change the product to something else entirely so there is effectively no obligation to provide that product
- the printed standard term, which entitled the lender to substitute a different product was inconsistent with the main purpose of the contract.
The right to call for full repayment of the loan
Clause 14 gave the lender, amongst other things, a right to give Mr Alexander one month’s notice requiring him to repay the loan in full, together with any accrued interest and any unpaid charges, which Lord Justice Hamblen held effectively made the mortgage contract terminable at will. It was an unqualified right to require repayment.
As this was an interest only mortgage for a term of 25 years, Mr Alexander had organised his affairs in such a way so as to repay the full balance of the loan at the end of the 25 year mortgage. To call the loan in earlier would mean Mr Alexander would most likely have to immediately sell the property. The Court noted “a property which was to be bought so it could be let could, at the Lender’s whim, be required to be unlet and sold. Buy to let becomes sell unlet”.
For these reasons, the Court of Appeal held that there was inconsistency between the offer document and clause 14, so clause 14 was not incorporated into the mortgage contract.
Sir Brian Leveson, who agreed with Lord Justice Hamblen, noted in his short judgment that it would have been open to the lender to preserve the power to alter the interest rate beyond any changes in the base rate provided the offer document had made that clear. Similarly, a lender would need to make clear on the face of the offer document the circumstances in which it could terminate, absent default, and noted that such circumstances would need to be carefully circumscribed so as not to deprive the borrower of the benefit of the bargain struck.
These comments underline the importance of providing contractual documentation which is clear and consistent.
In conclusion, this is a case about contractual interpretation which does not change the law and turns on the contractual arrangements that the lender had in place in this case. Our understanding is that the Financial Ombudsman Service has previously rejected complaints brought by affected borrowers. This is a good example of a rigorous legal analysis in the court environment leading to a different outcome.