Contractual interpretation of a tracker mortgage

The Commercial Court has handed down judgment in the group action against West Bromwich Mortgage Company on the construction of the terms of a tracker mortgage.

In September 2013, West Bromwich Mortgage Company (the ‘lender’) informed Mr Alexander (and other customers who had three or more buy to let properties and so were not regarded as ‘consumers’) 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 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 should prevail. The question for the court was whether there was a clear and irreconcilable difference between the two clauses.

No clear and irreconcilable discrepancy

Mr Justice Teare noted that it is well recognised that one term may qualify another without contradicting it and there is a distinction between a conflicting provision and a qualifying one1. He held that effect could ‘sensibly be given’ to both clauses if clause 5 is regarded as qualifying Box 4. There was no clear and irreconcilable discrepancy. While Box 4 was different from clause 5, the court’s task was to read the provisions together and if possible, give sensible effect to each of them. It was not to read one contractual provision and compare it with another2. Importantly, the process of construction is not dependent on the label attached to this type of mortgage, a ‘tracker’.

The court also reviewed the termination provisions of the mortgage and again determined that the relevant clauses were complementary, not contradictory.

A question of construction

The court was keen to point out that it was concerned with the construction of the agreement, not whether it was fair for the lender to rely upon clause 5. However, the Financial Ombudsman has considered similar complaints by those affected by the increase in interest rate under this type of mortgage offered by the West Bromwich Mortgage Company and it too decided not to uphold the complaint. In one of the published decisions, Mr Ken Rose, Ombudsman, concludes that ‘after carefully considering what both Mr C and West Bromwich have said, I don’t consider that West Bromwich has acted unfairly in the way it applied the increase.

An application for permission to appeal has been made. The hearing is expected to take place towards the end of April 2015.