Background

On 12 November 2007 Mr Graves and Capital Home Loans Ltd (‘CHL’) entered into a buy to let mortgage. The mortgage was subject to CHL’s 2004 Mortgage Conditions (the ‘Mortgage Conditions’) which provided that s103 of the Law of Property Act 1925 shall not apply to the mortgage and the statutory power of sale will be immediately exercisable if the mortgage account fell into arrears and if Mr Graves became incapable of managing his affairs by reason of mental incapacity. Further, pursuant to the Mortgage Conditions CHL were entitled to obtain possession of the Property.

In 2008, the mortgage account fell into arrears. Mr Graves made promises of payment which were not maintained and arrears continued to accrue. Letters were sent to Mr Graves requesting payment of the arrears, failing which CHL were likely to appoint receivers of rent.

In March 2012 CHL were advised that Mr Graves had been admitted to hospital. CHL sent to Mr Graves a Debt and Mental Health Evidence Form (the ‘Form’), a consent form that allows the lender to obtain details of a borrower’s condition. The Form confirmed that Mr Graves had mental health problems and lacked capacity to deal with financial issues. In May 2012, CHL were advised that Mr Graves had regained his capacity.

In the interim, CHL had sent a letter before action to Mr Graves’ home address which stated that as he lacked capacity to manage his financial affairs CHL had no alternative but to appoint a receiver of rent. In October 2012 the property was sold by CHL as mortgagee in possession. Mr Graves’ Possession Proceedings

Mr Graves issued possession proceedings against CHL. He acknowledged the arrears and provided an explanation as to why these accrued. Further, Mr Graves admitted that he was sectioned but denied that he was unable to manage his affairs.

CHL applied to strike out the claim pursuant to CPR 3.4(2)(A). The Judge was asked to consider three allegations: (1) that the mortgage account had not been in arrears; (2) that receivers of rent had not been validly appointed because Mr Graves was not mentally unfit to manage his financial affairs; and (3) that taking possession of the Property by CHL was in breach of industry guidelines.

The Judge found in CHL’s favour in respect of the calculation of the arrears and held that Mr Graves had no reasonable prospect of successfully challenging this. Further, it was held that it was not necessary to decide the issue as to Mr Graves’ mental capacity because the arrears on the mortgage account justified the appointment of receivers of rent. The Judge found in any event that, as Mr Graves was sectioned and incapable through mental incapacity of managing his financial affairs, CHL’s power of appointment by virtue of this fact was exercisable; it made no difference that Mr Graves’ incapacity had ceased at the time of the appointment of receivers of rent.

The Appeal

Following the decision, Mr Graves raised the application of sections 140A and 140B of the Consumer Credit Act 1974. Permission to appeal was granted on the question of whether these provisions applied to the mortgage and, if so, whether the relationship between himself and CHL was unfair because of (a) the inclusion of the clause relating to mental capacity in the mortgage; and/or because of (b) the way in which CHL exercised or enforced its rights under the agreement in the light of its knowledge of Mr Graves’ mental disability.

Section 140A provides that the Court may make an Order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement is unfair to the debtor because of (amongst other things) (a) any of the terms of the agreement; and (b) the way in which the creditor has exercised or enforced any of his rights under the agreement.

The Court held that neither the Mortgage Conditions per se nor the appointment of the receiver gave rise to an unfair relationship. The Court considered the OFT guidance on irresponsible lending, the Good Practice Awareness Guidelines for Consumers with Mental Health Problems and Debt published by the Money Advice Liaison Group and the Equality Act 2010 in considering CHL’s actions in exercising their power of sale. The Court noted the facts of the matter, specifically the history of the arrears, the fact that the property was vacant and that the decision to sell was not taken until sometime after Mr Graves had left hospital and was deemed fit to re-take control of his financial affairs. The Court, in dismissing Mr Graves appeal found that it would “have to be an exceptional case for the Court to conclude that a mortgagee whose power of sale had become exercisable due to the non-payment of mortgage instalments was to be treated as having acted unfairly in deciding to realise its security”.

Commentary

The case provides helpful guidance on the definition of ‘unfair relationship’ as included in the Consumer Credit Act, a term which had previously had little judicial direction in respect of its meaning and application. Further, it provides useful guidance to lenders in enforcing their rights under mortgage agreements.