The case of West Bromwich Mortgage Co
West Bromwich Mortgage Co will have to repay millions of pounds to borrowers with its tracker mortgages following a recent decision by the Court of Appeal. The result of this case may also benefit borrowers with tracker or similar variable-rate mortgages from other lenders.
This case also highlights the importance for all borrowers of looking carefully at the actual terms of any mortgage offer as well as all other accompanying documents - and retaining paperwork in case of any later conflict.
Most mortgages will specify that the rate of interest charged on the loan can go up or down (perhaps after a specified period at a fixed rate.) In the case of tracker mortgages the interest rate is linked to some well-known rate, such as Bank of England Base Rate or LIBOR, and so will vary as this rate goes up or down.
Do “standard Mortgage Conditions” override the mortgage offer
Can a mortgage lender change the way interest is calculated from that set out in a mortgage offer, even if the lenders standard mortgage conditions apparently allow them to do so?
That was the question at issue in the case of Mark Robert Alexander (as representative of the "Property118 Action Group") - v - West Bromwich Mortgage Co Ltd. The case hinged upon the inconsistency between the terms of a mortgage offer and the lenders standard mortgage conditions which were incorporated in the mortgage.
The facts of the case were quite straightforward. West Bromwich issued an offer for a buy-to-let mortgage, stating that the interest rate was fixed for 2 years and would then be a variable rate of 1.99% above Bank of England Base Rate from time to time - i.e. a tracker mortgage.
When the base rate fell the interest rate on the mortgage therefore also fell, substantially reducing the monthly repayments. But the mortgage company decided that this was insufficient and wrote to the borrower to say they were increasing his interest rate and might even recall the loan altogether. They quoted various “standard conditions” in the mortgage which apparently gave them carte blanche to make these changes.
But the Appeal Court has now decided that they were not entitled to take this action and the mortgage company is now having to repay substantial sums to borrowers with similar mortgages.
In the offer document sent to Mr Alexander 6 June 2008 the Product Description was set out as “Buy to Let 6.29% fixed until 30.06.2010…” It then added: "After 30 June 2010 your loan reverts to a variable rate which is the same as the Bank of England Base Rate, currently 5%, with a premium of 1.99%, until the term end, giving a current rate payable of 6.99%.”
Mr Alexander understood from this that after 30 June 2010 he would be paying interest on the loan at 1.99% above BoE Base Rate for the remainder of the mortgage term of 25 years. If the base rate fell below 5% he would pay less but if it rose he would have to pay more.
In fact the base rate fell to 0.5% in 2009, so the interest rate on the mortgage fell to 2.49% and Mr Alexander continued to make monthly payments at this rate as requested by the lenders.
He was therefore somewhat surprised to receive a letter from the West Bromwich in September 2013 advising him that an additional premium was being added to their lifetime Buy-to-Let Tracker Mortgages. So he was being asked to pay interest at a higher rate than the 1.99% above Base Rate as quoted in the offer.
As if that wasn't enough to spark outrage, the letter also contained a veiled threat to call in the mortgage with just 30 days' notice if the lender deemed it to be unprofitable business. In other words they were saying that they could require Mr Alexander to repay the whole of the loan irrespective of the fact that he was not in default in any way.
Over 6,000 other buy-to-let borrowers received similar letters from the same mortgage company.
The lenders claimed that they were entitled to make these demands in accordance with various provisions contained in their printed Mortgage Conditions, a copy of which had been sent out along with the original mortgage offer.
Mr Alexander decided not to take these threats lying down. He runs a web-site offering an advice forum for landlords and tenants known as Property 118, and through a campaign on that site he was able to raise the considerable sum of money necessary to bring legal action on behalf of himself and many others similarly affected against the mortgage company.
It was clear that there was inconsistency between the terms of the offer and the company's standard Mortgage Conditions which were deemed to be incorporated in the mortgage deed. The Court therefore had to decide which should apply.
The lenders argued that there was a provision in their standard Conditions that if there was any inconsistency between the terms of the offer and the Conditions the latter were to prevail.
At the first hearing in the High Court the judge decided that West Bromwich was correct in their interpretation of the documents and they were therefore entitled to raise the interest rate and also to recall the loan if they wanted to.
However Mr Alexander and the Property 118 Action Group felt that they had good grounds to appeal this decision, and having obtained leave to appeal and raised the necessary further funds their barristers presented the case to three senior judges at the Court of Appeal. The Court was asked to consider two issues:
- Was clause 5 in the company's standard Mortgage Conditions (which purported to give them wide powers to vary the interest rate) a term of the mortgage contract?
- Were the company entitled to require the borrower to repay the whole of the loan on one month's notice in accordance with another of the standard Conditions even if the borrower was not in default?
The judgement is very detailed and considers judgements in many previous cases where inconsistencies between various terms in contracts had to be considered by the courts.
Court of Appeal says mortgage offer takes precedence over “standard conditions”
On the first issue the Appeal judges pointed out that “There is no hint in the Offer Document that the rate will, or can ever, be different to the Bank of England Base Rate plus 1.99%. ... The firm indication is that the rate will only be varied in accordance with changes in the Bank of England Base rate, which would be entirely consistent with reasonable parties' general understanding of a tracker mortgage.”
They decided that the company could not rely on their standard condition for the following three reasons:
- The Product Description set out in the specially agreed Offer Document defines how the rate is to be variable and it is inconsistent with that specially agreed term to incorporate a printed standard term which provides for an entirely different method of varying the rate.
- The parties agreed a Product Description in clear, absolute and unqualified terms. The wide terms of clause 5 confer on the Lender the right unilaterally to change that product to something else entirely. A printed standard term which confers such a right is inconsistent with the specially agreed Product Description and would indeed negate the whole contract.
- The Product Description set out in the Offer sets out the main purpose or object of the contract, namely to provide a mortgage product of that description. A printed standard term which entitles the Lender to substitute a different product is inconsistent with that purpose or object.
On the second issue Lord Justice Hamblen said “The issue is whether the Lender's obligation to provide a mortgage of the Product Description for the mortgage term [i.e. 25 years] can fairly or sensibly be read together with a right for the Lender to require repayment on one month's notice. For reasons already given, in my judgment they cannot be so read together.”
He therefore found in favour of Mr Alexander on both issues and the other two judges agreed with him.
The West Bromwich Building Society (which owns West Bromwich Mortgage Company Ltd) has issued a statement saying that they accept the Court of Appeal's decision and will be contacting all affected borrowers, including those who were not part of this action, to advise them of the outcome and that we will be reimbursing them any additional interest charged.
The one-off cost of this will be approximately £27.5m. and will result in the Society recording a loss for the year to March 2017.
Mark Alexander says “This ruling sends a clear message to other lenders who have acted in a similar manner, and to those who might have been considering following suit. There are thought to be in the region of one million tracker buy-to-let mortgages which could have been affected in this case had gone the wrong way… I am extremely grateful to all of the Property118 Action Group members who didn't lose faith in our quest for justice.”
Which other mortgage providers will have to give refunds?
Several other lenders, including Bank of Ireland and Skipton Building Society, have previously taken similar steps to vary their mortgages. It remains to be seen whether they will now apply the West Bromwich ruling and make refunds, but at present that does seem to be happening.
This case is important for all mortgage borrowers as it indicates that the courts will give greater importance to the wording of a mortgage offer (which is what most people look at closely) rather than some printed standard-form conditions which may technically be incorporated in the final mortgage but which few people bother to read.
Nevertheless borrowers should look carefully at all the paperwork sent with any mortgage offer to check that it does not contain any unexpected traps. If in doubt your solicitor or mortgage broker should be able to provide further advice.