The court has refused to order specific performance of an option agreement because the relationship between the parties was unfair under section 140A of the Consumer Credit Act 1974 (CCA) in Arthistory Ltd v Alan Eric Campbell and Maureen Campbell [2022] EWHC 848 (Ch); [2022] PLSCS 66.
The defendants were the registered freehold owners of a mixed-use holding in Southport comprising a house and surrounding land with development value. The house was valued at £385,000 but, together with the land and with planning consent for 26-28 new homes, its value was £1.5m-£1.84m.
In September 2015, the defendants were threatened with mortgage repossession and, with a view to benefiting from the development potential of the property, the claimant advanced to the defendants a sum to repay the mortgage. At the same time, a suite of documents was entered into between the parties: a facility agreement in respect of the payment of £123,215 to be repaid within 36 months; a legal charge over the property with all monies repayable on demand, an option agreement whereby the defendants granted the claimant an option to acquire the property in return for payment of all sums due under the facility agreement and legal charge and; a buy-back option agreement in favour of the defendants which broadly mirrored the option agreement.
The claimant exercised the option and when the defendants failed to co-operate or to complete the sale sought specific performance. The defendants claimed that there had been no discussion about the option, and that they had signed the documents in blank, on trust and under pressure to prevent the repossession: they had challenged certain issues and been promised a side letter to address them which never materialised.
The court found that, since the non-domestic element of the holding exceeded 40%, the facility agreement and legal charge was a regulated mortgage contract for the purposes of the Financial Services & Markets Act 2000 but, as the claimant had not entered into the arrangement with the defendants by way of a business – its business was buying and selling property not providing secured lending – the general prohibition on such an arrangement did not apply.
However, the arrangements did constitute an unfair relationship under section 140A of the CCA. The facility agreement provided for initial interest of 28% and an exit fee of 3% but it was always intended that these would be waived by the promised side letter. Most seriously was the fact that the option went well beyond what was intended to be security for the facility. This was achieved by the legal charge. The claimant’s calculation did not reflect the hope value of the property which might be unlocked by the grant of planning permission and there was never any real prospect of the defendants exercising the buy-back option. The option agreement was not a legitimate or proportionate attempt by the claimant to protect its position: the defendants had been pressurised by the urgency of their situation to agree the documents presented to them. The court ordered the option agreement and buy-back option to be set aside and made alterations to the facility agreement and legal charge.
Louise Clark is a property law consultant and mediator