Alexander (as representative of the “Property 118 Action Group”) v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496;[2016] PLSCS 163 concerned the extent of a lender’s contractual right to vary the interest rate payable by borrowers under their buy-to-let mortgages. A further question that arose was whether the lender was entitled to call in such loans before the 25-year mortgage terms expired, even though their borrowers were not in default.
The agreement between the borrower and lender was set out in the lender’s mortgage offer, which incorporated its mortgage conditions. The borrower understood that, after an initial fixed-rate period, the interest charged to him would vary in accordance with the Bank of England base rate. Indeed, box 4 of the mortgage offer stated that the variable rate of interest was to be the same as the Bank of England Base Rate, plus a premium of 1.99%, “until the term end”. However, clause 5 of the mortgage conditions stated that the lender was entitled to vary the interest rate in a wide variety of circumstances.
The borrower argued that there was an inconsistency between the mortgage offer and the conditions and relied on a contractual precedence clause in the conditions to prevent the lender from increasing its rates in circumstances where the Bank of England base rate had remained unchanged. The clause in question stated that: “if there are any inconsistencies between the terms in the Mortgage Conditions and those contained in the Offer of Loan then the terms contained in the Offer of Loan will prevail”.
The judge at first instance decided that the provisions in the offer and mortgage conditions were not irreconcilable because the mortgage offer did not state that the variable rate was liable to variation only if there was a change in the Bank of England Base Rate. The mortgage conditions qualified the mortgage offer and, because there was no inconsistency between the documents, the contractual precedence clause was irrelevant.
The Court of Appeal has overturned the decision, applying Pagnan SpA v Tradax [1987] 3 All ER 565. In that case, Bingham LJ stated that “…..it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses”.
The court decided that clause 5 of the mortgage conditions enabled the lender to alter the tracker mortgage and substitute an entirely different product. The standard printed conditions did not simply qualify, or modify, the terms of the mortgage offer. They negated them – and could not fairly or sensibly be read together with the specially agreed terms of the mortgage offer, which gave no hint that the rate would, or could ever, be different to the Bank of England Base Rate plus 1.99%. Furthermore, there was no hint in the mortgage offer that the lender could curtail the 25 year mortgage term at will. Therefore, the standard provision in the mortgage conditions giving the lender the right to call in the loan on one month’s notice, in the absence of any breach or default by the borrower, was also inconsistent with the offer document.
Consequently, the terms of the mortgage offer prevailed. The lender has indicated that it is disappointed to have lost the case, but accepts the ruling which, since many thousands have mortgages on similar terms, will cost it approximately £27.5m.
Allyson Colby is a property law consultant
