Mortgage – Conditions – Appellant taking out interest-only “tracker” mortgage with respondent lender to fund buy-to-let investment – Mortgage offer specifying term of mortgage as 25 years with interest rate variable at 1.99% above Bank of England base rate – Mortgage conditions conferring power for respondent to increase interest rate for purposes of efficient running of its business and further power to demand full repayment on giving one month’s notice – Whether respondent entitled to exercise those powers – Whether mortgage conditions inconsistent with mortgage offer – Appeal allowed
In July 2008, the appellant took out an interest-only “tracker” mortgage with the respondent lender to finance a buy-to-let investment. The mortgage offer stated that the term of the mortgage would be 25 years, that the interest rate would be fixed at 6.29% until the end of June 2010 and that thereafter it would be at a variable rate of 1.99% above the Bank of England base rate. The lender’s mortgage conditions stated, however, that the lender could vary the rate of interest specified in the mortgage offer in certain circumstances, including to ensure that the respondent’s business was carried out “prudently, efficiently and competitively”; the conditions also stated that the borrower might be obliged to repay the loan in full if the lender gave one month’s notice to that effect.
The respondent later informed the appellant, along with other customers who had three or more buy-to-let properties and so were not regarded as consumers, that it was increasing the margin over base rate applicable to their mortgages by 2% in light of market conditions.
The appellant disputed both the respondent’s right to increase the interest rate and its right to demand repayment on giving one month’s notice. He applied to the court for declarations as to the true meaning of the contractual documents. He contended that the relevant clauses of the mortgage conditions were inconsistent with the terms of the mortgage offer and, consequently, were not incorporated into the contract since the conditions expressly provided that the mortgage offer was to prevail in the event of inconsistency.
Those contentions were rejected in the court below. The judge held that, read as a whole, there was no inconsistency between the mortgage offer and the conditions; instead, the latter modified and qualified the former: see [2015] EWHC 135 (Comm); [2015] PLSCS 35. The appellant appealed.
Held: The appeal was allowed.
(1) The mortgage conditions relating to interest rates were inconsistent with the terms of the mortgage offer. The offer document contained the specially agreed, bespoke terms which described and defined the particular mortgage contract that was being agreed. Those terms included the way in which the interest rate was to be variable, namely in accordance with changes in the Bank of England base rate. There was no hint in the offer document that the rate would, or could ever, be different to the Bank of England base rate plus 1.99% or that it could be raised other than by reason of, and strictly in accordance with, a change to that base rate. The firm indication was that the rate would only be varied in accordance with changes in the Bank of England base rate. That position would be entirely consistent with reasonable parties’ general understanding of a tracker mortgage. Accordingly, by the terms of the offer document, the respondent was promising that the interest rate would be varied in accordance with, and so as to reflect changes in, the Bank of England base rate.
The mortgage conditions were inconsistent with that position, since they purported to give to the respondent a wide power to vary the rate, enabling it, if it wished, to convert the mortgage into a standard variable mortgage, and remove any tracker element, by adjusting the resulting rate to match its standard variable rate rather than tracking the Bank of England base rate. While such a condition might well be appropriate where the mortgage conditions supplemented a standard variable rate or similar mortgage product, it was not appropriately incorporated where the method of variation had been agreed in the terms set out in offer document in the instant case. It was inconsistent with the specially agreed terms to incorporate a printed standard term that provided for an entirely different method of varying the rate. Variation of the rate at the discretion of the lender was a different method of variation to that specially and specifically agreed in the offer document and was inconsistent with it.
Further, the offer document set out the product description in clear, absolute and unqualified terms. The wide terms of the mortgage conditions purported to confer on the lender the right unilaterally to change that product to something else entirely. A printed standard term that conferred such a right was inconsistent with the specially agreed product description. Such a term was not a matter of qualification or modification but was instead a matter of transformation and indeed negation. If the lender had the right or liberty to replace the mortgage product as described in the specially agreed terms with some other product, then there was, effectively, no enforceable obligation to provide that product. The product description set out the main purpose or object of the contract, namely to provide a mortgage product of that description. A printed standard term that entitled the lender to substitute a different product was inconsistent with that purpose or object.
One way of testing whether clauses could be fairly or sensibly read together was by seeking to put them together in a single clause. In the instant case, such a clause would be to the effect that the variable rate was to be the Bank of England base rate plus a premium of 1.99%, subject to the lender’s right to vary that rate at any time for broadly specified or unspecified “valid” reasons in accordance with the mortgage conditions. Faced with such a clause, a reasonable borrower would understandably question what was being agreed and whether there was any obligation to provide the product described in the offer document. The answer would be that the lender was only agreeing to provide such a product unless and until it decided to vary the rate and that, accordingly, it was effectively under no obligation to provide it. That was negation rather than modification or qualification.
(2) The right to demand full repayment of the mortgage on giving one month’s notice was similarly inconsistent with the terms of the mortgage offer. The product description in the offer document was of considerable importance. The product was a buy-to-let, interest-only mortgage, with the contemplated purpose of enabling the borrower to buy a property which he would then let out. The term of an interest-only mortgage loan was of central importance. The parties would reasonably contemplate that the rental income would be used to meet the mortgage interest payments and that the repayment of the principal loan would be funded by the sale of the property at the end of the agreed term, or earlier if the borrower so chose. The borrower would be expected to arrange his affairs on the basis that, in the absence of any default on his part, he would have 25 years before repayment was required. An entirely unqualified right to require repayment on one month’s notice, as the mortgage conditions purported to give to the lender, would give the lender the right to turn the borrower’s contemplated business arrangements on their head. There was therefore an inconsistency between the mortgage specifically agreed in the offer document and the lender’s purported right under the mortgage conditions to terminate and require repayment on one month’s notice. The lender was still entitled to require repayment if there was a breach or an event akin to an event of default. If there were other circumstances in which the lender was likely to wish to require full repayment, then it could and should have set them out in the offer document.
Michael Ashcroft QC and Mark Smith (instructed by direct access) appeared for the appellant; Raymond Cox Qc and Chloe Carpenter (instructed by Addleshaw Goddard LLP) appeared for the respondent.
Sally Dobson, barrister
