Whether an interest rate is a penalty is a question of construction which does not require evidence and it is for a creditor to establish that there is not an unfair relationship under the Consumer Credit Act 1974.
The High Court has granted an appeal and ordered a retrial in Seculink Ltd v Salih [2023] EWHC 1706 (KB).
The defendant owned three “buy-to-let” flats in London. In June 2018, he took a bridging loan from the respondent for £250K which together with fees and rolled-up interest totalled £355K. The loan, secured by legal charges against the flats, was for a six-month term at a simple interest of 2.5% per month but this increased to compound interest at 12% per month in the event of default.
The unfair relationship provisions under section 140 of the 1974 Act applied which permits the court to make an order reducing or discharging any sum payable by a debtor under a credit agreement if it determines that the relationship between the creditor and the debtor is unfair due to the terms of the agreement; the way in which the creditor has exercised or enforced its rights under the agreement or anything else done by the creditor. If the debtor alleges an unfair relationship, it is for the creditor to prove otherwise.
The defendant defaulted on repayment of the loan and the respondent sought possession of the flats. The claim was defended and the defendant sought the benefit of the 1974 Act arguing that being required to sign the documents in his wheelchair in the street was unfair, the initial fees and interest rate were too high and the default interest rate was wholly unreasonable.
By the date of trial, the defendant’s contractual claim totalled £13.3M but it agreed to limit its claim to £850K. The trial proceeded in the defendant’s absence due to illness. The judge concluded that the defendant knew what he was signing and that it was not necessary to consider the issues of penalty and unfair relationship because both would require evidence. He granted the respondent possession of the flats, judgment for £850K and costs.
The High Court concluded that the judge’s reasons for dismissing the cases of penalty and unfair relationship were unsustainable. The issue of penalty was a question of construction and the judge had before him agreed facts of the default interest and its arithmetical consequence. The judge’s decision on the claim of unfair relationship took no account of the reverse burden of proof and he was wrong to decide it necessarily failed without expert evidence.
Louise Clark is a property law consultant and mediator
