Newsflash: Court of Appeal rules on West Brom rate-tracker casePrint publication
We are all familiar with ‘tracker’ mortgages which provide that, following expiry of an initial fixed rate, the loan reverts to a variable rate which is linked to (and therefore changes with) the Bank of England base rate (“the Base Rate”). Most people’s understanding is that, although the absolute certainty of the fixed rate has come to an end, nevertheless the borrower has greater certainty with a tracker than with a standard variable rate, because of the tracker’s link to the Base Rate. In Alexander v West Bromwich Mortgage Co Ltd , a high-profile case which will be of interest to lenders, borrowers and savers alike, the Court of Appeal was asked to determine whether that interpretation was necessarily correct.
Outside the mortgage arena, the case also has implications for anyone involved in multi-document contractual arrangements.
The interest-only buy-to-let mortgage offer in this case (“the Offer”) provided that, at expiry of the fixed term, the loan would revert to a tracker variable rate which was the Base Rate plus 1.99%. Enclosed with the Offer was the building society’s standard conditions (“the Conditions”) which provided, at clause 5, that, except during the fixed rate period, the interest rate may be varied by the society for a variety of specified reasons. The Conditions also included a priority clause which dictated that, in the event of any inconsistency between the Offer and the Conditions, the Offer prevailed. In 2013 the society increased the variable rate in accordance with Condition clause 5, but at a time when the Base Rate did not change.
The claimant borrower, Mr Alexander, was a property investor whose monthly repayments increased significantly as a result of the interest rate change. Mr Alexander (leading the Property 118 Action Group (P118AG) and representing nearly 400 landlords in a similar position) sued the lender for breach of contract. He relied on the priority clause and therefore the terms of, and the tracker rate specified in, the Offer.
At First Instance, the High Court found for the lender. To rely on a priority clause which provides that one contractual document is to prevail over another, there must be a clear and irreconcilable discrepancy. However, Teare J had found that, when all of the contractual documentation was read together, the Offer and clause 5 of the Conditions were not inconsistent, and so the Offer did not prevail. Rather, he considered that the contract as a whole envisaged that, apart from during the fixed rate period, the interest rate would be variable: the Offer explained one means by which the variable rate could be determined; and clause 5 explained other means by which the variable rate could be determined. If the Offer had specified that the only variable rate would be the Base Rate-linked rate, then the provisions would have been inconsistent and the Offer would have prevailed. The Court of Appeal disagreed.
Finding for Mr Alexander, the Court of Appeal held that a standard condition in the small print of a tracker mortgage product which allows a lender to unilaterally vary the interest rate in a method unconnected with the Base Rate, and entirely different to that set out in the Offer, was inconsistent. The Offer prevailed and the society’s interest-rate increase was, therefore, unlawful.
An aside – the standard one-month notice repayment provision
The Court of Appeal also considered another standard clause within the Conditions: clause 14, which purports to allow the lender to require the borrower to repay the mortgage loan in full (together with any accrued interest and charges) merely by giving one month’s notice and absent any default by the borrower.
Again finding for Mr Alexander, the Court of Appeal held that a printed standard condition which entitled the lender to require repayment on only a month’s notice and absent any borrower-default was inconsistent with, and effectively negated, the main purpose of the mortgage contract which was set out in the Offer – namely a 25 year term.
WM Comment and practical advice
The Court of Appeal conclusively decided both that the lender could not unilaterally vary its rates on a tracker mortgage in a way that was unconnected with the Base Rate and inconsistent with a mortgage offer; and that it could not call in its loans at short notice and without any reason such as borrower-default.
This is a customer-friendly decision but it does turn on the specific mortgage offer and standard conditions in the particular case. The judgment is a matter of contractual interpretation which reinforces the importance for lenders of ensuring consistency between any mortgage offer/special conditions and their general mortgage terms and conditions.
It also bears noting that the customers in this case were landlords, and therefore investors. As such, they were not classed as ‘consumers’ and so the courts were not asked to consider whether any of the Conditions might be ‘unfair’ and therefore unenforceable pursuant to the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 (recently replaced by Part 2 of the Consumer Rights Act 2015). In another case, therefore, consumer protection law may add a further dimension for lenders to consider when seeking to rely on standard mortgage conditions.
The West Bromwich Building Society has always maintained that it was acting in accordance with the terms of its contract and in the best interests of its members as a whole – seeking to balance the interests of both its borrowers and its savers. However, it has accepted the Court of Appeal’s ruling and has publicly committed to contacting all affected borrowers and to promptly processing any reimbursements due as a result.
The ruling is also likely to affect other lenders and buy-to-let borrowers who have seen tracker rates increase irrespective of Base Rate stability, not least because Mr Alexander and P118AG already have other financial institutions in their sights.
So, what lessons can financial institutions and contracting parties generally take away from this case?
- Lenders, borrowers and parties to any multi-document contractual arrangements should ensure that all terms incorporated into a contract are consistent with each other.
- Be wary of reliance on priority, or prevail, clauses. Wherever possible, contractual documents will be read as a whole and will be construed on that basis. Priority clauses will only apply in cases of clear and irreconcilable discrepancy. They can therefore often be ineffective and, as such, can represents contractual traps for the unwary.
- Consider whether all parties have properly understood the implications of their multi-document contracts and, in particular, have brokers, agents and legal advisors properly advised on their true meaning? If not, mis-selling and/or professional negligence claims could abound.
- In the case of mortgage offers and arrangements, lenders and their agents should regularly review their standard terms and conditions, as well as their marketing material and practices. Has there been any inadvertent misrepresentation or mis-selling of products – perhaps through advertising the ‘certainty’ of rates moving with Base Rate on products which the lender does not actually intend to be true trackers, or in any other circumstances where headline promotions or sales practices may not tally with small print provisions?
If you would like any further advice or assistance in connection with this case or your contractual arrangements generally, please do not hesitate to contact Andrew Beck or any member of Walker Morris’ Litigation and Dispute Resolution department.
  EWCA Civ 496