Southern Pacific Mortgage Ltd v Heath [2009] EWCA Civ 1135
It has taken me a day or three to get to this one. Nobody else was up for doing it and frankly the detail of the Consumer Credit Act 1974, allegedly intended to make agreements clear for consumers, makes my head hurt.
In 2002, Ms Heath sought a remortgage of her house. The existing mortgage had about £19,000 outstanding. She arranged a remortgage for about £28,000 (after fees),a condition of which was that the lender had first charge, so that the existing mortgage would have to be discharged. This was arranged and in March 2002, the existing mortgage was paid off and Ms Heath paid £9,000.
In 2002, a credit agreement for more than £25,000 was not caught by the Consumer Credit Act requirement. It was common ground that the documents involved in the agreement and provided to Ms Heath did not satisfy the requirements of the Act, if applicable.
Ms Heath fell into arrears. Following two possession orders, suspended on terms, and facing a warrant for possession, Ms Heath argued that:
the agreement has to be treated for the purposes of the [Consumer Credit] Act [1974] as if it comprised two separate agreements, one relating to the amount which was used to repay the previous mortgage, and the other for the rest. If that were correct, the Act would have applied to each agreement, and, because it had not been complied with, no part of the agreement would be enforceable.
This defence did not succeed. On appeal to the Circuit Judge, the appeal was dismissed. This hearing was the second appeal.
Now, as simply and brutally as I can manage to set this out, Ms Heath argued that as regards the sum which was applied in redemption of the Halifax mortgage, the agreement was for restricted-use credit, because it was to refinance existing indebtedness, so it fell under section 11(1)(c) Consumer Credit Act 1974, while the remaining £9K for unrestricted-use credit under section 11(2).
Therefore the one transaction contained within it two different types, or categories, of agreement, in terms of the definitions in the Act. Because one part of the agreement fell within one category and the rest within another, section 18(1)(a) applied to the respective parts. Each part, therefore, has to be treated as a separate agreement under section 18(2).
Section 18 states:
(1) This section applies to an agreement (a ‘multiple agreement’) if its terms are such as—
(a) to place a part of it within one category of agreement mentioned in this Act, and another part of it within a different category of agreement so mentioned, or within a category of agreement not so mentioned, or
(b) to place it, or a part of it, within two or more categories of agreement so mentioned.
(2) Where a part of an agreement falls within subsection (1), that part shall be treated for the purposes of this Act as a separate agreement.
(3) Where an agreement falls within subsection (1)(b), it shall be treated as an agreement in each of the categories in question, and this Act shall apply to it accordingly.
(4) Where under subsection (2) a part of a multiple agreement is to be treated as a separate agreement, the multiple agreement shall (with any necessary modifications) be construed accordingly; and any sum payable under the multiple agreement, if not apportioned by the parties, shall for the purposes of proceedings in any court relating to the multiple agreement be apportioned by the court as may be requisite.
Thus the argument was that because the ‘two parts’ of the agreement feel under different (and not congruent) categories, s.18(1)(a) applied, not s.18(1)(b), which only applies if all the categories are congruent and compatible (e.g. unrestricted-use, running-account, and debtor-creditor). Each part, therefore, has to be treated as a separate agreement under section 18(2).
If, on the other hand, it had been an agreement involving different, but congruent, categories, it would fall under s.18(1)(b) and s.18(3) would apply such that all relevant requirements of the Act have to be complied with, whatever the categories may be, as to the whole agreement (or not, if it was oer £25K at the time). But this was not such an agreement. the categories of restricted use and unrestricted use were not congruent and were different, so s.18(1)(a) and s.18(2) were the relevant subsections.
As each part of the agreement was under £25K (£19K restricted use, £9K unrestricted use), the requirements of the Act applied and had not been complied with. Therefore the agreement(s) were not enforceable.
The respondent pointed out that just about any regulated agreement would fall under two or more categories, particularly congruent ones. This meant that 18(1) would apply to pretty much every regulated agreement and thus lack any purpose. The words ‘applies to an agreement […] if‘ at the start of 18(1) indicates that only in some instances would the subsection apply, which was not the appellant’s argument. Instead the subsection should be read as both (a) and (b) being concerned with disparate categories of agreement, and the difference between them depends on whether the agreement, by its terms, is to be treated as being in separate parts or not. In this instance, the parts are rightly to be treated as being of one part, it being one agreement for provision of a single advance. Therefore, being over £25k, it was outside the requirements of the Act.
Precedent was found to be unclear and mostly obiter on this point. Academic discussion was divided in its view (for details, read the judgment paras 26-37).
Held, in Lloyd LJ’s sole judgment:
The practical difficulties if the appellant was correct would be large – for instance the specified amount of credit under the restricted use category – in discharge of the previous loan – would not be known until the last point of a redemption statement, if not later. The appellant’s point that argument from practical difficulty cannot prevail when the law is clear was taken, but was not sufficient. The respondent was right.
The starting point is that it is from the terms of the agreement that one must find out whether the agreement is one under which there are two or more parts, in different categories, or whether it, or part of it, falls into two or more categories. It is not correct to start from the proposition that more than one disparate category is concerned, and to conclude from this that the agreement must fall into two or more parts.
It is the agreement that is at issue in considering categories, not the credit provided under it. The term ‘categories’ in s.18(1)(a) means the same as in s.18(1)(b) as there is no reason to believe that the same word used in adjacent subsections would have different meanings. Read this way, subsection 18(1) should be taken:
as covering two possibilities, both being cases in which there are elements of an agreement which fall within two or more disparate categories, at least one of which is a category under the Act. Paragraph (a) deals with the case where the respective elements within the agreement can be seen as constituting separate parts of the agreement; paragraph (b) deals with the opposite case where they cannot be seen in that way. Moreover, this reading of section 18(1)(b) is supported also by the opening words “if the terms of the agreement”, because on the other reading the paragraph would apply to every agreement, not, as the opening words suggest, only to some.
In short, this was a single loan agreement, which could only be drawn down as a unit. The credit under the loan fell into two disparate categories, but as part of one agreement, so s.18(1)(b) applied. It was not an agreement whose terms put part in one category and part in another. The agreement could not be taken apart in that way.
Appeal dismissed. Ms Heath’s defence failed and the whole debt was enforceable.
And the next consumer credit mortgage case that comes our way will be written up by someone else…