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07/07/2010

A charge for credit isn’t credit

Southern Pacific Securities 05-2 Plc v Walker & Anor [2010] UKSC 32

A brief note on this case, which concerned the enforceability of a credit agreement secured on the Walker’s property. Our report on the Court of Appeal decision is here, and there is little to add in this note, because the Supreme Court in Lord Clarke’s lead judgment, agree completely with the Court of Appeal.

The issue was whether a separate charge – here for broker’s fees – on which interest was charged, should have been included in the total amount of credit specified in the agreement. At first instance, the fact that it wasn’t, had meant that the agreement was declared unenforceable under the Consumer Credit Act 1974. The Court of Appeal held that the brokers fee was a charge for credit, not part of the credit, and that there was nothing in Consumer Credit Act 1974 that meant that interest couldn’t be levied on a charge for credit. The credit agreement held good.

The Supreme Court agrees. Something which is a charge for credit cannot be part of the credit:

But for the provisions of section 9 of the Act, there would be a strong case for saying that, since the total amount advanced was £18,350, that was the amount of credit and, since that sum was not stated in the agreement to be the amount of the credit, it follows that it does not contain a prescribed term and is unenforceable. The problem is that section 9(4) provides that an item entering into ‘the total charge for credit’ shall not be treated as credit. It follows that if an item is part of the total charge for credit, it cannot form part of the amount of credit, even if it would otherwise be regarded as credit.

That conclusion, which, in our judgment, follows from the plain meaning of subsection (4), is supported by the authorities: see in particular Wilson v First County Trust Ltd [2001] QB 407, Watchtower Investments Ltd v Payne [2001] EWCA Civ 1159, [2001] GCCR 3055 and Wilson v Robertsons (London) Ltd [2005] EWHC 1425 (Ch), [2006] 1 WLR 1248.

The charge for credit in this case, even though advanced by the same lender, fell clearly under Wilson v First County Trust Limited.

To the objection that there was interest charged on the loan of the broker’s fee, Lord Clarke says:

Section 9(4) does not prohibit the charging of interest. If the fee itself was part of the total charge for credit, it seems to us to follow that interest on that fee was also part of the total charge for credit and not therefore to be treated as credit. As the court sees it, both the fee and interest on the fee are ‘other charges’ within regulation 4(b) of the TCC Regulations quoted above and are thus ‘included in the total charge for credit’. Even if, for some reason, the interest were not so included in the charge for credit, we do not see how the interest could itself be credit.

The borrowers’ argument involves saying that, whereas in the case of, say, a loan of £1,000 repayable with interest and a document fee of £50 repayable without interest, the amount of credit is £1,000, nevertheless in the case of such a loan but with a document fee of £50 repayable with interest, the amount of credit is £1,050. That seems to us to be nonsensical. Either the credit is £1,050 in both cases or in neither. For the reasons we have given we conclude that the answer in both cases is £1,000.

Appeal dismissed, but

It is perhaps important to note for the future that section 127(3) of the Act was repealed by sections 15, 70 and Schedule 4 of the Consumer Credit Act 2006 and does not apply to agreements made after 5 April 2007. Further, when the Consumer Credit (Agreements) Regulations 2010 come into force, they will require documentation of the ‘total amount of credit’, which is defined as ‘the credit limit or the total sums made available under a consumer credit agreement’.

So that form of defence to possession proceedings by sub-prime lenders for loans secured on properties has gone up in smoke.

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

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