Court of Appeal rules on contractual construction of buy to let tracker mortgage

Alexander v West Bromwich Mortgage Company Ltd [2016] EWCA Civ 496

Court of Appeal rules on contractual construction of buy to let tracker mortgage

The case concerned provisions in a 25-year buy-to-let tracker mortgage which entitled the lender to (i) increase the variable rate charged from 1.99% over the Bank of England base rate to 3.99% and (ii) require repayment on one month's notice.  The landlord appellants had argued that both provisions were inconsistent with the mortgage offer and that, in accordance with an inconsistency clause in the mortgage conditions, the terms of the offer prevailed. 

The Court of Appeal overturned the decision of the judge at first instance, who had held that the relevant terms in the two documents were not inconsistent as the clauses could be read as modifying or qualifying one another.

On the mortgage provision entitling West Bromwich to increase the variable rate charged from 1.99% over the Bank of England base rate to 3.99%, the Court found it to be inconsistent with the offer because:

  • The offer contained the specially agreed, bespoke terms which defined the particular mortgage contract, including how the rate was to be variable.  It was therefore inconsistent to incorporate a printed standard term which provided for an entirely different method of varying the rate.
  • The product description in the offer was clear, absolute and unqualified. The wide provisions of the standard term did not merely qualify or modify the product description (as held by the judge at first instance) but transformed and negated it.  To allow the standard term to prevail would be to give the lender the unilateral right to replace the agreed mortgage product with something else entirely.
  • The product description in the offer set out the main purpose or object of the contract, ie 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.
The mortgage provision entitling West Bromwich to require repayment on one month's notice was also inconsistent with the offer.  As argued by the landlord appellants, the existence of such a right was contrary to the 'spirit, intent and object of the agreement as a whole' and produced a 'commercially unreasonable, if not absurd, result.'  The mortgage was a 25-year buy-to-let, interest only mortgage where the parties would reasonably contemplate that 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). An unqualified right to repayment on short notice would 'turn the Borrower's contemplated business arrangements on their head' and constituted negation rather than modification or qualification of the product description in the offer; as a result it was inconsistent with the main purpose or object of the contract.  As with the provision on variable rate increase, it was the 'wide ranging nature of the right' that gave rise to the inconsistency.

Comment:  Contrary to some of the related press reports, the Court of Appeal's decision in this case turned on questions of contractual construction rather than any considerations of fairness.

This decision is a reminder that lenders need to be very explicit if they want to have an ability to vary the margin on a tracker product.  Repayment provisions of the type in question in this case have previously been subject to regulatory challenge in a consumer context so the judgment isn't surprising in this respect either.

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