Summary

The recent decision in Greenlands Trading Ltd & Another v. Girolama Pontearso [2019] EWHC 1282 (Ch) has shed some light on the court's approach to claims made by borrowers that the terms of their loan agreement amount to an unfair relationship under section 140A of the Consumer Credit Act 1974 (CCA).

Background

Ms Girolama Pontearso obtained a six-month bridging loan of £132,000 from Fourth Bridgefast Partnership, secured on a residential property with a monthly interest rate of 1.35 per cent and a default interest rate of 3 per cent per month. She intended to refinance the loan against the security of a separate commercial property but this strategy did not materialise. Following her default on the first bridging loan, she agreed to take further bridging loans from Greenlands Trading Limited and Wargrave Trading Limited (the Lenders), also for six months, but with a monthly interest rate of 1.45 per cent and a default interest rate of 3 per cent per month, again with a similar exit strategy.

Subsequently, Ms Pontearso defaulted on her repayments and the Lenders issued proceedings for possession and a money judgment. She defended on the basis that there was an unfair relationship under section 140A CCA, which reads as follows:

"(1) The court may make an order under Section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following:

(a) any of the terms of the agreement or of any related agreement;

(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;

(c ) any other things done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).

(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor)."

No expert evidence about industry standard rates was provided at trial but the judge accepted the Lenders' evidence and made the orders sought.

The appeal

Ms Pontearso's appeal was on the following basis:

1. The judge was wrong to accept evidence from the Lenders that the 3 per cent default interest rate followed standard industry practice, as it was unsupported by any other evidence.
2. The judge placed too much emphasis on Chubb v. Dean [2013] EWHC 1282 in reaching his decision as to the level of default interest rate in bridging loans that may give rise to an unfair relationship under section 140A.
3. The judge was wrong to find that the borrower had a workable exit strategy from the second bridging loan.

In respect of point one, Ms Pontearso took issue with the fact that the trial judge had allowed the Lenders to provide self-serving evidence on whether the interest rate was fair. On appeal, Mr Justice Nugee found that it was open to the first instance judge to allow evidence from the Lenders in relation to standard industry rates. No objection to it had been made at the time and the judge undoubtedly should have taken into account the belated way it came out when deciding how much weight to give to that evidence. However, it was important to bear in mind that deciding to allow this evidence was a case management decision. The judge's decision to accept 3 per cent was a factual finding which was difficult to overturn. It was not plainly wrong, and it was not possible to interfere with the judge's finding that the rate was not unfair.

As to point two, Ms Pontearso argued that the judge had placed too much emphasis on Chubb v. Dean, which is a case concerned with the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR). The exercise in determining whether a relationship was unfair under section 140 CCA is not identical to that in determining whether a term is unfair under the UTCCR. The appeal judge accepted there could be a number of other factors that make a relationship unfair under section 140A CCA that would not meet the test under the UTCCR although this was not necessarily conclusive of the question of whether the judge was wrong in this instance.

In any event, the appeal judge was not certain that the judge had placed any particular reliance on Chubb v. Dean. It may have been that he was referring to it as an illustration of the fact that a default rate of 3.1 per cent had been held to have followed industry standards. The points noted in Chubb v. Dean concerning the fact that the interest rate was clear on the face of the documents and that the defendants were not only legally advised, but were clearly intelligent consumers foreshadowed the list of matters to which Lord Sumption specifically referred in Plevin v. Paragon Personal Finance Limited [2014] 1 WLR 4222.

In Plevin Lord Sumption provided a list of matters such as the characteristics of the borrower, her sophistication or vulnerability, the facts that she could reasonably be expected to know or assume, the range of choices available to her and the degree to which the lender was and should have been aware of these matters, which would be relevant in deciding whether a relationship was unfair. 

Ultimately, in this case too, the judge found as fact that not only was the borrower legally advised, but she appeared to know her own mind when it came to lending and mortgages and she knew that they were short-term loans which had to be repaid.

As to point three, Mr Justice Nugee pointed out that the appeal court should not substitute its own view as to the likelihood of an exit strategy working. The judge's conclusion that the borrower had a possible exit strategy was not wrong given that the trial judge had the advantage of being immersed in the facts of the trial in much more depth than an appellate court.

Overall, the question of whether a relationship was unfair is not limited by the borrower's perception. What is required is an exercise of forensic judgment of all the relevant facts including the standard of commercial conduct reasonably to be expected of a lender and the degree of sophistication or vulnerability of the borrower. In this particular case, the borrower had received independent legal advice in respect of the second bridging loan. The solicitor expressly stated "you must carefully consider and calculate the repayment strategy both in terms of the monthly interest and the capital repayments at the end of each loan term". The question of unfairness is for the court's objective assessment and taking everything into account Mr Justice Nugee dismissed the appeal.

Implications

This is a useful case which should be considered by all lenders, particularly those involved in unregulated, short-term, secured lending, when faced with the challenge of an unfair relationship. When things go wrong, a borrower may complain about the rates of default interest and other charges. This case establishes that a lender is able to adduce its own evidence about industry standards although expert opinion may still be preferred. If a challenge is made, the court will exercise careful judgment taking into account all the relevant facts including the standard of commercial conduct reasonably to be expected of a lender and the degree of sophistication or vulnerability of the borrower.