Court of Appeal

Published November 19, 2009

Southern Pacific Mortgage Ltd v Heath

Before Lord Justice Waller, Lord Justice Dyson and Lord Justice Lloyd

Judgment November 5, 2009

A consumer credit agreement which provided for the redemption of an existing smaller mortgage loan and left the remainder as credit, comprised one agreement for the purposes of the Consumer Credit Act 1974.

The Court of Appeal so stated when dismissing the appeal of Jayne Elizabeth Heath against a decision of Judge Purle, QC, sitting as a Chancery Division judge ([2009] Bus LR 984), that an agreement made with Southern Pacific Mortgage Ltd exceeding the limit for regulation under the 1974 Act was not a multiple agreement in two parts within section 18(1)(a) of that Act, each of which was regulated.

Ms Heath had a mortgage advance on which some £19,000 was outstanding. She wished to obtain further credit on the security of her house and obtained an offer from a different lender of a loan of almost £29,000 gross to be secured on a first legal mortgage of the house.

In order to ensure that the new lender obtained a first legal mortgage, the previous mortgage had to be redeemed, and it was a term of the offer that that should happen.

In 2002, the transaction was completed, the first mortgage was redeemed, and about £9,000 was released. The benefit of the mortgage was assigned by the lender to the claimant.

At the time of the transaction, an agreement providing for credit of more than £25,000 was not regulated by the 1974 Act. Thus the formal requirements of the Act as to the content of the documents and procedures for execution were not followed.

She argued that the agreement had to be treated, for the purposes of the Act, 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. Thus the Act applied to each agreement, and, because it had not been complied with, no part of the agreement would be enforceable.

She fell into arrears and a possession order was granted, suspended on her appeal. The judge dismissed the appeal.

Mr Bradley Say for Ms Heath; Mr Malcolm Waters, QC and Mr Jonathan Hough for the company.

LORD JUSTICE LLOYD said that the appeal raised a question as to the correct interpretation of section 18 of the 1974 Act which had serious consequences for transactions of a commonplace nature, and which had not previously arisen for decision in the Court of Appeal and had been the subject of strongly divergent academic comment.

The 1974 Act sought to protect consumers by imposing a number of distinct requirements on the documentation of transactions to which it applied. What requirements applied to any given transaction or proposed transaction depended on the nature of the transaction.

For that purpose, the 1974 Act had a number of definitions of different types of transaction, some of which were or might be cumulative while others were mutually exclusive. The particular problem with which the present case was concerned was a transaction which fell within more than one category of agreement, at least one of those categories being one mentioned in the 1974 Act.

Such a transaction would give rise to several concerns on consumer protection. One was to ensure that all appropriate formalities were observed, having regard to the nature of the transaction.

Another was to avoid the possibility of evasion of the statutory regime, by the aggregation or combination into one transaction of what were really two or more separate transactions, if, taken separately, they would be subject to the 1974 Act’s controls whereas as one larger transaction they would escape it, for example, because the amount of the credit exceeded the monetary limits relevant under the 1974 Act.

One would also expect the legislation to be framed in a way which made it clear, both for consumers and for providers of credit, what was the regulatory regime and when and how it applied to any given transaction. Otherwise it would be unfair and inappropriate on one or both parties In the present case, the defendant had the offer of a single facility, which could only be drawn down as a whole. It was to be secured by a first mortgage on the property, which was at the time subject to the existing mortgage. It was a term of the loan agreement that any existing mortgage was to be paid off out of the loan.

Assuming, in the defendant’s favour, that meant that the part of the credit which would be used to redeem the existing mortgage was restricted-use credit, nevertheless, his Lordship found nothing in the terms of the agreement which permitted a conclusion that part of the agreement was to be placed in one restricted-use category and part in another unrestricted-use one. It was a single agreement which could not be dissected into separate parts. The whole credit facility had to be drawn together or not at all.

His Lordship considered that the agreement was one whose terms placed the whole of the agreement in two relevant and disparate categories under the 1974 Act, so that section 18(1)(b) applied. It was not one whose terms placed part of the agreement in one category and another part in another. The agreement could not be taken apart in that way.

Accordingly it was not to be treated as two separate agreements, and because the amount of the credit provided exceeded £25,000 it was not a regulated agreement. The judge was correct in his decision and the appeal would be dismissed.

Lord Justice Waller and Lord Justice Dyson agreed.

Solicitors: Burton & Co LLP; Glenisters.

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