The recent case of Goldhill Finance Limited v Smyth [2023] EWHC 362 provides a warning of the importance of raising issues early and accurately in pleadings and highlights an underused defence to claims for the enforcement of second charges.
Mrs Smyth obtained a loan of more than £25,000 for business purposes. It was secured as a second charge against her North London flat. Those three criteria meant that although the loan was secured against Mrs Smyth's home, it was not a Regulated Mortgage Contract (under Financial Services and Markets Act 2000 and the Regulated Activities Order (FSMA)). It was also not a regulated agreement under the Consumer Credit Act 1974 (CCA).
Mrs Smyth, and later her solicitors, focused on arguing that the agreement was regulated, which on the facts it clearly was not. They did not appear to be aware of s.140A and s.140B of the CCA 1974. These provide an often-misunderstood remedy that enables a court to refuse to enforce a loan, or vary its terms, where there is an "unfair relationship" between the lender and the borrower.
The trial proceeded on the issue of whether the loan was a regulated mortgage (FSMA) or a regulated agreement (CCA) and, if so, whether the lender had breached its obligations under those statutes. The judge decided it was not regulated under either statute, and granted possession. He stated that, because the loan was unregulated, it could be enforced "free of statutory restrictions".
That last observation was incorrect: s.140A CCA applies to credit agreements whether or not they are regulated.
Mrs Smyth appealed. However, Mr Justice Soole found that it was far too late to raise the issue on appeal. This was not least because, once raised, s.140A puts the burden on the lender to prove that the relationship was fair, and the evidence at trial had not dealt with that.
Mrs Smyth also argued that she had in fact pleaded unfair relationship in her defence, which was contained in the standard mortgage defence form (N11M). She said this was done by ticking the box in her N11M which says "Do you want the court to consider whether or not the terms of your original loan agreement are fair". Soole J did not accept this, for two reasons. Firstly, the concept of "unfair terms" (i.e. the standard wording in the N11M) was to be contrasted with the s.140A regime, which only applied to an "unfair relationship". Secondly, the unfair terms defence identified in the N11M was preceded with: "Only answer [this] if the loan... is a regulated consumer credit agreement". It was clear, according to Soole J, that this was not meant to include s.140B remedies. The appeal failed.
The trial judge's mistake (thinking no statutory fetters applied to unregulated agreements) was not an uncommon one. Many borrowers in unregulated agreements, and their advisors, overlook the s.140A regime, perhaps because they don't know about it, or they believe that it does not apply because their agreement is unregulated, or because it is a mortgage. In fact, it applies to regulated and unregulated credit agreements, provided they are not a regulated mortgage under FSMA.
It is surprising that the N11M defence form does not include reference to the s.140A unfair relationship defence. Mrs Smyth's case indicates that its omission may mean s.140A is not being applied in cases where it could affect the outcome.
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