The case concerned ‘tracker’ loans, of which there are well over a million in the UK. Offered by a range of lending institutions, often starting with a discounted or fixed initial rate and then switching to a tracked rate, they are calculated by adding a fixed premium to an external ‘reference rate’ such as the Bank of England base rate or a LIBOR rate. This means, or should mean, that borrowers can predict with certainty when their interest rate will vary, and by precisely how much. In the Alexander (A) case, however, this widely accepted consensus was challenged by the action taken by the West Bromwich Mortgage Company (WB), a wholly owned subsidiary of the West Bromwich Building Society.

Background to the case

A, and several thousand borrowers like him, had taken tracker loans to buy residential buy-to-let properties. The bespoke offer in his case provided that, at expiry of a two-year fixed term, the loan would revert to a tracker variable rate which was the Bank of England base rate, plus a margin of 1.99%, for the life of the loan.

Apart from the mortgage deed, the suite of documents that had to be considered included a booklet of ‘standard conditions’. That booklet contained several clauses of significance, including one which provided that in the event of inconsistency between the bespoke offer letter and the standard terms in the booklet the former would prevail.

The term which was later relied upon by WB to justify the increase was also in that booklet, and provided that, except during the fixed rate period, the interest rate may be varied by the society for a variety of commonly encountered specified reasons, such as prudent operation of the business, and competitiveness in the market.

In September 2013 A, and others in his category, were advised by WB that their interest rate would be increased by 2% from December, by means of a rise in the premium above base rate from 1.99% to 3.99%. The selected borrowers all had account numbers beginning with 8, and all had at least three buy-to-let mortgages, whether with WB or other lenders. They were selected as WB considered that they were not likely to be protected by the additional layer of regulation that affects consumer mortgages. The reason cited by WB was the need to allow the business to be run prudently, efficiently and competitively, utilising the standard clause referred to above. Around 6,500 mortgages were affected, making a difference of around £10m a year to WB’s income, and in fact moving it from loss to profit in the event. The loans had been securitised.

Many of the affected borrowers complained to the Financial Ombudsman that their rate had been changed when the base rate had not, and uniformly their complaints were dismissed.

Formulating an action plan

Not only was A an affected borrower, but the co-founder of a landlords’ website and forum with over 250,000 subscribers, called Awareness of the stance taken by WB quickly turned into action, and the Property118 Action Group (P118AG) was formed.

A number of complainants to the Financial Ombudsman had instructed a firm of solicitors, but were dissatisfied with the seeming lack of progress or strategy. A meeting was held in London in February 2014, attended by 80 or so of the more active borrowers, which was addressed by the solicitor having conduct of the case, and by the writer. Unanimously the P118AG voted for the latter to plan and execute the challenge to the WB. The strategy had a number of crucial features:

1. Conducting litigation

The writer needed to obtain authorisation to conduct litigation. As a former solicitor committed to a direct access practice, the processes were already in place allowing the application to be made and granted with expedition by the Bar Standards Board.

2. BARCO: funding and security for costs

Funding of both the claim and security for costs was achieved by use of a BARCO account. A target was set, and each participating borrower made a contribution based on the number of mortgages held. The target was easily passed, and when WB suggested it would seek security for costs, a payment into court was able to be made which more than met its aspirations. It meant that the group could not be denied the hearing of its case by imbalance of financial power. Around 230 borrowers joined the group, representing over 400 mortgage accounts. Property118 set up a secure forum to allow efficient communication with each member, who had each individually signed terms of business mutually agreeing to allow their funds to remain in BARCO or the Court Funds Office to the conclusion of the first trial.

3. Framing of the application to court

Many members considered themselves consumers, and sought the protection of such regulation. Others felt they had been victims of misrepresentation, or had been treated ‘unfairly’. It was obviously necessary to make an application which all the affected borrowers could benefit from, without the court having to delve into individual fact-finding exercises, which would rapidly have depleted the war chest. It was decided to seek a declaration of the true contractual position in relation to the interest rate hike, and the standard condition allowing WB to demand and receive repayment on one month’s notice, even in the absence of any default event.

Progress through the courts

The Commercial Court (Teare J) [2015] EWHC 135 Comm found for the lender, ruling that there was no ‘clear and irreconcilable discrepancy’, which he found would have to be the case before any hierarchy clause could be deployed. When all the contractual documentation was read together, the offer and the standard condition were not inconsistent, and the clauses could both be given effect by deeming the contract to be providing two ways of varying the rate. If the offer had specified that the only variable rate would be the base rate-linked rate, then the provisions would have been inconsistent and the Offer would have prevailed.

This was a severe blow to the group. Application for permission to appeal was immediately lodged, and the group had to consider its position. The funds remaining did not allow for a further security for costs to be lodged, but there was a balance left in BARCO (with interest). The mutuality of the group had come to an end with the trial, and members were given three individual choices: (a) contribute a further sum for each mortgage; (b) leave the share in BARCO; or (c) request a refund of their share of what was left. All but one member chose (a) or (b), and the group was thus able not only to fund the appeal, and secure costs, but engage Michael Ashcroft QC to lead at appeal. These choices were made before Christopher Clarke J granted permission to appeal on a paper application.

A strongly constituted Court of Appeal (Leveson P, Hamblen and Sharp LJJ) allowed the appeal in full. Hearing the case on 28 April and giving judgment on 8 June [2016] EWCA Civ 496, in finding for A the court held that the standard condition was entirely different from that set out in the offer and was therefore inconsistent and subservient to the bespoke offer letter. WB’s interest-rate increase was, therefore, unlawful.

The court also considered the other standard clause subject of the application, which purported to allow the lender to require the borrower to repay the mortgage loan in full (together with any accrued interest and charges) merely by giving one month’s notice and absent any default by the borrower. Again finding for A, the court held that condition which entitled the lender to require repayment on only a month’s notice and absent any borrower-default was inconsistent with, and effectively negated, the main purpose of the mortgage contract which was set out in the offer – namely a loan repayable over a 25-year term.

WB accepted the appeal decision, and paid all budgeted costs without demur. It also adhered to its pledge to apply the decision to all affected borrowers, whether or not in the action group. This pledge was made public during the fundraising phase, but did not persuade enough affected borrowers to leave it to others to fund the challenge.

Challenges and contributions

The case posed unprecedented challenges and it is important to recognise the vital contributions of a large number of people to its success. The BARCO team, for example, was responsive and efficient throughout. Distilling the wishes of the group into instructions was not always a simple task, but it is fair to say that democracy and self-regulation prevailed amongst the members. Only one member withdrew over the whole life of the case. Committed to the cause and never losing faith, they attended both hearings in large numbers and felt they had been part of something significant. Leveson P, on entering court for the appeal hearing and seeing the packed public gallery in Court 1 said (not entirely sotto voce): ‘I didn’t realise we could have sold tickets for this one.’

Contributor Mark Smith, Cotswold Barristers