Evans v Cherry Tree Finance Ltd & Anor

The Unfair Terms in Consumer Contracts Regulations 1991 apply to contracts concluded between a seller or supplier and a consumer. In these regulations consumer means “a natural person…acting for purposes which are outside his trade, business or profession.” If a term in such a contract is regarded as unfair according to the regulations it is not binding on the consumer. In this case HHJ Kaye QC, sitting as a deputy high court judge in Leeds, found that a term providing for payment of a substantial early redemption penalty in a secured credit agreement made between the claimant borrower and the defendant lender was unfair and gave judgment for the claimant for repayment of the penalty of £33,939.85 plus interest. The defendant appeals the judge’s decision on the single ground that he was wrong to conclude that in entering into the agreement the claimant was acting as a consumer.

The appeal has proceeded on the defendant’s concession that if any of the purposes for which the claimant borrowed the money were outside his trade or business, he was a consumer as defined by the regulations. It is common ground that the defendant was a seller or supplier.

So the question for us is simply: for what purpose or purposes did the claimant borrow the money? It is common ground that such purpose or purposes must be ascertained objectively from the evidence of the parties’ dealings with one another up to the time when the loan was made. This is a question of fact.

Before looking at the exchanges between the parties in this case it is necessary to refer to some of the background. The defendant carries on the business of lending money by borrowing from banks or other financial institutions and lending to non-status, high-risk borrowers secured on commercial (as opposed to domestic) premises. The claimant was such a borrower. By 1987 he and his then wife jointly owned a property in Hinks Hall Lane, Markington, from which they carried on an antiques restoration business in partnership. The property consisted of a fair amount of land and a number of buildings from which the business was carried on, but in about 1993 they converted some of the rooms on the first floor of one of the buildings into residential accommodation for themselves and their two children. There was a separate entrance to the residential accommodation. The business address was Daleside, Hinks Hall Lane and the residential address: Wilburne House, Hinks Hall Lane. The two parts of the property were separately rated.

In 1998 the claimant and his wife obtained a secured loan of about £85,000 from a building society. By this time however the couple had separated or were about to separate. When the wife started divorce proceedings in 1999 the partnership was dissolved. The claimant, however, continued to carry on the business and live in the residential accommodation.

In proceedings for ancillary relief the wife claimed her share in the property, which of course she jointly owned. At the end of 1999 she obtained an order for it to be sold in order to realise her share. The claimant was anxious to avoid this happening and in June 2001 persuaded the district judge to give him four weeks to raise £150,000, which he had agreed to pay in settlement of his wife’s claim for ancillary relief on terms that she would transfer her interest in the property to him and redeem the building society mortgage.

So it was that the claimant made an application for a loan to the defendant through brokers. His first application was for a loan of £100,000 but this was increased to £105,000 to cover the transaction costs, for which he made a fresh application shortly before completion. The balance of the £150,000 needed to pay off his wife was to come from his family.

The two application forms signed by the claimant are in much the same terms, but for the purpose of seeing what the defendant was told we have concentrated on the later form. In the box labelled “Purpose” the claimant said: “Remortgage an existing property to pay equity to divorced wife and pay off an existing mortgage.” Under the heading “Personal Information” he gave his address simply as Hinks Hall Lane, although in the earlier form he had added Wilburne House. In the next section he gave details of the profits earned by the business, Daleside Antiques. In the following section he gave the address of the property offered as security as Hinks Hall Lane and described it as “warehouse/workshops”. At the end of the form the claimant explained that he had been in business for 20 years, but his divorce had caused him financial difficulties.

Nothing was said in the application form about the residential accommodation, although careful reading would have revealed that the claimant’s home address and telephone numbers were the same as those of his business. The claimant supported his application with a surveyor’s report, which again did not mention the residential accommodation. It identified the property as Hinks Hall Lane, which it described as an owner-occupied industrial building. In the surveyors report that they were told that it was rated as a “factory and premises”.

Various queries were raised on behalf of the defendant in the weeks before the transaction was completed on 23 August 2001. On 13 July brokers were told (on the basis of information provided to them by the claimant) that on settlement the existing building society mortgage would be redeemed and the balance of the loan would be “repaid to the ex spouse for the balance of equity due to her under the divorce settlement.” The property was owner-occupied and being used for manufacture and renovation of furniture. During this time both parties were represented by solicitors who corresponded with one another and the ex-wife’s solicitors. At completion the claimant signed a legal charge and the loan agreement, which described itself as a “secured credit agreement for a commercial loan.”

To complete the story the claimant soon defaulted on the loan and in due course the property was sold by the defendant. It realised the amounts due under the agreement, including the early redemption penalty. These proceedings then followed to recover the penalty.

The issue with which we were concerned was one of a number which the judge had to resolve at trial. The claimant’s pleaded case on this issue was that the agreement was for domestic purposes. Although labelled a commercial loan, it was a consumer agreement because it was:

“a ‘one-off’ arrangement stimulated by the consequences of divorce proceedings and the need to raise money on the Claimant’s home to buy his wife’s equity. The purpose of this transaction is…plainly ‘outside his trade business or profession’”

The defendant’s pleaded case was that it was a commercial mortgage and the claimant had repeatedly referred to it as such. The security was offered on the basis that it was commercial property. In the application form the claimant was referring to his wife’s equity in such a property and to the existing building society loan which had been a commercial mortgage so that the loan was entirely for the purposes of the claimant’s trade or business.

At trial the claimant and his ex-wife and the defendant’s director, Mr Cummings, gave evidence. At the beginning of his judgment the judge said that he accepted that all the witnesses were being honest and trying to assist the court. We have been referred to passages in their evidence by both parties to support their arguments, but I have found this of little assistance. The outcome of the appeal must, I think, depend upon the documents, which crossed the line between the parties.

The judge dealt with the point with which we are concerned at paragraph 48 and 49 of his judgment where he said:

“48 I remind myself that the purpose of the loan expressed to be by Mr Evans in his application form was to purchase equity from divorced spouse and re-finance existing loan. Mr Putnam, on behalf of the Defendant, submits that in effect, this amounted to the purchase of the property and the wife’s former share in the business carried on at the property and that the purchase was, therefore, for purposes connected with the business and Mr Evans’ desire to preserve the business and hence, for these purposes, he was not acting outside his trade, profession or business, but, on the other hand, was acting for purposes relating to his trade, profession or business. That, coupled with the commercial nature of the loan, and the fact he obtained some tax relief on the interest payments, or some of them, reinforced this.

49.

I respectfully disagree. In my judgment, Mr Evans is to be viewed as a consumer for the purposes of the 1999 Regulations in respect of the loan made by the Defendant to him. He was not borrowing, in my judgment, for the purposes of his business, e.g to raise working capital, but for purposes outside his trade, business or profession, i.e. to buy out his wife in divorce proceedings. The loan was essentially for personal purposes to enable him to have a place to live -- a home -- as well as to work. It may well be there may have been a mixed purpose, but the predominant purpose was not in my judgment for the purpose of his business, so much as for the purpose of paying off his wife in order to be able to establish himself separately outside the partnership formerly carried on with his wife and, as I say, to acquire the property both as a place to live as well as a place to work. In my judgment it is plain, therefore, that in this sense, Mr Evans was dealing in my judgment as a consumer with the Defendant who was the seller or supplier for the purposes of these Regulations.”

Mr Putnam does not challenge the judge’s conclusion that in fact the claimant required and used the loan, at least in part, to keep a roof over his head and thus partly for domestic or private purposes and not for trade or business purposes, but he says this purpose was never revealed to the defendant. Looking objectively at what the defendant was told, the purposes of the borrowing were to refinance the earlier commercial loan from the building society and buy out his ex-wife’s interest in the commercial property from which they had formerly carried on their antique restoration business in partnership. The loan was therefore only for trade or business purposes to enable him to continue to earn his livelihood. The defendant was not told that the claimant was living, or that he and his wife had ever lived, in the property, or that the loan was needed by the claimant to keep a roof over his head. In making the findings which he did, the judge failed to distinguish between the claimant’s subjective purpose and the objective purpose to be derived from his exchanges with the defendant.

Persuasively though these submissions were put, I do not accept them for the simple reason that whilst I would accept that, looked at objectively, a purpose of the loan was to enable the claimant to earn his livelihood from his antique restoration business, that was not the only purpose. On the basis of the defendant’s concession, to which I referred in paragraph 2, it follows that the claimant was contracting as a consumer.

I take the claimant’s stated purposes from the later application form in turn. First, “Remortgage an existing property to pay equity to divorced wife”, supplemented by the additional information that this was due to her under “a divorce settlement”. I do not think a loan to discharge such a personal and private obligation can or can only be for business purposes, although it may have a business effect. We do not in fact know what matters were taken into account in reaching the divorce settlement, but they may have included all sorts of things which were unrelated to the business not least that the property itself comprised a fair amount of land which was apparently not used, or used entirely, for the purpose of the business.

The other disclosed purpose, “Pay off an existing mortgage” is equivocal. It is asserted that this was a commercial mortgage. But the defendants were not told this and did not ask. It was taken out at about the time the claimant and his wife separated and may just as well have been required for personal rather than business purposes or for both.

For these reasons I think the judge was entitled to conclude that the loan was “for purposes outside [the Claimant’s] trade, business or profession, i.e. to buy out his wife.” Whether this was the predominant or merely a subsidiary purpose does not matter, in view of the defendant’s concession. Nor does it matter that another of the claimant’s purposes was to secure the place where he lived and that this was not disclosed to the defendant. As to this latter point it is not alleged that the claimant misrepresented anything to the defendant. If he had, different considerations would apply. As it was the defendant could as I have said, have deduced from the information provided by the claimant that he was both working and living in the property.

So for these reasons I would dismiss this appeal.

I agree.

I also agree. I only add this. In reaching a conclusion in this appeal it has not been necessary for the court to consider the true construction of the definition of “consumer” in the 1999 regulations. It follows that any issue as to the correct meaning of the definition will have to await a future case in which it arises. I should, however, emphasise that in saying that I do not intend to suggest that the concession was not correctly made. In any event, I agree with Tuckey LJ that, in entering into the agreement in this case, one of the purposes of Mr Evans, as borrower, was outside his trade, business or profession. That purpose was, as it was put in a letter of 23 August 2001, from Mr Evans’ solicitors to the lender’s solicitors “as part of a matrimonial settlement with his wife”. That was not, to my mind, a business purpose but a personal purpose. In these circumstances I agree that the appeal must be dismissed.