TFG Security Limited v Howard Shade & Anor

The defendants are the freehold owners of Oak Tree Manor, A1 Burneston, Bedale, where they live and from where was run the business Howard Shade Haulage Contractor. They entered into a loan agreement with the claimant, dated 7 January 2015, and gave security for the loan by granting a second charge over that property in the claimant’s favour. They did not make payments due under the loan agreement and in these proceedings, the claimant seeks possession of the charged property and judgment for the sums outstanding under the loan.

At trial, the claimant was represented by counsel, Mr Clayton. The defendants had solicitors and counsel at an earlier stage in the proceedings, but say they could not afford continued representation, so they have appeared at trial in person. This has undoubtedly been difficult for them, particularly given the technical nature of their response to the claim set out in the amended defence. They nominated Mr Shade to deal with the advocacy at trial . In the event, and in light of the Civil Procedure Rule 3.1A(5), which sets out the courts role at a hearing where unrepresented parties have to deal with the giving of evidence and cross-examination, I had to undertake much of the questioning myself, as well as prompting Mr and Mrs Shade when they gave their evidence as to matter arising from other evidence from the claimants, to which they may wish to respond in order to supplement their witness statements.

At the beginning of the trial I dealt with an oral application for relief from sanctions by the defendants to rely upon witness statements which they had they not served in accordance with the order for direction in this case. I granted the relief they sought for the reasons I set out in a judgment which I gave at the time. There is no dispute as to the validity of the claimant’s mortgage or that, under the terms of the loan agreement and mortgage, the claimant is entitled to possession and a judgment for the balance of the loan outstanding. The loan agreement and the supporting mortgage were signed by the claimant and the defendants, after the defendants had taken legal advice, and was completed on 7 January 2015.

The original loan was for £180,000 repayable in 12 months, though by a subsequent variation, the loan was increased to £209,400, and the period for repayment extended to 29 February 2016, which was a matter of a few weeks.

Clause 2 of the mortgage contains a covenant to pay and discharge the secured liabilities as they fall due, and Clause 3.1 charges the properties as continued security for the payment and discharge of these liabilities; these include all monies owing under the loan agreement. The security becomes immediately enforceable in the event of non-payment of sums due under the loan agreement; Clauses 11 and 12.1 of the mortgage.

The defendants are in default, in that they have failed to repay the loan by a final repayment date of 29 February 2016. Indeed, they were in default by October 2015 when they stopped paying the instalments due. In addition, Clause 12.7 of the loan agreement provides that at any time after an event of default, the lender may, by notice to the borrowers, declare that the loan is payable on demand, whereupon it shall immediately become payable on demand.

Notice of demand was sent to the defendants by the claimant’s solicitors on 26 September 2016. Mr Shade accepted at the trial that the defendant stopped paying under the original agreement in October 2015, and only made one payment thereafter of £1,000 toward the agreement, as varied. In total he says he has repaid about £30,000 of the total sums borrowed.

The issue as to the possession claim is solely as to whether there have been some regulatory failings in relation to the loan agreement or unfairness as to its terms, or the relationship between the claimant and the defendants which prevents the claimant from obtaining the possession order sought.

Like issues arise in relation to the monetary claim, albeit the claimant has indicated that it would be prepared for the quantification of the monetary claim to be adjourned. The total amount due will not be known until the property has been sold,. Further, because there is substantial negative equity, Futher, as the money claim beyond enforcement of the security will, as regard Mr Shade, fall into his bankruptcy and the defendants have no other capital, it may be that quantification of how much is due under the mortgage beyond that which is represented by the equity in the property is academic.

Mr Clayton has informed me that Mr Shade was made bankrupt on 1 December 2017. Mr Shade told me that that was on the petition of HMRC, due to non-payment of tax. Mr Clayton told me that the Trustee in bankruptcy has been informed of these proceedings, but he does not wish to take part.

In summary, the defence is to the effect that the loan agreement was a regulated credit agreement, and the varied agreement a regulated mortgage contract and these are not enforceable as the claimant was not authorised to lend under such agreements. Further, there has been a lack of compliance with necessary documentary requirements to render such agreement enforceable. Central to this part of the case is the question as to whether the transaction was exempt from regulation on the grounds that the loan was for more than £25,000 and was entered into by the borrowers for the purpose of the business carried on by them. If the agreement is enforceable, however, it should not be enforced in relation to the terms as to making the loan payable on demand, the payment of default interest and costs, as these are unfair or penalties and are thereby of no effect. For the statutory provisions engaged by this defence, a key feature would have to be that the defendants were dealing as consumers. Finally it is argued that there was an unfair relationship with the meaning of Section 140A of the Consumer Credit Act 1974, which should lead the court to use its powers under Section 140B of the Consumer Credit Act to alter the defendant’s liabilities under the agreement or require the claimant not to enforce the loan.

It is worth pointing out that despite some of the evidence in this case as to how Mrs Shade came to be a joint borrower and mortgagor, it being suggested that she was really going along with what her husband had arranged, her defence is not put forward on the basis that she was acting under the actual or presumed undue influence of Mr Shade, of which the claimants had actual or constructive notice. Indeed, in evidence she accepted she was not acting under pressure from her husband. Such a plea would have encountered difficulties in any event, as her solicitors had certified that they gave independent advice, although it is right to say there are cases where such a defence can succeed, even with the involvement of a solicitor ; see, for example, Northern Rock Building Society v Hazel Archer; Hazel Archer v Hickmotts (Formerly, Hickmott, Elmirst, Hargan and Co) (a Firm); Hazel Archer v Hickmotts [1998] EWCA Civ 1375

The business ,which is described as Howard Shade trading as Howard Shade Haulage Contractor, got into financial difficulty, according to Mr Shade, in 2008, when its bankers cancelled an overdraft facility for £20,000. I should add that this recitation of the background either deals with evidence, which is uncontested, or where it is not accepted I will make clear that this is an account of events being put forward by a particular witness.

In the following years, the difficulties became more acute as there was a level of bad debt in the business. By March 2014, Mr Shade had debts of over £400,000. He entered into an IVA in that month, under which he was to repay his creditors in full, within two years, but gained some moratorium on the enforcement of debts. There was a provision for the two years to be extended by agreement with his creditors. His proposal provided that the repayment would come from realising the equity in Oak Tree Manor, or a re-mortgage of the property. He agreed that if he was not able to re-mortgage by 31 March 2015, the property would be placed on the open market for six months, and if still not sold, put up for auction by his supervisor.

In 2014, the defendants were put in touch with Richard Mr Gunson, a commercial broker. He visited the defendants at their home. He was told funding was needed to expand the business. There was some work available on the improvement of the A1 road, and Mr Shade wanted money to acquire more vehicles and employees to services this work.

Mr Gunson, having approached a number of lenders who declined to lend, informed the defendants that the best option was a bridging loan in the short-term. It is common ground that it was said by Mr Gunson that it was intended that the bridging loan was to be replaced by longer-term lending. Mr Gunson approached James Mortimore, of the claimant, in September 2014, to provide a short-term bridging loan which was to be used to pay off the IVA, a second charge on both defendant’s interests in Oak Tree Manor in favour of Spring Finance, and to ease cashflow.

Mr Gunson sent Mr Mortimore an informal valuation of Oak Tree Manor at £437,500, and emailed accounts for the Haulage business and confirmation that there was a first mortgage with Halifax, which has also been referred to as Bank of Scotland, because it was Halifax Bank of Scotland, and a second with Spring Finance. In response, Mr Mortimore made an offer in principle which was sent to Mr and Mrs Shade, trading as Howard Shade Haulage Contractor, and who were shown as ‘the Joint Borrowers’. This provided for a 12 month loan facility for £180,000, for the stated purpose of cashflow to take on new work; so it is clear that Mr Mortimore was aware that the loan was to be used to pay off these debts, in order to develop the business further.

The interest rate was 2% per month in advance, with a default rate of 4% per month on unpaid instalments. The arrangement fee was £8,500 and the repayment fee £3,000 . Legal fees are estimated at £1,500, and they were to be paid by the defendants. There was to be a security taken in the form of a second charge over Oak Tree Manor. Following the sending of the heads of terms, Mrs Shade sent Mr Gunson trading invoices for debtors which he passed to Mr Mortimore. Thereafter, the loan and security documentation was provided to Mr and Mrs Shade. They instructed HLW Keeble Hawson, solicitors, to act on their behalf in the transaction. They visited the solicitors to execute the documents.

They say it was a short meeting, but on 21 November 2014, the solicitors wrote to the claimants in these terms; in relation to Mr Shade they wrote, the letter in relation to Mrs Shade, which was a separate letter sent on the same day, simply changed the names of the client who had been advised. They said, ‘I write to confirm the following…’, this is a letter to TFG, ‘1) that HAS’, that is Mr Shade:

It looks, from the context of the letter, that the documents were signed by the defendants and witnessed at the same time; 20 and 21 November 2014. The loan agreement contained declarations by Mr and Mrs Shade at Schedule 3, in these terms:

On 7 January 2015, the claimant completed and dated the loan agreement, and deed of mortgage. The latter also contained a signed declaration in Schedule 3, identical to that in the loan agreement, save for the substitution of the words ‘legal mortgage’ for the word, ‘Agreement’.

The full sum of £180,00 was drawn down and the IVA paid off and, until October 2015, the defendants kept up payments due under the agreement. It was at that stage that Mr Gunson, again, became involved in seeking long-term finance to discharge the bridging loan. Mr Shade said that Mr Gunson was involved much earlier than that, as three months into the loan he, Mr Shade, was phoning Mr Gunson weekly to ask how he was fairing in finding a long-term funder. Both Mr Gunson and Mr Shade were looking for long-term funding but none could be found. Mr Gunson found a company called Together, to whom Mr and Mrs Shade made an application of for a 10 year interest only loan of £200,000 on 5 November 2015, expressed to pay off joint business debt. Together made an in principle offer, but it did not proceed. Mr Gunson said that the proposed lender withdrew after speaking to Mrs Shade, who had indicated some pessimism as to their ability to repay.

The original loan was varied by deed of variation dated 11 February 2016, where it is recorded that payments and instalments had been missed and £14,400 of default interest was owing. Under the deed, the claimant agreed to increase the loan facility to £209,400 and extend the repayment date to 29 February 2016; the repayment fee was increased to £7,000. Mr Mortimore said that he was approached by the defendants to vary the terms, as some payments had been missed, and the business needed money to pay a creditor, Wade Haulage Limited. In fact, the claimants only advanced another £15,000 for that purpose, and the balance of the extended borrowing was capitalised outstanding interest.

Only one payment was made under the agreement as varied, the sum of £1,000 in March 2015. The letter of claim was sent on 26 September 2016, and proceedings commenced on 25 October 2016. In their original defence, the defendants admitted the claim, but indicated an inability to pay until they had refinanced, which they said they were seeking to do; in the event they have not been able to do so. The amended defence puts the enforcement of the security and loan in issue.

I have read and heard evidence from Mr Gunson and Mr Mortimore for the claimant, and Mr and Mrs Shade. There was very little evidential dispute between the witnesses, save as to what part Mrs Shade played, if any, in the business of Howard Shade Transport.

In general, it seemed to me that the witnesses were honest witnesses seeking to give me their account of the evidence as they believe to be the case. Although, in one respect, it seemed to me that what I was being told by Mr and Mrs Shade concerning Mrs Shade’s part in the haulage business was not entirely accurate, but whether that makes a difference will be explained later .

Section 19 of the Financial Services and Markets Act 2000 provides in Section 19(1): ‘No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is (a) an authorised person… (2) The prohibition is referred to in this Act as the general prohibition’. In this case it is common ground that the claimant is not an authorised person under the Act.

Section (27) of the 2000 Act provides at Section 27(1):

Section 28 provides what happens when an agreement is made unenforceable. Section 28(1) is headed ‘Agreements made unenforceable by section 26 or 27’. Section 28(1) reads:

On the facts of this case I do not need to read on from that section, but it is worth recording in the judgment that a court has a power to permit enforcement of an unenforceable agreement if it is just and equitable.

There are two sets of regulatory regimes which may be engaged in this case, and which may render the loan and security unenforceable without an order of the court, where, as here, the lender is not an authorised person.

The first is that which relates to regulated mortgage contracts. That is the Financial Services and Markets Act 2000. In the event, this regime does not apply, because at the time that this mortgage was entered into, only first mortgages were regulated; that is provided for in Article 61 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

The other regulatory regime is that which applies to regulated credit agreements. This regime will apply in this case unless the loan facility was an exempt agreement. Article 60(c) of the 2001 order exempts the agreement if the lender provides the borrower with credit exceeding £25,000 and, ‘The agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on or intended to be carried on by the borrower’.

Article 60(c) provides in paragraph 5, ‘for the purposes of paragraph (3)’, which is that which is the exempting provision from which I have just quoted:

The rules governing the form of declaration, which have the force of law, are to be found in the Financial Conduct Authority’s consumer credit specialist source book. These provide at 1.4.5:

CONC at 1.4.8 R provides a declaration for the purposes of Articles 60(c) of the regulated activities order must have the following form and content:

There is instruction to delete certain parts of the proforma which would not be appropriate.

The declaration, in this case, does not contain the heading either as to the declaration for exemption related to business, or the reference in the heading to Article 60(c) of the Financial Service and Markets Order. The rest of the declaration, in this case, mirrors the information required by the order, although it also includes some additional information.

The claimant acknowledges that the certificate is not in the requisite form, but Mr Clayton argues that it is substantially in the same form and that is sufficient. No authority is advanced for that proposition. For myself, in view of the fact that the source book provides that “the declaration must have the following form and content,” (my emphasis) and shall comply with CONC at 1.4.8, on general principles and in the absence of authority to the contrary, I cannot see any support for Mr Clayton’s contention. The declaration does not comply, and accordingly cannot be relied upon to give rise to the presumption in paragraph 5 of Article 60 (c).

In the alternative, Mr Clayton relies on the declaration as giving rise to an estoppel or contract, that the loan is for a business carried on by the borrowers, so that it is not open to the defendants to assert otherwise. Mr Clayton’s case on contract is based on the fact that Clause 1.7 of the mortgage deed provides that the schedules, which include the declarations at Schedule 3, form part of the deed and have effect as if set out in the deed. He argues on the authority of Fortwell Finance Ltd v Halstead & Anor [2018] EWCA Civ 676 that, as the parties have contracted on terms that the loan is to be used for a business carried on by them, they cannot deny that this be the case.

Fortwell was a case in which there was an agreement that it was a special condition of a secured loan that neither the borrower or a member of their family would occupy the secured property, thus taking the loan and security out of regulation. The absence of such occupancy brought the loan agreement outside regulation, and thus enforceable by an unauthorised lender. In the Court of Appeal the issue ranged around whether a consent order giving up possession should have been set aside to enable the defendants to argue that they had occupied the premises as a dwelling. In dealing with the judgment below, the court said at paragraph 32 to 34: ‘It had been urged upon the judge’, that was Picken J, ‘… by the first appellant that the provisions of FSMA 2000 had been enacted to prevent circumvention of them by means of such clauses in a loan agreement in cases in which lenders were aware of the property being used, in fact, as a dwelling’. The judge did not agree with that submission. He found that the appellants, having agreed the special condition, could not raise the points on the FSMA 2000 now being advanced. The judge said that he agreed with the following submission of Mr Popplewell appearing for the respondent, then as now, to this effect:

Waterside Finance Limited v Karim [2013] 1 PCR 21 was case in which the borrower had contracted that the mortgaged property would be empty at the completion of the mortgage and until the loan was repaid. After dealing with issues concerning setting aside a consent order, which was actually the issue that was determined on appeal, McCombe LJ said in the judgment in the Court of Appeal at paragraph 64:

I should point out at this stage that, there the contractual promise was as to what was to happen, not only at the time of the contact but in the future. However, here in this case, the representation was as to what was the purpose of the loan at the time it was taken; so in a sense promises as to the future in the present case are less important than they may have been regarded in Fortwell.

The fact that the declarations are incorporated into the contract does not itself render them contractual terms. They are more properly treated in the same way as recitals, admissions by the parties as to the factual background against which the deed is set. This is highlighted by the fact that, although they are said to be incorporated into the mortgage deed, there is no provision in the deed that, for instance, the truth of these representations are warranted. They are, nevertheless, representations, and if relied upon by the claimant, in the sense that it has suffered detriment due to such reliance, it is not open to the defendants who made the representation to deny the truth of what, in this case, they declared; that is the case based upon estoppel.

Although this was not argued by the defendants, unsurprisingly since they are not represented, I have given consideration as to whether there is room for the application of the doctrine of estoppel, where there is a statutory scheme requiring a declaration in a particular form which gives rise to a presumption. Could it be said that the question for the court is whether, in fact, the loan was entered into wholly or predominantly for the purposes of the business carried on by the borrower, so that it does not matter what the borrower had said about the purposes of the loan. Article 60(c), after all, provides a presumption in the face of compliant declaration, but the presumption is not said to be irrebuttable, thus there could be a case in which a declaration gives rise to the presumption, but the borrower proves that the loan was not for a business.

Having considered this argument, I reject it. Fortwell clearly contemplated that estoppel is available to prevent a borrower seeking to prove facts inconsistent with their own representation. Further, as a matter of general policy, albeit that the Consumer Credit legislation is there for the protection of the consumers, they do not need to be protected from the consequence of their own falsehoods.

It is not disputed that the defendants both declared that they were borrowing the money for a business carried on by them. Whilst they accept that the borrowing was predominantly used to pay off business debts, their case is that Mrs Shade was not carrying on the business at all, that it was her husband’s business, and her only involvement was occasionally to act on his directions to send out emails, as he had little time to attend to such activities due to working an 80 hour weeks. They point to the fact that the trading accounts were in the name of Mr Shade trading as Howard Shade Haulage.

Asked why she signed the loan agreement which identified them both as trading as Howard Shade Haulage, and why she signed the declaration in the terms she did, Mrs Shade said she, ‘…must have read it wrong’. She accepted that she had seen the offer letter describing them both as trading as the business; she said she had read the declaration and signed it. She confirmed that the solicitor went through the documents with her, separately from her husband, although she said that he went through it quickly. This last point, that it all went very quickly at the solicitor, may have had some force if she had not already seen the offer letter describing her as trading as Howard Shade Haulage, which had come about a month before her visit to the solicitor. Also, it would have had more force had she not actually read the declaration, so I do not place much weight on her explanation that the solicitor went through these documents quickly.

As to the part played by Mrs Shade in the business of Howard Shade Haulage, the claimant relies on the fact that not only did she sign the declarations, but that she was shown on the business website as the point of contact and when documentation was sought by Mr Gunson, such as bank account statements, invoices and documents to confirm identification, these were emailed to him by Mrs Shade. There were also a number of transfers between her bank account and the business bank account between May and November 2014 totalling were £5,000 in all. Furthermore, the Spring Finance charge which secured a loan to extend the house and develop the garage to be used by the business, was in the joint names of Mr and Mrs Shade, and was paid off by the loan facility.

In cross-examination, Mrs Shade said that she had worked as a part-time carer from about 2002 to 2014. She had been a non-working director of a limited company set up by Mr Shade, who at one stage ran the business through the limited company. As to the website, she explained that this was a free site set up by Google and her husband had asked for it to be taken down for some time, although it had remained in position from 2000 to 2017, and although her name appeared as the point of contact it was, in fact, her husband’s phone number.

The bank account transfers were due to her account and the business account being linked, and she had a mandate to make payments out of the business account. The transfers related to money her husband paid into her account, seemingly to keep it separate from the money in his account, and to keep it out of the hands of his bank; that last explanation came from Mr Shade.

On balance, I am satisfied that Mrs Shade knew and understood that she was holding herself out as trading in business with her husband. The points relied upon the claimant, which I have identified, suggest that she had more dealings with the business than she cares to let on. Given that Mr Shade said he was working an 80 hour week, and his evidence that there came a time when Daisy, his secretary, left due to the business getting more difficult, it was inevitable that he would need administrative back up, as is evidenced by the fact that it was Mrs Shade who sent many of the documents to Mr Gunson. There is not sufficient evidence, however, that it was her business that was being carried on, as opposed to taking a greater part than she claimed in helping her husband in the running of his business.

Again, due to lack of representation, there has not been argument as to whether the requirement in Article 60 for the lending to be intended for the purpose of the business carried on by the borrower, requires that it is the borrower’s business, as opposed to the borrower is just taking a full part in the carrying on of somebody else’s business, but in the absence of argument, I approach this on the basis that the requirement under Article 60(c) is that it is the borrowers’ business which is being carried on.

Nevertheless there were these declarations, so provided there has been reliance on the declarations, the claimant does not need to prove that it was Mrs Shade’s business due to her representations that the loan was for a business, because she has made representations along with her husband, that the loan was required for a business carried on by her and her husband. If there is reliance, they are prevented, by the doctrine of estoppel, from denying that this is the case.

On the subject of reliance, I have heard from Mr Mortimore. He said his company would not have lent in this way if he had been made aware that Mrs Shade was not carrying on the business. As the claimant was not an authorised lender, it could have structured lending in another way so as to render it enforceable. What it would have done was to lend to Mr Shade and taken a charge by their security for his borrowing, with a third party security and guarantee from Mrs Shade. I see the sense in what he says; clearly he is going to want to lend in such a way that they agreement is enforceable and therefore would structure it in the way that he suggests if he had appreciated that Mrs Shade was other than what she was suggesting. I accept his evidence on this point.

Further, the loan agreement provides that there can be no drawdown until the declaration is provided, thus without the representations as to the purpose of the loan and the status of the borrower, I am satisfied the claimant would not have entered into this particular type of transaction but would have entered into one which would not have put it at risk of the agreement and the mortgage being unenforceable, and would certainly not have paid out any money under this loan in the absence of the representations.

It is right and I, really on the defendant’s behalf, explored the question with Mr Mortimore, as to whether he did not actually conclude that the representations were not correct, or may not have been correct, because some of the documents showed that the business was Mr Shade trading as Howard Shade Haulage, namely the accounts and the bank statements. Of course, however, the fact that business is described in those documents in that way does not mean that Mrs Shade does not have some interest in the business, sufficient to spring Article 60(c) and, as he said, he had solicitors’ certificates confirming the explanations that had been given to the parties. Solicitors were involved in the provision of the declarations and therefore he did not have any reasonable ground for concluding otherwise than what he was being told in the declarations was the truth.

The result of all these considerations is that the defendants are estopped from denying that which they represented, namely that the loan was for the purposes of a business carried on by them. The effect of this conclusion is that the loan is not unenforceable on the grounds of regulatory failings.

The defendants rely upon the Consumer Rights Act 2015, in relation to the post-1 October 2015 transaction, namely the variation of February 2016. They rely upon the Unfair Terms in Consumer Contracts Regulation 1999 for the transactions prior thereto. Under the 1999 regulations, the defendants would have to be consumers to take advantage of its provisionsThey would have to be acting for purposes which were outside their trade business or profession, that is Regulation 3(1) of the 1999 regulations.

To qualify for protection under the 2015 Consumer Rights Act, the defendants would have to be persons acting for purposes wholly or mainly outside their trade business or craft or profession. In view of the representations they made in the Schedule 3 declarations, they are estopped from alleging that they were borrowing otherwise then for the purpose of their business, thus they cannot be regarded as consumers under either provision, and cannot take the benefit under either.

In view of that conclusion, I shall not lengthen this judgment by looking at the counter-factual position as to what would have happened if they had been consumers. However, I will say this, tthey would certainly have had difficulties in relation to a number of their assertions under the regulations and the Act. Firstly, because the terms were individually negotiated; secondly, because a term which provides for payment of the balance due on default, or all sums becoming due on default, is generally not regarded as unfair, provided it does not include that all rolled up future interest is payable; thirdly, they had both a solicitor and broker acting on their behalf in acquiring this loan; and fourthly, insofar as they are saying that the price paid under the loan was, ‘too much’ that was a core term which would not fall to be considered as being an unfair term. However, I do not need to look at that closely due to the conclusion on the issue of consumer.

The law as to penalties has been raised on the pleadings but there has been little argument on the issue to assist me. Indeed, the height of the argument seems to have been that as there is evidence that an association with short-term lenders recommends a 3% default rate on bridging loans; it is industry practice to charge default interest.

The allegation which is said gives rise to a penalty is to be found in paragraph 15 of the amended defence. There it is said that Clause 6.5 of the loan agreement is a penalty, because it requires the defendants to pay 4% per month interest on sums which become due under the loan but are not paid on the due date. The only evidence on this issue as to why the interest rate has effectively doubled on default came from Mr Mortimore. He said that the term as to default interest was in the agreement to ensure the claimant was paid by the client; that is to say they would be more inclined to pay if they knew they would have to pay double if they failed to pay.

He also said that the imposition of the default interest rate was standard in the industry, and the association of short-term lenders recommended a rate of 3%, although he did not tell me of their base, if there is a basic recommended rate i.e. a non-default rate, with which to compare it, so I do not actually know how much the 3% rate exceeds what would ordinarily be the default rate.

The rules as to penalties apply to sums that are payable on breach of contract by a defendant. A clause which provides for a penalty is unenforceable. In the absence of argument on the case, I have resorted, myself, to looking at Chitty on Contracts.

In Chapter 26, paragraph 195 of Chitty a reference is made to a decision of the Privy Council in Cavendish Square Holdings BV v Makdessi and the Supreme Court in ParkingEye Limited and Beavis [2016] AC 1172. What is said about the doctrine of penalties in Chitty, is that the doctrine was modified by the Cavendish Square case. The correct question is not whether one party secured the clause by use of unequal bargaining power or oppression, but whether or not the clause is genuine pre-estimates of the likely loss’, and it goes on “Where a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into, the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party of the breach. The question that always has to be addressed is, therefore, whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. “That is taken from Lordsvale Finance plc v Bank of Zambia [1996]QB 752, 762-764.

Looking at the question of genuine pre-estimate of loss, Chitty refers to what was the seminal case on penalty clauses Dunlop Pneumatic Tyre Company v New Garage Motor co [1915] AC 79. The following propositions which were set out and which are referred to in Chitty:

On the other hand:

That was the position in Dunlop v Selfridge that has been since modified to an extent following the ParkingEye case, because if we go to Chitty at chapter 26 paragraph 213:

Then the passage goes on, referring to what was said by Lords Neuberger and Sumption in ParkingEye:

In ParkingEye, deterrence was part of the legitimate interest, because in ParkingEye the scheme that ParkingEye operated was the control of parking spaces, and therefore there is an interest in the efficient running of the scheme to deter people from overstaying their welcome, for otherwise then parking places are not available for others. Thus, naked deterrence, whilst in itself may not be a legitimate reason for charging sums which are not explained as being a pre-estimate or a possible pre-estimate of damage, there can be circumstances where deterrence is legitimate. In this case the only evidence as to why this charge was imposed is that it was a deterrent to give the claimant pause for thought to ensure that they complied with the terms of the contract.

However, simply saying that other people impose this charge does not seem to me, on its own, a justification for the charge when we come to look at the law of penalties, because it might be that other people, that is to say the industry standard, have a reason for imposing this charge. It would not be right for me to speculate upon the reasons they put forward. One could quite see, I am not saying these are their reasons, but it may be said that additional interest charges are a legitimate pre-estimate of loss because, for instance, when you enter into a loan and a contract for a period, you may have some backing transactions to source the finance, so if there have to be unexpected drawings on the source finance this can have an additional cost for the lender, or there can be additional administrative costs; these are all matters which may be prayed in aid by the Association of short-term lenders but no such justification has been put forward in this case, so we are really dealing with what one might call a naked deterrence case.

Therefore, on the facts that are presented to me, the doubling of interest on default would be capable of being a penalty, given that the sole object of the imposition is said to be to pressure a defendant into making a payment on the due date. However, I have hesitation in treating it as a common law penalty in the absence of the benefit of argument of the parties as to whether this is a secondary or a primary obligation under the contract. Referring again to Chitty, at Chapter 26 paragraph 239, Chitty says in Cavendish Square Holdings BV v Anor v El Makdessi [2012] EWHC 3582:

It goes on later:

My view, therefore, is that looked at solely in the light of law of penalties, it seems to me that the obligation to pay default interest is a primary obligation. The defendants had agreed to pay 2% if they paid by the due date, 4% if they did not. Essentially that was part of the charge for the credit, and that charge went up in default. That was a matter negotiated between the parties and, in a sense, the claimant put forward the terms on which it would lend. The defendant offered to borrow on those terms and the claimant accepted that offer.

That, of course, is not the end of the matter as the question as to this additional charge for credit had to be looked at in light of the final line of defence, which is whether or not there was an unfair relationship between the creditor and the debtor, and that takes me to the Consumer Credit Act which applies, albeit that this was an unregulated agreement.

Section 140A of the Consumer Credit Act 1974 provides at subsection (1):

Section 140B sets out the various powers the court can use. These include: ‘(d) requiring the return to the surety of any property provided for him for the purpose of the security; (c) reducing or discharging any sum payable by the debtor by surety, by virtue of the agreement or a related agreement or I can alter the terms of the agreement’.

Subsection (9) is also important; ‘ if, in any proceedings, the debtor or surety alleges that the relationship between the creditor and the debtor is unfair to the debtor, it is for the creditor to prove the contrary; so it is for the claimant to prove the contrary.’

Before embarking on an examination of the allegations of unfairness pleaded, it would be right to refer to the evidence about this aspect of the case from Mr Shade. His evidence was that he said he knew he was paying a particularly high interest rate, and this was needed as he required this short-term loan; he said he expected that. His real complaint was against the broker Mr Gunson, who he said had assured him that this was a short-term arrangement, and Mr Gunson would find him cheaper lending within the year. He only entered into the agreement because he had that assurance from Mr Gunson; it is important to point out that Mr Gunson was his agent, not that of Mr Mortimore.

It is right also to add that he said in evidence and when giving his closing submissions, that he is now in a predicament where he cannot settle the amount claimed because the interest is being added. Therefore, each time he could come to some arrangement with some other lender to pay off the claimant, the debt has gone up. Secondly, since the claimants have appointed receivers under the mortgage deed, he cannot use his property in the way he would wish to use it, to generate an income in order to find another lender, so he is in a difficult situation. I regard this point about not being able to settle the claim because the interest was raising the sum claimed as not made out. The parties quite freely referred in evidence to details of offers which have been made and, in fact, the evidence has been, and I accept from Mr Mortimore, that there was an offer to accept a fixed sum to settle the claim; first for £250,000 and later for £300,000, and that simply has not been paid. Of course, there is a good reason for that, which is that on Mr Shade’s own evidence he cannot afford to pay that or, indeed, any realistic sum to pay off this loan or even the principle under the loan.

This is set out at some length in paragraphs 27 and 28 of the amended defence. The first few allegations can actually be taken together. The first is that the claimant is an experienced and sophisticated lender, whereas the defendants are not sophisticated or experienced in dealing with financial products, so there is an inequality of financial knowledge and expertise.

I accept that the claimant is an experienced lender; they make no secret of that face. However, if it were the case that everyone who dealt with a professional lender could obtain the court’s finding that there is an unfair relationship because they were less experienced in lending, there would be no credit business at all, and trade could not proceed. In fact, in this case the defendants had a broker acting for them, so they had their own expert with whom Mr Shade understandably says, I say understandably, as far as Mr Shade is concerned he does not think the broker did a very good job but, nevertheless, he had his own professional advisor and they had lawyers; both legal and financial advisers acting for them. Accordingly, I cannot see that there is any imbalance in expertise which could give rise to an unfair relationship. Although the burden is on the claimant, I cannot see that a claimant would do anything more than to point to the fact that these facts to satisfy me in relation to that matter.

Secondly, it is said that there was an inequality in the bargaining positions because the defendant was in a financially distressed position, after all had entered into an IVA and the IVA required that they either re-mortgage their property or sell it. Again, it is right that the claimants were a last resort lender in this case, but there is a good reason for that. Either the defendants got some breathing space by borrowing from the claimant, or they got no breathing space at all and the IVA was not going to be paid off.

Their broker had gone into the market and he could not find anything else other than short-term lending. Unless we are going to come to the conclusion that bridging finance is going to be outlawed because those in need of bridging finance only take it because they have to, for example, because they cannot get long-term lending, I cannot see why it should be said that it gives rise to unfair relationship here.

The next allegation is that the claimant knew that the first defendant was subject to an IVA, so it should have been careful in entering into this arrangement. I should say, also, that it is also alleged that the accounts of the business showed that they could not afford to meet the monthly interest charges, and therefore this was an unsuitable product. The defence case, it seems to me, is that there should not have been any lending at all; they should have just been allowed to fail on the IVA. In my view, there is no unfairness in the relationship if the claimant knew that the defendant was subject to an IVA, and that they were likely to be the only resort. The fact the higher interest rates and arrangement exit fees are incurred, I will restrict this to higher interest rates actually, arises from the fact that this was very risky lending because of the whole history of the lending.

Where a business is at risk and the owners as, rather late in the day, to finance so as to keep the business going, unless it is to be said that those people are to be deprived of finance, I cannot see why it should be said that this gives rise to an unfair relationship. After all, the defendants did not have to take it, they had the alternative course; either borrow or face the consequences. They took a risk of which they knew; Mr Shade made it clear that he was aware this was a high rate of interest, and he took it on the basis that he, at the time, had confidence in Mr Gunson that this was to be a short-term arrangement, which could be paid off, and they would get other finance. Accordingly, I do not see why the claimant should have seen it in any other way. This was a business seeking short-term finance, clearly with a view to, in the long-term, repaying this debt and finding other finance.

As regards to affordability, the fact is that this loan is being sought not just to keep the business ticking over, but to put the business in what was thought to be a much better position by taking on more extensive contracts and thereby raising the revenue. Obviously, the claimant will make its assessment as to whether it thinks that is realistic, but it is the defendants who, and certainly Mr Shade, who knows the business better than the claimants, and if they are borrowing to expand the business, and Mr Gunson is told about these additional contracts, why should the claimant doubt that.

Again, the fact that the accounts, historically, did not show an ability to repay did not give rise to an unfair relationship. The claimant says there is no obligation upon them, whether it were common law or otherwise, to satisfy themselves that this business can afford these repayments, and I have not been referred to any statutory requirement or common law requirement that that is the case. Therefore, I am satisfied that whatever was shown by the accounts, what they revealed did not give rise to an unfair relationship, neither did the fact that the claimant’s view of the defendants’ predicament give rise give rise to an unfair relationship.

Then it is said, ‘A prudent lender would have made further enquiries and determined this was an unsuitable product’. This really falls within what I have already said; there was no obligation to make further enquiries. Then there is the allegation that the modified agreement was an unconscionable bargain in which the borrowers were in default of the terms of the loan because the borrowers, if in default, had to pay a double rate of interest and because on the further advance, the exit charge went up by £4,000 when, in fact, the effective additional sum paid over was £15,000 because the rest of the additional borrowing of £29,000 was capitalised interest.

This has to be read together with paragraph 18.7, where it sets out that there was an excessively high arrangement fee, exorbitant level of interest at 2% per month, and exit charges increased to £7,000 and a harsh and arbitrary provision governing default and a penal level of default interest. It is also said the legal fees were unreasonably high; this refers to the cost recoverable in the case.

As to the legal fees, those are payable under the contract, but there is a procedure for requiring an assessment of those fees these days under the Civil Procedure Rules, so it does not seem to me that that is a valid challenge.

The arrangement fee; that amounts to about 0.07% of the borrowing. Arrangement fees are a feature of this sort of loan, I have not had comparative figures, but 0.07% does not seem to me striking or excessive, and indeed there was evidence from Mr Gunson that the fees in this case were what he would expect to find in the industry, so that will satisfy me that just charging an arrangement fee of £8,500 does not give rise to an unreasonable relationship.

The interest rate, again, Mr Gunson said this as the sort of rate you could expect and, indeed, we have had the evidence from Mr Shade that he expected to pay this higher rate of interest for the bridging loan. In the face of a 24% rate of interest on a risky loan of this sort, it is difficult to see where that gives rise to unfair relationship, the exit charges I will come back to. The provision in default seemed to me a very standard provision. If you decline to abide by the terms of the contract by not paying the sums due, the other side generally can treat that as a repudiatory breach and say you are not going to comply so just pay us our money back. That does not seem to me to be a particularly exceptional term and does not give rise to an unfair relationship.

Then the penal level of default interest, I will come to that. The amended defence goes on, interest, fees, charges and costs should be viewed in the context the claimant had a security over a real property in respect of the loan. Well, yes, but the defendants were clearly a bad credit risk and as has happened in this case, if they do not pay for long enough, the equity in the property which of course had a first charge on it to Bank of Scotland Halifax, could quickly be exhausted. Therefore, I do not see that as giving rise to an unfair relationship.

Then there is, it seems to me, a repeated allegation that there was a reckless disregard for what the defendants could afford, and the claimants would profit from default. This was a term of the loan and does not seem to me a reckless disregard for the reasons I have given.

As I say, I will return to the default interest rate in a moment. There is an allegation of criminal conduct. That is all on the basis that this was a regulated agreement, which it was not. Then, a general allegation, ‘The defendant [inaudible] on all relevant circumstances leading up to the agreement’.

I return to the two areas where I have said I have some doubt as to whether the question of whether this is an unreasonable relationship has been dispelled. The first is the increase in the exit fee. Mr Mortimore’s explanation for the increase in the exit fee, is that instead of charging an arrangement fee, this was added to the exit fee so as to provide the defendants with greater liquidity, but the effect was to increase the exit fee by £4,000. The borrowing, £180,000 borrowing with an £8,500 arrangement fee, represented 0.044% of the loan, whereas when the borrowing was increased to £209,000 and the arrangement fee of £4,000 added to the exit fee, the percentage of arrangement fee to increased loan had risen to 14% of the additional loan. At 0.044%, it should be closer to £1,276. Although this £209,000 could be seen as a complete replacement loan, in fact it was not, it was simply a fact that the amount borrowed was increased by £29,000, £15,000 of which was paid over and a few weeks extra grace given for repayment.

I cannot see on the evidence of the claimant how it has justified how the increase in this deferred arrangement fee has been increased to that extent. Under Section 140B I can reduce it to £1,276 and I do so. Therefore, the total exit fee, because it was all deferred, would be the £3,000 plus £1,276 or £4,276.

I come to the default interest. As I indicate in my judgment, the default interest I see as a primary obligation; this is part of the price of the credit. However, I can look at it again in the context of unfair relationship, not simply under the common law doctrine relating to penalties. The evidence is that the industry recognises that default interest is charged where there has been default, and if it is an industry norm, and I accept from Mr Mortimore that it is an industry norm, it is difficult to conclude that the charging of default interest gives rise to an unfair relationship where it is commonly found in bridging loan facilities of this sort, because I can also look at the position in the industry generally in deciding as to whether this relationship has given rise to unfairness.

However, what of the rate? Mr Mortimer tells me that the industry recommends 3%. There is no explanation of how he has come to 4%. Mr Clayton says there is not much difference between 3% and 4% and so it is not so out of the ordinary that I should find it gives rise to an unfair relationship. However, bearing in mind it is for the claimant to prove that the effect is not to make the relationship unfair, and although the claimants point to the fact that the defendant had a broker and were legally represented and did not question the 4% rate at the time, I still do not know, on the evidence, why it is 4% as opposed to the industry standard of 3%.

Therefore, in this particular regard, in the absence of such an explanation, I am not satisfied that the charging of default interest at a rate greater than that recommended by the association representing short-term lenders is properly justified, and I am not satisfied that charging 4% as opposed to 3% does no indeed give rise to an unfair relationship. Accordingly, I reduce the default interest rate under my powers under Section 140B to 3% on unpaid balances as and when they fell due, therefore the sums due would need to be calculated.

What is the result? l, the agreement is enforceable, as is the charge. Some adjustment needs to be made to the amounts being claimed. I am satisfied that the defendants have no possibility whatsoever of paying off the debt, even reduced in the way I have suggested. No defence to the possession order has been made out, and in those circumstances I should make a possession order and not, for instance, suspend the order because there does not seem to be any possibility that this debt will be paid off in a reasonable time and, indeed, the loan agreement has come to an end.

As regards whether I should quantify the sums due at this stage I accede to the claimant’s original suggestion that I should adjourn assessment of sums due for a number of reasons. First, I have not been given a breakdown, that is to say a schedule of how all the sums are made up and would, in any event, be disinclined to reach a conclusion as to what are the sums due in the case of unrepresented defendants who do not have a schedule in front of them and one which I can pick over to see what has been included in the charges. Secondly, the sums need to be recalculated anyway and thirdly, there is going to be possession; the property will be repossessed and after sale post repossession it will be known what the balance due may be and the matter can be looked at that stage if the claimants think it is worthwhile which, on the facts as presented to me seems unlikely but not impossible.