A Guide to Fixed Rate / Bridging Loan Unfair Relationship Claims

What aspects of a loan agreement may be unfair? The unfair relationships provisions of the Consumer Credit Act 1974 (ss 140A to 140D), apply to lending agreements whenever made. Borrowers are increasingly bringing unfair relationship claims before the County Courts of England & Wales often resulting in multi-million pound confidential lender settlements. The Court has a wide discretion to alter unfair agreements to make them fair. If successful, such claims can result in the lender repaying parts of the loan, compensating the borrower, or being ordered to vary the terms of the loan agreement.

The claims that we are litigating often involve repayment of multi-million pound swaps break costs risks that were routinely and unfairly passed on to the customer under the loan agreement, by major UK banks and building societies.

What is an Unfair Relationship Claim?

Under Section 140A of the Consumer Credit Act 1974, an unfair relationship claim refers to a situation where a consumer (borrower) alleges that the relationship between themselves and their lender has become unfair. The section outlines the circumstances under which a court may determine that a relationship is unfair, including if the lender has taken advantage of the borrower’s lack of understanding or experience, if the lender’s conduct was oppressive, if the lender has used an excessive rate of interest, or if the terms of the agreement were so onerous that they left the borrower with no reasonable chance of paying back the debt.

In such cases, the court may declare that the relationship is unfair, and the lender may be required to take specific actions to remedy the situation, such as reducing the interest rate, waiving charges, or returning the borrower’s property that was taken as security for the debt.

It is important to note that a successful claim under Section 140A requires the borrower to demonstrate that the lender’s actions were both unfair and that the relationship between the lender and the borrower has become unfair as a result. Our experienced team can provide guidance and assistance in whether you can pursue an unfair relationship claim under the Consumer Credit Act 1974.

What is an Oppressive Loan Agreement?

An oppressive loan agreement is one where the loan terms are not balanced and put the borrower in a disadvantageous position. This can include high-interest rates, short loan terms, or unsuitable security arrangements. To be considered oppressive, the loan must also have caused the borrower undue hardship.

What is Undue Hardship?

Undue hardship refers to the impact of the loan agreement on the borrower. For a loan agreement to be considered oppressive, the borrower must demonstrate that the loan caused them undue hardship. This may include financial difficulties, loss of business, or loss of property. The court will assess the unique circumstances of each case when determining if the loan caused undue hardship.

Examples of Potentially Unfair Terms:

Interest rates being excessive is the most common pleaded unfair term especially when it comes to default rates of interest and the effect of compounding.

However, any term can be scrutinised for potential unfairness. For instance, we have taken legal action against several major UK lenders for imposing massive break costs liabilities for financial derivatives (swaps) onto borrowers without fully disclosing the risks involved. The borrowers may have thought these costs would only amount to a few thousand pounds, but in reality, they could reach several million or more depending on the underlying derivative, which the borrower may not understand but the lender is aware of and has attached to the borrower’s internal credit profile.

When determining if a term in a lending agreement is unfair, it is crucial to consider if the term is widely used and if it serves a valid commercial purpose. It is also essential to examine whether the term protects the reasonable interest of the creditor, and if it favours the creditor over the debtor. Factors such as the lending value, the borrower’s commercial experience, and their bargaining power should also be taken into account. Other considerations include any pressure put on the borrower by the creditor, their prior lending experience, access to professional advice, the borrower’s education and background known to the lender, and any objections the borrower raised about the terms.

Case Study: Pontearso v Greenlands Trading (2008)

In this case, the lender brought a repossession claim under a short term unregulated second charge bridging loan that contained a monthly interest rate of 1.45%, increasing to 3% on default together with a Default Administration Fee of £1,995. The claimant argued the loan agreement included a high rate of interest and unreasonable charges. He argued that the lender had taken advantage of his financial difficulties and lack of understanding of loan terms to impose oppressive terms on him.

The court declared the relationship between Mr. Pontearso and Greenlands Trading to be unfair under Section 140A of the Consumer Credit Act 1974, and ordered the lender to reduce return some of the charges.

This case highlights the importance of carefully reviewing loan terms before entering into an agreement, and the ways in which a court may declare a relationship to be unfair if the lender takes advantage of the borrower’s financial difficulties or lack of understanding, particularly with regards to default rates of interest and default administration fees.

Case Study: Pilgrim Rock v Iwaniuk (2011)

In this case, the claimant, Pilgrim Rock, took assignment of a loan agreement between Brooke Investments and Mr. Iwaniuk with regards to a £1.2m JV property renovation deal.

The loan agreement included several unreasonable terms, including a high rate of interest and oppressive charges. The loan was repayable after 4 years and carried a rate of interest of 6% per annum up to the end of the term and a default rate of interest of 9%. Interest was compounded quarterly. When repayment was demanded 4 years after maturity, £2.74m was claimed by Pilgrim.

The borrower argued that the lender had taken advantage of their lack of experience and understanding of loan terms to impose unfair terms on them.

The court declared the relationship between Pilgrim Rock and Mr. Iwaniuk to be unfair under Section 140A of the Consumer Credit Act 1974, particularly due to the cost of compound interest and lack of action by the lender allowing the debt to increase. The court exercised its wide discretion and ordered the lender to waive some of the charges by reducing the rate of interest to 1.25% per annum over Bank of England base rate compounding annually.

This case demonstrates that the acts and omissions of third parties can be relevant matters in respect of which which a court may declare a relationship to be unfair if the borrower’s rights are violated under the Consumer Credit Act 1974.

Case Study: Thomas Nelmes v NRAM Plc (2016)

This was a case involving a consumer (Mr. Nelmes) who owned a residential property portfolio and took out a loan from Northern Rock Asset Management Plc (NRAM).

Mr Nelmes refinanced with NRAM in 2007 and entered into loan and security arrangements. In 2013, NRAM sought to enforce security over the portfolio and Mr Nelmes brought a case alleging the relationship was unfair under s.140A of the Consumer Credit Act (CCA). Nelmes claimed the relationship was unfair based on contract terms, NRAM’s exercise of rights, and other things done by or on behalf of NRAM. The Court rejected all but one of Nelmes’ allegations, finding that the terms were standard for this type of product and Nelmes was experienced in the buy-to-let field.

However, the Court found that two instances of unfairness existed: NRAM’s appointment of receivers was precipitous, but Nelmes failed to make any payment proposals, so the unfairness did not lead to relief; and, the undisclosed procurement fee paid to the broker by the lender, breaching the broker’s duty of undivided loyalty to Nelmes, made the relationship unfair.

The Court ordered the secret commission plus interest be returned to Nelmes to rectify the unfairness.

What Happens if Your Unfair Relationship Claim is Successful?

If your unfair relationship claim is successful, the court may order the lender to repay all or part of the loan, compensate you, or change the terms of the loan agreement. The specific outcome will depend on the facts of your case and the circumstances surrounding the loan.

It’s crucial to note that unfair relationship claims in tailored business loans are complex and a specialised area of law. Before making a claim, it’s advisable to seek legal advice to increase your chances of success.

In summary, unfair relationship claims offer a crucial legal remedy for borrowers feeling that their loan agreement is unbalanced and puts them at a disadvantage. With the help of legal advice, a successful claim can result in the lender being ordered to remedy the unfairness thereby compensating the borrower.

Book an Initial Consultation with Our Financial Services Litigation Lawyers 

Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and companies in unfair relationship claims. Our high profile and high value cases regularly appear in the national and international media and our team have successfully managed and settled litigation against all major UK banks.

_{Please note that for regulatory reasons we do not offer any free advice.}