Possession proceedings and the unfair relationships provisions

Housing Rights has been providing specialist advice to homeowners at risk of repossession for many years. One of the avenues open to certain people facing repossession is an argument that the loan they’ve entered into has created an “unfair relationship”. Solicitor Chris McGrath discusses how this argument can work as it is important that those advising in respect of mortgage lending have an understanding of the remit of the unfair relationship provisions

Borrowers who wish to resist a claim for possession against their home can explore a number of avenues. These include challenging the validity of the loan agreement, raising a defence that the transaction was fraudulent and subject to undue influence, or applying for a time order, to vary the structure of a loan. Additionally, a borrower may seek to apply for an Order from the court if they can show that the borrowing was subject to an unfair relationship.

This argument can only be advanced where the possession action is being taken in respect of a loan, which is a regulated agreement within the terms of the Consumer Credit Act 1974, as amended by the Consumer Credit Act 2006(the Act). An application for a court order as a result of an unfair relationship can also be brought independently to possession proceedings.

Court powers to deal with unfair relationships

Unfair relationships are a statutory creation. The provisions apply to credit agreements at the points in time during which they were entered into and, in effect, permit the court to ‘reopen’ the credit agreement at any time. The court has the power to vary the terms of the agreement between the lender and borrower, and this could ultimately result in the prevention of possession by giving the borrower more favourable repayment terms.

Under Section 140A of the Act the court can make an order if it determines that the relationship between the borrower and the debtor arising out of the agreement is unfair to the debtor. The court can do this if any of the following are deemed to be unfair:

• any of the terms of the agreement or of any related agreement
• the manner in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
• any other thing done, or not done, by or on behalf of the creditor before or after the making of the agreement. 

Significantly, when determining whether an agreement is unfair, the court “shall have regard to all the matters it thinks relevant” (Section 140 A (2)). Furthermore, a court has the power under these provisions to make a determination on a relationship, even if that relationship has ended. (Patel v Patel (2009) The court has a very wide, yet defined, discretion, to take into account any matters as it considers relevant when assessing the fairness of relationship between the parties.

Where the Court finds a relationship to be unfair, they have wide reaching powers, which include altering the terms of the credit agreement, reducing the amount payable by the borrower, requiring the lender to refund money to the borrower, removing any duty placed on the power under the agreement, and imposing particular requirements on the lender.

Once the borrower alleges that the relationship was unfair, the onus shifts to the lender to prove otherwise.

Factors to be considered when determining if a relationship is unfair

In deciding whether a relationship is unfair, the court must look at all the circumstances pertaining to the terms of the agreement and the history of the relationship between the parties. The case of Director General of Fair Trading v. First National Bank [2001] UKHL 52 provides examples of factors that may be considered when deliberating fairness. These include, among others:

• the deliberate or unconscious taking advantage of a consumer’s necessity, lack of experience, unfamiliarity with the subject matter or weak bargaining position;
• a lack of fair and open dealings between the consumer and the lender;
• whether the lender has acted other than in good faith;
• whether the agreement is detrimental to the consumer.

Additionally, leading texts on the law of mortgages and Consumer Credit Act 2006[1] provide further guidance on the matters which might be taken into consideration when determining whether an unfair relationship exists and is relevant to the court assessment. Such factors include:

• whether the lender, or any broker, has engaged in an unfair commercial practice, such as misleading, harassing, coercing, or otherwise unduly influencing the borrower to enter into the transaction
• the steps taken by the lender to ensure that the consumer was suited to the financial product, including any assessment of creditworthiness
• the circumstances of the borrower, including age, experience, business capacity, state of health and the extent to which he or she may have been under pressure to enter into the agreement
• whether the borrower provided accurate, full, and honest information to the lender
• the relevant practices in the current market and in particular the level of interest charged throughout the term

Although a borrower can rely on a number of factors to demonstrate that a relationship is unfair, the court may take into consideration the prevailing practices of lenders within the market. Lending practices in the early 2000s were often markedly different to current lending practices. These circumstances should be taken into consideration when advising borrowers in respect of these provisions.

Office of Fair Trading guidance on unfair relationships

In 2008 The Office of Fair Trading published guidance, namely, the Unfair relationships – Enforcement action under Part 8 of the Enterprise Act 2008. This guidance sets out what is acceptable business practice and may be useful in identifying behaviour falling within the remit of the unfair relationship provisions.

Practices which may be regarded as unfair or improper include:

• failure to disclose status or potential conflicts of interests, such as where a fee or commission is payable to a broker
• applying unreasonable pressure on consumers to sign an agreement, in particular when dealing with them face to face
• misrepresenting or concealing the terms of the contract, or making false representations, for example as to the borrower’s obligations
• irregular or incomplete documentation, or falsification of income or other details, or knowingly permitting such information to be provided
• encouraging the consumer to replace unsecured debt with secured debt, unless this in the borrower’s interests and is explained fully to them
• failure to check information or to obtain sufficient evidence regarding the borrower’s financial position and ability to repay
• failure to deal with arrears sympathetically and positively, or imposing excessive charges on default.

There are occasions when the lender’s practices may not in themselves infringe the law, but the practice may have created an unfair relationship between the parties.

Holistic assessment

When a borrower or adviser identifies symptoms of an unfair relationship they may seek to demonstrate to the court that it is just to make an order under the provisions.

The UK Supreme Court decision of Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 pointedly confirms that the unfair relationship provisions do not confer a right to a borrower by reason of a breach of legal duty, or impose any specific obligation on a lender.  Rather, Section 140A of the Act is concerned with the question of whether the creditor’s relationship with the debtor was unfair.

Although we have set out a number of factors to be considered when advising a borrower, the court has made it clear that these provisions are not about specific minimum standards expected of creditors. Rather, as the Supreme Court has stated, it is a broader test of fairness applied to the particular debtor-creditor relationship and any determination of unfairness involves a large element of forensic judgment and a holistic assessment of the relationship.

It is relevant to note that although there has been a significant volume of case law stemming from the unfair relationship provisions, there have been much fewer legal decisions favouring borrowers. However, the provisions continue to provide a useful and potentially powerful tool to borrowers when the circumstances allow.