Unfair relationship? – Follow the guidance
by Kate Harrison
With one in four people in the UK now expected to experience mental health problems at some time in their lives, a recently reported Court of Appeal decision highlights the need for lenders to follow best practice guidance when enforcing their security in order to avoid a claim of unfair relationship.
In the case of Graves v Capital Home Loans Ltd the borrower, who had a buy to let mortgage with Capital Home Loans Ltd (CHL), was sectioned under the Mental Health Act 1983 and admitted to hospital. There was a long history of arrears on the mortgage account by the time of his admission. CHL used a medical consent form produced by the Money Advice Liaison Group to discover the extent of the borrower’s mental health problems and were informed that the borrower had lost capacity to deal with his financial affairs. The hospital consultant advised CHL that the incapacity was only expected to be temporary, since the borrower was expected to make a good recovery. CHL exercised the powers contained in the mortgage deed to appoint a receiver and once the borrower regained capacity exercised its power of sale.
In the action brought by the borrower once he had regained capacity, the Court had to consider whether CHL’s enforcement of its rights constituted an unfair relationship under s 140 of the Consumer Credit Act 1974 given its knowledge of the borrower’s mental health problems. The borrower argued that he had not been treated with sufficient understanding of his illness and CHL should have made more of an effort to negotiate a repayment scheme with him before selling the property.
Section 140 entitles the Court to intervene where there is a credit agreement if the relationship between the creditor and the debtor is considered to be unfair in relation to any aspect of the agreement, including the manner of enforcement of the creditor’s rights.
Reference was made in evidence to the guidance issued to lenders on the handling of default and arrears by the now defunct Office of Fair Trading and the cross industry forum the Money Advice Liaison Group. Although there was some criticism of CHL for failing to observe one of its own mortgage conditions by not arranging a face to face meeting with an arrears counsellor, it was determined that CHL had followed a procedure to ascertain the extent of the borrower’s mental health problems and its relationship with the borrower was not deemed to be unfair. Ultimately the Court considered that CHL had not been unfair as it had already demonstrated considerable patience with the borrower over his arrears in the years before the hospital admission.
If the power of sale had been exercised when there had been no history of arrears before the period of incapacity, it is likely that the Court would have expected CHL to have engaged more fully in an assessment of the borrower’s situation before taking steps to enforce its security. With an increasing emphasis on the empowerment of those living with mental ill-health, both through legislative means and government backed initiatives, lenders would do well to keep up to date with best practice guidance in this area and demonstrate adherence to it.