Supreme Court shuts Section 18 door
Paul Heeley of Glenisters Solicitors says Section 18 of the CCA (on multiple agreements) should be repealed following the Court of Appeal’s rejection of the highly significant Heath case
When is an unregulated agreement not an unregulated agreement? Answer: when it is really a number of smaller (regulated) agreements rolled into one. And so says Section 18 of the Consumer Credit Act 1974 (‘the Act’/CCA) which concerns multiple agreements. But whilst this is no new principle of consumer credit, lenders made aware by their advisers of the recent potentially cataclysmic Heath consumer credit case can relax now that the Supreme Court has refused permission to appeal to a borrower who sought to avoid her loan by arguing that one of the most common types of credit arrangement, a remortgage, was in fact a multiple agreement. Why the relief? Well, had the Court of Appeal’s decision been overturned it is anyone’s guess how many lenders would have suffered a major financial loss overnight.
The 1974 Act has had its fair share of criticism over the years for its drafting. Thirty-five years after receiving Royal Ascent it is quite astonishing that the interpretation of some of its provisions still results in extensive litigation in the appeal courts. In Southern Pacific Mortgage Limited v Heath the Court of Appeal ruled on whether a regular remortgage was caught by Section 18 and this was the first time the issue of multiple agreements had reached this level.
Multiple agreements
Section 18 is widely accepted as an anti-avoidance provision to prevent a lender from treating a number of separate advances as one composite loan in order to lend over the statutory threshold and thus circumvent consumer protection provisions; provisions which, if breached, would render the loan unenforceable. That threshold was £25,000 at the time of Mrs Heath’s advance and was scrapped altogether in October 2008.
The common view is that Section 18 really ought to have been repealed long ago, if only to be replaced by something less troublesome. A golden opportunity to do so came about in 1995 when the Department of Trade and Industry conducted a consultation on the idea, but it survived unscathed. Costly litigation has therefore continued as parties have argued about whether various types of lending situations, from car hire agreements to banking facilities, could be dissected to reveal a multiple agreement.
The facts in Heath were that in 2002 Mrs Heath borrowed £28,000 net to re-finance her home, using £19,000 of the advance to settle her existing mortgage and taking the remaining £9,000 to spend as she wished. So far as SPML were concerned this involved one unregulated (being over £25,000) loan and so requirements applicable only to regulated loans were not followed. The central plank of Mrs Heath’s argument was that the advance in fact comprised two distinct loans, one to pay off the existing mortgage and the other for unspecified purposes and that as both were below the statutory threshold were unenforceable for non-compliance.
Lending categories
Section 18 relies in its application upon lending falling into different ‘categories’. Restricted-use credit and debtor-creditor-supplier credit are two common CCA categories but the Section is not restricted to those mentioned in the Act and this lack of specificity is one major reason why Section 18 has caused so much trouble to lenders and practitioners alike. Such categorisation is however important because the Section applies where a part of an agreement falls into one category and another part falls into another category (s.18(1)(a)), or in the alternative where an agreement or part of an agreement falls into two or more categories (s.18(1)(b)). Under subsection (2) where a ‘part’ of an agreement falls within either (a) or (b) then that part is regarded as a separate agreement, thus loans so affected must be considered for compliance purposes on that basis. Whether the amount advanced under any ‘part’ falls above or below the threshold will therefore be a fundamental consideration. Unfortunately however, the definition of ‘part’ (or more precisely the lack of one) is the other reason for the difficulties with interpretation.
It is interesting to note that in order to assist with understanding and application of its provisions, the Act includes a number of examples of different lending scenarios together with corresponding explanations of how it impacts upon them, two of which - 16 and 18 - were relied upon by Mrs Heath in support of her position. However, not even the statutory examples have escaped significant controversy. In Heath, Lloyd LJ (one of the Court of Appeal judges) found that part of the Act’s analysis of example 16 was quite simply wrong. As for example 18, the most the Court could say was that it “may be right”.
Analysing her loan in the context of subsection (1) Mrs Heath argued that the funds paying off her existing mortgage represented restricted-use credit (given that the new mortgage required that the existing mortgage be paid off) and that the remaining funds, for which no particular purpose had been intimated by either lender or borrower, amounted to unrestricted-use credit. She submitted that the arrangement comprised credit that fitted into two separate and disparate categories and accordingly the loan necessarily was comprised of two separate parts. On that basis (b) applied and by virtue of subsection (2) there were deemed to be two separate agreements.
Court of Appeal
The Court of Appeal, however, took a common sense approach to the technical analysis of Section 18, to whether there really could be said to be more than one agreement; also, more generally, to whether Parliament could ever have intended that ordinary remortgages were to come within, and therefore be protected by, Section 18. By a unanimous decision the Court held that SPML had offered a single loan facility which could only be drawn down as a whole. It was a single agreement that could not be dissected into separate parts. In other words it was an agreement whose terms placed the whole agreement into two disparate categories (that is, it was an indivisible - or ‘unipart’ - Section 18(1)(b) agreement) rather than an agreement in parts that fitted into different categories. The Court also held that that it was incorrect to start from the proposition that if an agreement fell into more than one disparate category it necessarily fell into two parts – that was an analysis that involved working, incorrectly, from an end-point backwards.
Apart from submissions on the technical interpretation of the components of Section 18, one argument advanced by SPML that was very clearly recognised by the Court was that if a typical re-mortgage was a Multiple Agreement then this would present lenders with serious practical difficulties, one being that it would require the new lender to very strictly restrict the sum advanced to the precise amount required to settle the old mortgage so as to avoid any suggestion of there being more than one loan. The problem with this would lie in knowing, weeks or even months in advance and without a crystal ball or the knowledge of a clairvoyant, exactly what amount would be needed to redeem the existing mortgage. Although these difficulties were not insuperable, this was a practical consequence which it was legitimate for the Court to bear in mind when interpreting the Act.
The Court of Appeal’s decision and the Supreme Courts closure of the appeal door therefore puts to rest an issue that has for too long troubled lenders and courts, something that clearer drafting would and should have avoided. That the Section is ready for repeal could hardly be more clearly demonstrated by the fact that even post-1974 ‘clarification’ of the Act’s provisions from the draftsman himself, Francis Benyon, was itself dismissed by the Court in Heath in favour of analyses and interpretation by other academics. If the draftsman himself is unable to assist in the interpretation of his own work, what hope do the rest of us have?
Most remortgages since 1974 have been arranged on precisely the same basis as Mrs Heath’s, with a portion repaying the previous charge and surplus going to the borrower. It is therefore easy to see why lenders have been (or ought to have been) concerned over the thought of Mrs Heath winning her case. Heath is therefore a victory for lenders and to an extent a triumph for common sense. We will have to wait and see whether Parliament now acts to spare lenders and borrowers further wasted time and money on more CCA bun fights by wiping the Section 18 slate clean and if necessary starting again.
Paul Heeley is operations partner at Glenisters Solicitors
