FAIR AND SQUARE?
REGULATED AND EXEMPT LOAN AGREEMENTS

Hill Dickinson

Legal News | 20/06/22

ANALYSIS OF A RECENT CASE BROUGHT ON THE BASIS OF ‘UNFAIR RELATIONSHIP’

Liverpool, the location of the 2022 CCTA conference, is also the backdrop for a recent decision on the boundary between regulated and exempt agreements, and on the ‘unfair relationship’ question.

A couple (since divorced) wanted to borrow £250,000, secured by a second charge over their home, with interest rolled up for six months. They declared the capital was to repay business debts, but not whose ‘business’ this was. Using the ‘business purposes’ exemption, the lender advanced £250,000.

Evidence later showed the husband had a business partner and the loan was to pay that partnership’s debts. The wife subsequently brought a case against the lender claiming the relationship was unfair.

BORROWING FOR BUSINESS PURPOSES
The loan was taken out in 2014, when borrowing above £25,000 for business purposes was exempt from regulation. However, declaring a business purpose in the agreement was not enough if evidence showed the lender knew, or reasonably suspected, the loan was not to be used by a business run by the borrowers.

The court held that a debtor (in this case the wife) must prove a loan agreement is regulated and that the business exemption does not operate. Holding that business exemption can only apply if the loan was taken for a business run by all borrowers, the court decided this loan was to repay existing borrowings of a business run by the husband and his business partner, not his wife. As the lender knew this, the business exemption did not apply.

Accordingly, the loan agreement was regulated – and being improperly executed, could not be enforced without court order.

UNFAIR RELATIONSHIP
The issue was whether the loan was unfair if the wife was not borrowing to benefit her own business. The wife complained her relationship with the lender was unfair to her, as the lender:

  • knew she was inexperienced in obtaining loans
  • did not carry out affordability checks
  • knew her marital difficulties and concern about losing her home
  • did not advise her to obtain independent legal advice
  • appointed receivers who conducted a ‘restricted marketing campaign’
  • colluded with her ex-husband to seize and develop the home for its benefit.

DECISION
Where a debtor alleges an unfair relationship, the lender has to disprove it, but the debtor must still identify facts supporting that allegation so the lender can respond.

Here, had the money not been made available, the bank would have repossessed and sold the matrimonial home, with no surplus being available. Dismissing the wife’s complaints, the judge also noted the funding allowed the borrowers a breathing space in which to try to sell the property.

In summary, the court decided the wife had signed the ‘business purpose’ declaration despite realising she was not borrowing to support any business of her own, because this was the only way of getting funding which might preserve her matrimonial home from imminent repossession by the bank and a forced sale.

While the court found the loan agreement to be regulated and therefore not immediately enforceable against her, it did however dismiss the ‘unfair relationship’ claim.