Legal Updates

Commercial Law – Unfair Contract Terms – Commercial Property - Loan Agreement

The case of Evans v Cherrytree Finance Ltd [2008] concerned unfair contract terms in relation to a loan agreement. The defendant company in this case ran a business which involved lending money to non-status, high risk borrowers on commercial premises.

The claimant and his wife owned a property. The property was used for their antiques business in which they were partners. In 1993, part of the property was converted into residential accommodation. From that point on the claimant and his family lived in the residential part of the property (“the Residential Accommodation”).

The Residential Accommodation and the business premises had separate addresses. Unfortunately, in 1999, the claimant's wife initiated divorce proceedings and the partnership was dissolved. During the course of the divorce, the claimant's wife secured an order for the property to be sold.

Understandably, the claimant was anxious to prevent the sale. The claimant was granted four weeks in order to raise £150,000, which would facilitate the transfer of his wife’s interest in the property to the claimant.

In order to pay the settlement, the claimant made an application to the defendant for a loan of £105,000. The application form for the loan was headed with the words “Commercial Loan”. The claimant gave his address as the Residential Accommodation and gave the address of the business premises as the property against which the loan would be secured. The claimant also stated on the application form that the purpose of the loan was to:

§   Repay an existing mortgage; and

§   To pay his ex-wife the balance due under his divorce settlement.

The claimant soon defaulted on the loan repayments. Accordingly, in due course the property was sold by the defendant. The defendant realised the amount due under the loan, which also included a penalty fee.

The claimant subsequently brought proceedings against the defendant. He claimed that he was in effect not bound by the terms imposing the penalty because they were unfair. The issue that arose to be determined by the court was whether the claimant was a ‘consumer’ for the purposes of Unfair Terms in Consumer Contracts Regulations 1999 (“the Regulations”).

The claimant was deemed a ‘consumer’ for the purposes of the Regulations with regards to the loan made to him by the defendant. The judge was of the opinion that the claimant had not been borrowing for the purposes of his business, but for a purpose existing outside of his trade, business or profession. That purpose being to buy out his wife in divorce proceedings.

Furthermore, it was held that the loan was essentially for personal purposes to enable him to have a place to live as well as work. Accordingly, the judge found that the Regulations did apply to the contract. This meant that the condition which imposed the penalty on the claimant was unfair.

The defendant appealed against the decision.

The claimant argued that the main reasons he took out the loan had not been related to his business, but that it was needed in order for him to establish himself. The defendant submitted that the claimant's purpose had never been revealed to the defendant. The defendant argued that it had not been told that the claimant and his wife had lived at the property or that the loan was needed to provide the claimant with a place to live.

The appeal was dismissed.

It was held that in the circumstances of the case, the judge had been perfectly entitled to conclude that the loan was for a purpose outside the claimant's business or trade.

When considered objectively, it was decided that although the loan enabled the claimant to continue his livelihood, it was not the sole purpose of the loan. The court was unaware of the matters that had been taken into account when reaching the divorce settlement.

It was decided that the statement on the application that the other purpose of the loan was to pay off a mortgage was equivocal. Furthermore, the court was of the opinion that the defendant could have deduced from the information it had been provided by the claimant that the claimant had been living as well as working in the property.

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© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.