Nelmes – v – NRAM plc: Unfair relationships in the context of the Consumer Credit Act 1974

November 4, 2016

In the recent case of Nelmes v NRAM plc, the Court of Appeal ruled on an unfair relationships claim relating to a loan by Northern Rock to refinance buy to let properties. It found that the payment of a procuration fee by a lender to mortgage broker under an undisclosed arrangement can give rise to an unfair relationship under section 140a of the Consumer Credit Act 1974.

The borrower, Mr Nelmes, owned a portfolio of 25 buy to let properties. In 2007, he sought to refinance his borrowing and engaged a mortgage broker to act for him in the process. The broker approached Northern Rock, who initially offered the loan subject to 80% LTV, but lowered the LTV to 70%, after learning of two County Court judgments against the borrower. Mr Nelmes entered into a loan arrangement for £2,148,300, which was secured over the portfolio. He paid an arrangement fee of £21,483 to the lender and a broker fee of £16,112.25. However, the broker was also paid half of the arrangement fee by the lender (£10,741.50) as commission, without the knowledge of Mr Nelmes.

Mr Nelmes went into arrears a year after the loan was made. In 2011, Northern Rock indicated that they wanted a revaluation of the property portfolio. In 2013, they commissioned valuations, which found that the LTV was 148% and the properties were in a state of disrepair, contrary to the terms of the loan. In July 2013, Northern Rock attempted to engage with the borrower, inviting him to put forward a proposal to resolve the situation. Mr Nelmes failed to provide any payment plan and Northern Rock demanded payment of the entire debt within 7 days, threatening enforcement action if the payment was not made. However, Northern Rock appointed Receivers before the stated deadline had expired.

The borrower claimed that the relationship was unfair because the original valuer had overvalued the portfolio and as a result the lending arrangement had not been economically viable from the beginning. He asked that the Court grant him relief.

At first instance, the Judge considered the relationship was fair, finding that Northern Rock had only acted unfairly in appointing receivers six days before the deadline which it had specified for enforcement, but he did not award any remedy in relation to this point. Mr Nelmes appealed this decision.

The Court of Appeal found that there were two instances of unfairness. The first relating to NRAM’s appointment of Receivers – although the appointment in itself was a contractual entitlement and was not unfair, Northern Rock had acted too quickly in appointing before the deadline. However, the Court found that in these circumstances, where Mr Nelmes had failed to provide any payment proposals, no substantial difference would have been made had the Receivers been appointed after the deadline and as a result, the unfairness did not give rise to any relief.

The second ground of unfairness related to the concealed payment of a procuration fee by the lender to Mr Nelmes’ broker. The Court found that the broker was acting for the borrower in his dealings with Northern Rock and was therefore entitled to his undivided loyalty. The broker’s acceptance of the secret commission paid by the lender was a breach of the duty owed by him to Mr Nelmes, which was brought about by Northern Rock’s payment of the fee. The Court of Appeal held that as a result of the secret payment, there was an unfair relationship between Northern Rock and Mr Nelmes.

Accordingly, the Court of Appeal held the appropriate remedy was for the procuration fee paid plus interest to be returned to Mr Nelmes by Northern Rock. The Court found that it was not appropriate in these circumstances to grant further relief, as Mr Nelmes was in a position to assess whether the loan on offer was value for money, and could have approached other lenders.

Whilst this decision does not represent a significant shift in the law, the fact that the Court found that there was an unfair relationship created by the payment of the procurement fee could relate to more significant remedies in other cases, depending on the facts.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.