Alexander (representative of the "Property118 Action Group") v West Bromwich Mortgage Company Ltd

Factual and Procedural Background

This appeal concerns the interpretation of contractual documentation relating to a "buy to let" interest only mortgage provided to the Appellant ("the Borrower") by the Respondent ("the Lender"). The mortgage offer specified a 25-year term with an initial fixed interest rate of 6.29% until 30 June 2010, followed by a variable rate of 1.99% above the Bank of England Base Rate, known as a "tracker" mortgage. The Lender's Mortgage Conditions allowed the interest rate to be varied by the Lender and permitted the loan to be repayable in full on one month's notice by the Lender.

The Borrower contended that these Mortgage Conditions were inconsistent with the mortgage offer and thus not incorporated into the contract. The trial Judge held otherwise, finding the conditions incorporated and enforceable by the Lender. The Borrower appealed this decision.

The contractual documentation included an Application Form, an Offer of Loan Letter, an Offer Document detailing terms and conditions, Special Conditions, a Mortgage Booklet with General Information, Standard Conditions, and Mortgage Conditions, and an Acceptance of Offer letter signed by the Borrower. The Mortgage Deed executed on 15 July 2008 incorporated all these terms.

The mortgage was described in the Offer Document as a "Buy To Let" product with a fixed rate until 30 June 2010 and thereafter a variable rate tracking the Bank of England Base Rate plus a premium of 1.99%. The repayment method was interest-only, with the principal balance due at the end of the term. The documentation included warnings about payment variability and the risks if interest rates increased.

The Borrower relied on industry definitions and materials to argue that a tracker mortgage's essential characteristic is that the interest rate varies only in line with a specified external base rate and not at the lender's discretion. The Lender disputed the admissibility of some evidence and argued the contractual terms permitted broader variation.

The appeal focused on two main issues: whether clause 5 of the Mortgage Conditions (allowing wide variation of interest rates) was incorporated into the contract, and whether the Lender had the contractual right under clause 14 to require full repayment on one month's notice absent any default by the Borrower.

Legal Issues Presented

1. Was clause 5 of the Mortgage Conditions a term of the mortgage contract?
2. Was the first bullet point of clause 14 of the Mortgage Conditions a term of the mortgage contract and/or, if so, did it permit the Lender to require the Borrower to repay the loan in full together with any accrued interest and unpaid charges merely by giving one month's notice, and absent any default by the Borrower?

Arguments of the Parties

Appellant's Arguments

• Clause 5 is inconsistent with the Offer Document’s Product Description, which defines the interest rate as varying only in line with changes in the Bank of England Base Rate plus a fixed premium.
• The wide discretion granted by clause 5 to vary the interest rate for numerous reasons fundamentally alters and negates the agreed tracker mortgage product.
• The one-month notice repayment right under clause 14 permits termination at the Lender’s will, absent any default, which contradicts the 25-year term and the nature of an interest-only buy to let mortgage.
• The contractual documents contain no indication that the mortgage term could be cut short without cause, rendering the Lender's termination right commercially unreasonable and inconsistent with the contract's main purpose.
• Clause 14’s termination right exposes the Borrower to significant risk, including loss of non-refundable fees and disruption of letting arrangements, without any contractual safeguard.
• The Product Description sets the main purpose of the contract, and any standard term conflicting with that purpose should be regarded as inconsistent and not incorporated.

Respondent's Arguments

• The mortgage was clearly described as having a variable rate after the fixed period, so clause 5’s right to vary rates applies once the fixed rate ends.
• Clause 5 can sensibly be read with the Product Description; Box 4 does not exclude the Lender’s right to vary the margin or interest rate as per clause 5.
• The inconsistency clause only applies if the Offer of Loan conflicts with the Mortgage Conditions, but the Offer of Loan includes the Standard Conditions which refer to clause 5, so no conflict exists.
• From a commercial perspective, the Lender’s right to vary the interest rate is reasonable and necessary; the Borrower can terminate early if dissatisfied, ensuring mutuality.
• The Lender’s right to vary the rate is repeatedly made clear in the contractual documents and acknowledged by the Borrower.
• If the Borrower’s construction were accepted, the Lender would lose the ability to vary interest rates even where legally required, which is untenable.
• The right to require repayment on one month's notice is comparable to the Borrower's right to repay early, providing mutuality.
• Any circumstances permitting early termination by the Lender other than breach or default would have been clearly set out in the Offer Document if intended.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the contractual documents, emphasizing that the Offer Document sets out the "costs, features, terms and conditions" of the mortgage and includes the bespoke Product Description. The Product Description promised a tracker mortgage with a variable rate defined strictly as the Bank of England Base Rate plus a fixed premium of 1.99% after the fixed rate period.

The court found clause 5 of the Mortgage Conditions, which allowed the Lender broad discretion to vary the interest rate for numerous reasons beyond changes in the Base Rate, inconsistent with the Product Description. This inconsistency arises because clause 5 would allow the Lender to alter the mortgage product fundamentally, negating the agreed tracker mortgage terms rather than merely modifying or qualifying them.

The court rejected the Lender's argument that clause 5 could be sensibly read with the Product Description, concluding that the wide power to vary the rate effectively nullifies the Borrower's expectation of a tracker mortgage. The court also acknowledged the implied duty on the Lender not to act arbitrarily but found this insufficient to reconcile the inconsistency.

Regarding clause 14, the court noted that while most bullet points describe events of default or circumstances justifying repayment demands, the first bullet point permits the Lender to require repayment on one month's notice without cause. The court held this to be inconsistent with the 25-year term and the nature of the interest-only buy to let mortgage, which contemplates repayment at term end or earlier if the Borrower chooses.

The court reasoned that this unilateral termination right would undermine the Borrower's business arrangements and expectations, effectively rendering the mortgage obligation optional from the Lender’s perspective. This negates the main purpose of the contract as set out in the Product Description.

The Lender's argument that this right merely provides mutuality with the Borrower's early repayment right was rejected because the consequences and burdens on the parties differ significantly. The court found no indication in the Offer Document that such a broad termination right existed or was intended.

In assessing inconsistency, the court applied established principles from Pagnan v Tradax and Glynn v Margetson, focusing on whether the terms can fairly and sensibly be read together and whether a standard term defeats the contract's main purpose. The court concluded that both clause 5 and the first bullet point of clause 14 fail this test and are not incorporated into the mortgage contract.

Holding and Implications

The court ALLOWED THE APPEAL on both issues.

Holding: Clause 5 of the Mortgage Conditions, permitting broad lender discretion to vary interest rates beyond changes in the Bank of England Base Rate plus premium, is inconsistent with and not incorporated into the mortgage contract. Similarly, the first bullet point of clause 14, permitting the Lender to require full repayment on one month's notice absent default, is inconsistent with the agreed 25-year interest-only buy to let mortgage and is not incorporated.

Implications: The decision affirms that specially agreed bespoke terms, especially those defining the essential nature and main purpose of a mortgage product, prevail over conflicting printed standard terms. Lenders cannot rely on broadly drafted standard conditions to alter fundamental contractual obligations absent clear incorporation. This protects borrowers’ reasonable expectations in tracker mortgage agreements and limits lenders’ ability to unilaterally vary key terms or terminate the mortgage without cause. The ruling does not establish new precedent but applies established principles of contractual interpretation and inconsistency clauses in the mortgage context.