A borrower who takes out a loan secured on a property that is partly residential and partly commercial is a consumer for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999 ("the Regulations").

This was the finding of the Court of Appeal in Evans v Cherry Tree Finance Ltd & Anor where the application form was entitled "Secured credit agreement for a commercial loan". The property was partly residential and partly commercial and each part had a separate address. The borrower's address on the form was given as his residential address and the property to be secured was given as the commercial address. The phone number given for each address was the same.

The purpose of the loan was said to be the repayment of an existing mortgage and to satisfy a divorce settlement. Subsequently, the borrower defaulted on the loan and the property was repossessed and sold by the lender. The lender realised the sum due under the loan which included an early redemption charge calculated under the rule of 78. However, the borrower claimed he was not bound by the terms imposing the early redemption charge because they were unfair in accordance with the provisions of the Regulations.

Classified as a consumer

The judge at first instance held that the loan was not a business one but one taken out to settle the divorce settlement and enable the borrower to have a roof over his head as well as a place to work. As a result, the borrower would therefore be classified as a consumer under the Regulations, which would therefore apply to the loan contract, and as a consequence, the condition imposing the charge was unfair.

The Court of Appeal agreed. Looked at objectively, the loan did enable the borrower to continue his livelihood; but that was not its only purpose. The main purpose of the loan had been for the borrower to pay to his wife the amount due under their divorce settlement, which was clearly a personal obligation. The lender could have deduced from the information supplied that the borrower had been both living and working at the property and that he had taken out the loan for non-business purposes.

As a consequence of this finding, the penalty applied by the lender was found to be unfair and the Court of Appeal upheld the decision that the lender must repay to the borrower the penalty sum, plus interest.

Things to consider

The courts will look behind what is written on the application form to determine whether a loan is truly for commercial as opposed to consumer purposes where clauses which are capable of being construed as unfair under the Regulations are being imposed.

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For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Amie Ryalls on +44 (0)121 213 2360

This published article may contain information of general interest about current legal issues, but does not give legal advice.