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McGinn v Grangewood Securities Ltd

Court of Appeal 23 April 2002

In 1990, Mrs McGinn wanted to have an extension built onto her home in Norfolk and needed a loan. She saw an advertisement in a newspaper, which had been placed by a credit broker. This resulted in an application being made to a 'non-status' or 'tertiary' lender for a loan secured by a second charge. The terms of the agreement that was entered into by the borrower included a provision that any first mortgage arrears had to be discharged on or before completion of the loan. Out of a loan of £8,350, an amount just under £360 was paid by the lender to the borrower's building society in respect of arrears under the first mortgage.

When the borrower defaulted, the lender sought possession of the house. A suspended possession order was made in 1991. A later action in the County Court was begun by the borrower to have the agreement set aside as an extortionate credit bargain. During the course of that litigation, the point was raised for the first time that the regulated credit agreement was unenforceable; however, the Judge found for the lender.

In the Court of Appeal it was submitted on behalf of the borrower that because that sum was treated as part of the credit and not the total charge for credit, the agreement was unenforceable. The lenders relied upon the case of Watchtower Investments v Payne [2001]. In that case, building society arrears had been held to be part of the credit and not the total charge for credit. The Court of Appeal had stressed the difference between a situation in which an item financed by the lender may be part of the total charge for credit and a situation where, although a payment is required to be made under the agreement, that does not make it part of the total charge.

The Court recognised the difficulty in deciding where to draw the line. In the present case, however, the purpose of the loan was for refurbishing the house and the Court of Appeal distinguished the Watchtower case.

The discharge of the building society arrears was not part of the objective purpose of the loan but rather the true cost of it. The sum was therefore an 'other charges' within Regulation 4(b) of the Consumer Credit (Total Charge for Credit) Regulations 1980. It followed that the amount of credit was improperly stated for the purposes of Schedule 6 to the Agreements Regulations 1983 and the entire agreement unenforceable by virtue of s127(3) of the Consumer Credit Act 1974.

COMMENT: This decision has been much criticised within the finance industry (see CCTA "Consumer Credit" magazine July/Aug 2002) as being wrongly argued by the Court in order to satisfy their wish to protect the lady concerned, and thus to interpret the law to fit the desired outcome.