Watchtower Investments Ltd v Payne & Anor

A payment is part of the credit, rather than a charge for credit, where an objective purpose of the borrowing is to meet that payment. A contractual requirement governing how the advance must be spent does not by itself convert the expenditure into a charge.

The court must examine all the circumstances, including the contractual documents, communications and factual matrix. The controlling question is whether the item represents the true cost to the debtor of obtaining the credit. Payments for services or facilities related to the credit may constitute charges, while money advanced for the substantive purpose of the borrowing ordinarily constitutes credit.

A lender appealed from an order of Woolwich County Court declaring a regulated consumer credit agreement and its supporting legal charge unenforceable. The borrowers had obtained a secured loan of £11,300. On completion, the lender's solicitors used £1,776.89 of the advance to discharge arrears owed under a prior mortgage.

The county court held that discharging the arrears was a linked transaction and formed part of the total charge for credit. That conclusion meant that the agreement misstated the amount of credit and was irredeemably unenforceable. The remaining issues concerned an insurance premium paid to the credit broker and whether the bargain was extortionate.

The central question was whether the amount used to discharge the prior mortgage arrears formed part of the credit or was a charge for the credit.

1. Permission to appeal granted and appeal allowed unanimously. Peter Gibson LJ gave the leading judgment. Clarke LJ gave concurring reasons, and Maurice Kay J agreed with both judgments. The county court's order was set aside.

2. The statutory scheme draws a necessary distinction between credit and the total charge for credit. Under section 9(4) of the Consumer Credit Act 1974, an item entering into the total charge cannot also be treated as credit. Section 20 and regulations 3 and 4 of the Consumer Credit (Total Charge for Credit) Regulations 1980 identify the total charge as the true cost to the debtor of the credit provided.

3. The fact that a payment is required by the credit agreement does not determine whether it is a charge. The court may examine all the circumstances and is not confined to the contractual documents. It must ascertain objectively the purpose of the borrowing from the communications between the parties and the surrounding factual matrix.

4. Charges ordinarily comprise payments exacted for services, expenses or facilities connected with obtaining or using the credit. By contrast, money advanced for the substantive object of the borrowing remains credit. Treating all expenditure required by a restricted-use agreement as a charge could produce the absurd result that an agreement provided no credit at all.

5. The objective purposes of this loan included discharging the arrears on the prior mortgage. The relevant amount was therefore part of the credit itself and not an “other charge” within regulation 4(b). The agreement did not misstate the amount of credit merely because it included that sum.

6. It was consequently unnecessary to decide whether the payment was made under the credit agreement, a linked transaction or another transaction within regulation 1(2). The case was remitted to the county court to determine whether the payment to the broker formed part of the total charge for credit and whether the agreement was an extortionate credit bargain.

1. Court of Appeal (Civil Division): Permission to appeal was granted. The appeal was allowed unanimously, the county court's order was set aside, and the outstanding issues were remitted.
2. Woolwich County Court: His Honour Judge Welchman declared the credit agreement and legal charge unenforceable, set aside possession and related enforcement orders, and permitted the borrowers to pursue their defences and claims.