London North Securities Ltd v Tony James Meadows & Anor

Whether a payment under a regulated consumer credit agreement is part of the credit or part of the total charge for credit must be determined objectively from all the circumstances and documents. The inquiry is not confined to contractual labels. Mortgage arrears were part of the credit where repayment had become an objective purpose of the loan by the time the borrowers signed. An insurance premium was part of the total charge where the lender required the borrowers to take the policy as a condition of the agreement. The cash-transaction exclusion concerned ancillary charges, not the principal subject-matter of the credit. Misstating the amount of credit made the agreement unenforceable, so the appeal was dismissed.

The appellant, an assignee of a lender, sought possession and enforcement under a 1989 credit agreement secured by a legal charge over the respondents’ home. The loan included sums used to discharge prior mortgage arrears and a £750 insurance premium. The Southport County Court held the agreement unenforceable, principally because the amount of credit had been misstated, and indicated alternative conclusions on other defences. The appeal concerned whether the arrears and premium formed part of the credit or the total charge for credit, and whether the insurance policy had been required as a condition of lending.

1. Appeal dismissed. The court disagreed with the judge’s treatment of the mortgage arrears but upheld his conclusion concerning the insurance premium.
2. In deciding whether a payment is credit or part of the total charge for credit, the court must assess the objective purpose of the borrowing from all the circumstances, including the documents. It must identify the reality and true cost of the transaction. Applying Watchtower Investments Limited v Payne [2001] EWCA Civ 1159, the court held that repayment of the prior mortgage arrears had become an objective purpose of the loan by the time the respondents signed. The sums used for that purpose were therefore part of the credit.
3. The evidence entitled the judge to find that the lender required the respondents to take out the insurance policy. Under regulation 1(2) of the Consumer Credit (Total Charge for Credit) Regulations 1980, the insurance contract formed part of the transaction. The premium was consequently a charge under regulation 4(b), payable under the transaction to a person other than the creditor. The optional-insurance exclusion in regulation 5(1)(j) did not apply.
4. Regulation 5(1)(c) concerned charges ancillary to the principal subject-matter of the credit or financed transaction and required comparison with a hypothetical cash transaction. The £750 was the principal subject-matter of the insurance-financing element, not an ancillary charge. The exclusion therefore did not apply, whether or not the agreement was dissected under section 18 of the Consumer Credit Act 1974.
5. The premium formed part of the total charge, so the agreement should have stated credit of £5,000 rather than £5,750. The amount of credit was therefore incorrectly stated and the agreement was unenforceable. The court declined to determine the separate section 18 issue, the penalty and extortionate-bargain issues, and other matters that could not affect the result.

• Court of Appeal (Civil Division). The court dismissed the appeal on the ground that the insurance premium formed part of the total charge for credit and that the amount of credit was consequently misstated.
• Southport County Court. His Honour Judge Howarth held the credit agreement unenforceable, principally because sums used to discharge mortgage arrears and pay the insurance premium had been included incorrectly in the stated amount of credit. He also gave alternative indications concerning an extortionate credit bargain, penalties, enforcement permission and a time order.