Mortgage costs and interest

District Judge Nic Madge outlines the latest developments in the continuing battles between mortgage lenders and borrowers

Two important aspects of the law affecting lenders have been clarified in recent months.

There is a new practice direction to the Civil Procedure Rules 1998 (CPR) dealing with mortgagees' rights to costs, and a significant Court of Appeal case has dealt with interest provisions in standard form loan contracts.

Gomba Gone?Special provisions apply to the costs of mortgage possession proceedings.

Lenders have always been in a privileged position when bringing possession proceedings against borrowers.

The normal rule is that they are entitled to add their costs of the proceedings to the security without the need for an order for assessment (taxation) of costs.

In the past judges making possession orders against mortgagors have simply not mentioned costs or have ordered 'costs be added to security'.This practice was confirmed by the Court of Appeal in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171, [1992] 3 WLR 723, [1992] 4 All ER 588, CA.

In that case the Court of Appeal said that a mortgagor is required to show a clear case of unreasonable-ness if any of the mortgagee's actual costs, charges and expenses are to be disallowed.However, in view of CPR rule 44.7(1) which provides for summary assessment of costs and rule 44.13(1) which states that 'where the court makes an order which does not mention costs no party is entitled to costs in relation to that order' it was suggested by some commentators that the CPR gave courts the power to summarily assess costs in routine mortgage possession cases (see, for example, 'Mortgage possession proceedings and the new rules', New Law Journal, May 28 1999, p823).

Others, though, took the view that such an interpretation conflicted with Supreme Court Act 1981 s.51 and that, if that was what CPR 44.13(1) meant, it was ultra vires (see, for example, 'Mortgage costs: the Woolf effect' Solicitors Journal, July 30 1999 p738).

The latter view was almost certainly correct.

But the position has been clarified by amendments to the CPR practice directions issued in August 1999.The PD to CPR 44 para 4.4(2) now provides that CPR rule 44.7(1) 'does not apply to a mortgagee's costs incurred in mortgage possession proceedings'.

The PD to CPR 48 para 1.3 restates the decision of the Court of Appeal in Gomba by providing that:X Where the court is assessing costs payable under a contract, the court may make an order that all or part of the costs shall be disallowed if the court is satisfied by the paying party that costs have been unreasonably incurred or are unreasonable in amount;X An order for the payment of costs of proceedings by one party to another party is always a discretionary order;X Where there is a contractual right to costs, the discretion should normally be exercised to reflect that contractual right;X The power of a court to disallow a mortgagee's costs sought to be added to the mortgage security is a power which does not derive from Supreme Court Act 1981 s.51.

It derives from the power of courts of equity to fix the terms on which redemption should be allowed;X A decision to refuse costs in whole or in part to a mortgagee may be a decision in exercise of the s.51 discretion, a decision in the exercise of the power to fix the terms of redemption, a decision as to the extent of a mortgagee's contractual right to add the costs to security, or a combination of those things;X A mortgagee is not to be deprived of the right to add costs to the security merely because of an order for payment of costs made without reference to the contractual provisions.In addition, a borrower may apply to the court for a direction that an account be taken of the lender's costs (PD to Part 48 para 1.4).

Post-judgment interest was unfairThe Court of Appeal case is Director-General of Fair Trading v First National Bank plc, noted briefly in The Times, 14 March 2000.

The Court of Appeal held that a term in standard conditions which provided that interest was payable at the contractual rate if the bank obtained judgment following default by a borrower was not a 'core term' governing the adequacy of price or remuneration for goods or services.It fell outside the Unfair Terms in Consumer Contracts Regulations 1994 SI 3159 para 3(2)(b) and so had to comply with the requirement of fairness in regulation 4.

In deciding whether or not the term was unfair, the court noted three elements in the test of fairness; (1) whether there is an absence of good faith; (2) whether there is a significant imbalance of the parties' rights and obligations under the contract; and (3) whether there is detriment to the consumer.

'Good faith' involved 'playing fair', 'coming clean', or 'putting one's cards face upwards on the table'.

It is in essence a principle of fair and open dealing.' The aim is to 'prevent unfair surprise and the absence of real choice...

terms must be reasonably transparent and should not operate to defeat the reasonable expectations of the consumer.'The term was unfair because it allowed the bank to obtain judgment without the court considering whether to make a time order under Consumer Credit Act 1974 s.129 or if it made such an order, also to make an order under s.136 reducing the contractual interest rate.

Peter Gibson LJ said: '...we are far from convinced that a borrower would think it fair that when he is taken to court and an order for payment by installments has been tailored to meet what he could afford and he complied with that order, he should then be told that he has to pay further sums by way of interest.' The bank, with its strong bargaining position as against the relatively weak position of the consumer, had not adequately considered the consumer's interests.District Judge Nic Madge sits at West London County Court