Court decides on investment property loans

The Court of Appeal has found in favour of an unregulated lender, confirming that agreements it entered into with individuals were investment property loans which were exempt from the RAO definition of “regulated mortgage contract”. LSC Finance had made a number of loans to two companies and also to the three individuals who were directors of one or both companies.  The individuals defaulted on the loans to them, and a dispute arose as to whether the lender could enforce the loans.

The RAO point turned on whether the contracts met the criteria in Article 61A(6) for investment property loans, and the necessary additional conditions for them not to be regulated mortgage contracts – because if they did meet the criteria, LSC Finance as an unregulated firm was able to make the loans and could enforce them.  Among other things:

• less than 40% of the land subject to the mortgage must be used as or in connection with a dwelling by the borrower;
• the agreement must be entered into by the borrower wholly or predominantly for the purposes of a business it carries on;
• the agreement must include statements from the borrower confirming the business purpose of the loan, that the borrower understands it will have no protection under FSMA and that the borrower is aware that it should seek independent legal advice on the consequences of the loan not being regulated; and
• the lender must have no reasonable cause to suspect that the agreement is not being entered into by the borrower for business purposes.

The Court noted that there is nothing in FSMA or the RAO that requires the declaration to be made. In this case, there was a declaration, but it did not meet all the requirements of the RAO, so it was for the lender to prove the loan was wholly or mainly for business purposes (and that the 40% condition was met), and the Court will look to ascertain the loan’s purpose. In this case, one of the individuals maintained that he had repeatedly told LSC Finance that the plan was to build personal homes for each of the 3 individuals, which was why the loans were taken out by them and not the companies of which they were directors.

LSC said it knew it could not lend under regulated agreements, and would have known that lending to individuals for them to build their own houses would be regulated, so would not have made the loans had it known their purpose.  It also gave evidence that the borrower was supposed to have been a company, but this had changed because the individuals wished to apply to lift restrictions on planning permission that attached to the plots.

The problem with the declaration was that it had used the “business” exemption language and references appropriate for regulated consumer credit and hire agreements, and so did not refer to regulated mortgages at all. The Court held that this meant it was not possible to interpret the declaration as showing the borrower understood they would not have the benefits of statutory protection that a regulated mortgage contract would have. That said, it did not mean the declaration was not relevant. And, in this case, all the surrounding evidence strongly pointed to the loans being investment property loans within the scope of the exemption. On that basis, the Court held that the loans were not regulated and therefore were enforceable.