There is widespread debate as to the practical effect which the Mortgage Credit Directive will have when it is introduced in just six months’ time.
The consequences of mortgages falling within the directive have been covered elsewhere. This short article instead focuses on whether mortgages are likely to fall within the directive or not.
The underlying basis for the directive is to introduce a framework of conduct standards for firms selling mortgages.
Although consumer buy-to-let mortgages fall within the ambit of the directive, buy-to-let mortgages connected with a business do not.
When consumer buy-to-let is defined as “any buy-to-let contract in which the borrower has not entered ‘wholly or predominantly’ for business purposes”, you do not need a crystal ball to see where problems are likely to arise. Fear not, guidance is now available!
Will the consumer buy-to-let regime apply or not?
The inconveniently titled The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 is a good place to start.
It states that the mortgage is presumed to have been entered into ‘wholly or predominantly’ for the purposes of a business if the borrower signs a declaration in which he/she says that the mortgage is for business purposes, that they waive the additional rights which they would otherwise have got as a consumer, and that they understand the consequences of signing on the dotted line.
So far, so good? Not quite - it is only a presumption; lenders and intermediaries will need to be alert to other circumstances if they are to avoid falling within the regulatory grasp of the directive when writing new mortgages.
Thankfully, though, the consumer buy-to-let framework provides some further guidance as to when a borrower will be regarded as entering into a mortgage ‘wholly or predominantly’ for business purposes. Examples include:
1. where the borrower intended from the outset that the security property be rented to tenants, and he/she has never occupied it or allowed a related person (i.e. a relative or partner) to do so; or
2. where the borrower has another buy-to-let property.
Also, HM Treasury has published its own shortlist of examples which are likely to constitute consumer contracts:
• where a borrower has inherited the property; or
• where a borrower who has previously lived in the property is unable to sell it and resorts to a buy-to-let arrangement.
The Treasury’s rationale is that these borrowers have become landlords as a result of circumstances rather than as a result of “their own active business decision.”
These individuals would be treated as consumers and would therefore receive the additional protection that comes with it.
HM Treasury goes further; it regards the following as examples which fall outside of the consumer buy-to-let scheme:
• where less than 40% of the property is used for residential premises (e.g. a farm); or
• where more than 40% of the property is used for residential premises but it is still predominantly a business (e.g. some kinds of bed and breakfast premises).
The requisite declaration will therefore be persuasive, but not conclusive.
It will be necessary to look at the whole picture on a case-by-case basis.
Lenders and their intermediaries will need to be alert to possible warning signs which suggest that the prospective borrower is likely to be a ‘consumer’.
However, it’s far from the end of the world; I foresee that lenders will address the risk by amending their buy-to-let/consumer buy-to-let mortgage application forms to include additional enquiries as to the borrower’s history of use of the security property and whether he/she has any other buy-to-let properties.
I also envisage that these changes are unlikely to have any material affect upon the application assessment process.
Any finally, what if....?
I have already been asked what the legal position would be if a borrower lived to regret obtaining a buy-to-let mortgage (i.e. ‘wholly or predominantly’ for a business) and his/her decision to waive their consumer rights.
The answer to that question will depend on what advice the borrower received from the broker or solicitor.
An aggrieved borrower would need to demonstrate that one or other of the parties owed a duty of care, that it breached that duty and that as a direct result of that breach the borrower suffered financial loss.
Establishing a duty of care is almost a given but it is often difficult to tick the remaining boxes; indeed, even if the borrower can establish that he/she received ‘bad advice’ from its broker or solicitor (i.e. breach of duty), the borrower will still face the task of having to prove that he has suffered a financial loss.
In short, it seems that the declaration will not make it any easier for a borrower to bring a claim against his/her broker or solicitor.
About the author
JAMES TEAGLE is a Partner in the Dispute Resolution department at Blacks Solicitors and a member of the Property Litigation Association. He specialises in: advising and acting for lenders; commercial landlord and tenant property disputes; restraint of trade cases, including the protection of confidential information and the enforcement of post-termination restrictive covenants.