A group of landlords have won a landmark legal victory that will see a building society reimburse thousands of borrowers who suffered as a result of an increase to its buy-to-let tracker rate.
In September 2013, West Bromwich Building Society raised rates on around 6,700 tracker mortgages. It defended its decision to respond to “market conditions”, despite the fact that the mortgages followed the Bank of England base rate. At the time, the base rate was not expected to rise for at least two years.
Two-year legal battle
In March 2014, a group of over 400 landlords mounted a legal challenge against West Bromwich. Mark Alexander, landlord and founder of Property118.com, led the campaign to challenge the hike.
The campaign suffered a knockback when, on 21 January 2015, the England and Wales High Court ruled that West Bromwich had acted lawfully. Mr Justice Teare, who heard the case, observed:
“At the heart of this dispute is the question whether there is any inconsistency between the Offer and the Mortgage Conditions.”
In this case, Mr Alexander’s offer document (dated 6 June 2008) described a variable rate that tracked the base rate, which at the time was 5%. The document suggested that the rate would thus change only if the base rate changed. But the mortgage agreement stated that the lender could vary the rate in response to outside circumstances, including commercial factors.
Mr Justice Teare concluded:
“Box 4 [of the Offer] does not conflict with clause 5 [of the Mortgage Conditions]. Although Box 4 specifies the rate of interest payable it is modified or qualified by clause 5 which permits the lender to vary the specified rate in certain circumstances.”
The landlord group challenged the decision, and in June 2015 were granted the right to appeal. The Court of Appeal heard the appellants’ case on 27 April 2016, and just over a month later announced a ruling in their favour.
Landlord victory will cost West Bromwich millions
In a statement, West Bromwich confirmed that they would reimburse not just the appellants, but all affected borrowers:
“While we are disappointed, we accept the Court of Appeal’s decision and so will be contacting all affected borrowers, including those who were not part of this action, to advise them of the outcome and that we will be reimbursing them any additional interest charged.”
The cost of reimbursing borrowers will, according to the society, “be approximately £27.5 million”.
West Bromwich assures its members that, although it will now record a loss for the 2016–17 tax year, its capital position “remains strong” and “significantly in excess of regulatory requirements”.
Ruling sets a precedent for further class action victories
Mr Alexander claimed that the victory “sends a clear message to other lenders”. Indeed, the victory may set a precedent for future class action challenges to have a chance of success where past challenges have failed.
It also strengthens the position of borrowers who are on tracker mortgages with other lenders. Had the appeal gone the other way, more case law would have supported West Bromwich’s decision to raise rates.
It is difficult to say whether other lenders might have followed suit in this case. But now, the prospect is far less likely.