Jonathan Newman of Brightstone Law on enforcing regulated mortgage contracts when entered into by non-authorised credit providers
A trial held at London’s High Court recently illustrated that there are circumstances where breach of FSMA may not be a bar to enforcement.
Strathmore Limited, a non-FSA regulated lender, advanced a £1 million bridging loan, secured by first legal charge, to Charles Helden for the purchase of a property in Chelsea.
Unfortunately, Mr. Helden defaulted. He sought to oppose the claim for possession (and made other claims) on various grounds, his primary case being; that where a lender is not regulated, there is a general prohibition against enforceability of mortgages, which are regulated activities under the Financial Services and Markets Act 2000 (FSMA).
Strathmore was an informally family run organization, with a history of advancing bridging loans for commercial use to a close, but limited, number of repeating customers. The loan in question was completed through solicitors who were unaware of FSMA and inexperienced in the relevant legislation.
Strathmore, in seeking an order for possession, argued that the facility was a one–off, outside its usual core business, and by reason of this, it denied that in making the advance it had carried on regulated activities by way of business.
The lender also argued that even if the advance was deemed a regulated activity then, on just and equitable grounds, the test the legislation provides for the granting of relief where breach has taken place, it should be permitted to enforce and recover the sums due.
On the facts the court determined that the loan was indeed a regulated activity, and the lender was in breach of the general prohibition. Nevertheless the lender was to be granted relief to enforce and recover sums due.
And so what can we learn from the Helden v Strathmore case?
For a start, the courts will look to the facts in each case and determine whether relief shall be granted.
Increasingly, non-regulated lenders find themselves in situations where there is dispute over whether a regulated activity has taken place, and that being so, enforceability is brought into question.
In this case, the lender knew the purpose of the loan, and that the property was to be occupied as a dwelling by the borrower, but was ignorant of the law.
This case illustrates that an offending lender may still get relief, even where breach has taken place.
It is interesting to note the factors the Court took into account in applying the just and equitable test. These included:
· The borrower had enjoyed use of money since 2006 without payment of interest
· The property had increased in value and borrower been enriched
· The lender would not have provided the money unsecured
· The lender had been deprived of a return on its monies which it could otherwise have expected to receive
· No advantage was gained by the circumvention of regulation
· The borrower would have been in no better position if he had been dealing with a regulated person
· The lender did not realise that FSMA applied and it was reasonable for them not to do so.
And the best lesson to learn?
Get the right advice early!
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