The borrower defaulted as a result of the lender failing to upload new account details onto its computer system. The lender took possession and sold one of the mortgaged properties to a third party. The borrower brought an application before the tribunal claiming that the default notice was defective because at the time of issue, the borrower was not in default and also claimed wrongful possession and sale and that the loans and mortgage be set aside as unjust.
The borrower’s application was dismissed because the tribunal found that the lender could rely on the first missed payment for each loan as an event of default because the direct debit was still in force and there were insufficient funds in that account. However the lender could not rely on the second missed payment as an event of default because by that time the borrower had submitted the second direct debit authority on an account with sufficient funds. Accordingly the default notices were invalid due to the overstatement of arrears. However despite the defects in the default notices, the lender was held entitled to take possession on the basis that it had made reasonable efforts to locate the borrower without success at the time of repossession. The borrowers’ claims were dismissed. The borrower appealed and the tribunal on appeal held that despite the overstatement, the notice was valid. The tribunal noted that if the default notices had not been valid, then the lender would not be entitled to exercise its statutory or contractual right to possession and sale. The appeal was dismissed.
The lender then sought summary judgment. The borrower argued that the term of the loan providing for interest on the balance owing under the loan where an instalment was overdue was unenforceable as a penalty because interest was calculated on the whole balance not just the overdue instalment.
The court noted that:
A penalty is in the nature of a punishment for nonobservance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different liability…It is a well settled, if not an intelligible, rule that if the mortgagee wishes to stipulate for a higher rate of interesting default of punctual payment he must reserve the higher rate as the interest payable under the mortgage and provide for its reduction in case of punctual payment. … An agreement to pay a higher rate for non-payment at the appointed time is considered to be a penalty against which equity may give relief.
The court held that the higher interest on the entire balance including the instalment was a penalty.
The test for summary judgment is whether the defence or counterclaim has no real prospect of success.
The court held that the borrower was entitled to be relieved of any liability for the penalty but that did not affect the validity of the default notice, which did not claim any default on the basis of non-payment of the late fees, but instead the missed monthly payment. Thus, the penalty argument did not affect the right of the lender to possession based on the default notice.
While the court noted that it was strictly unnecessary to deal with the argument that the tribunal hearing created an issue estoppel in relation to the penalty argument, the court found that it did not, because there was no substantive consideration of the penalty argument in the course of the tribunal proceeding.
The court found for the lender.
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