FML Timeline: Thomas Nelmes v NRAM PLC

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Mr Nelmes owned a portfolio of residential properties. In February 2007, Mr Nelmes engaged the services of broker Ian Blair of ASC West Yorkshire (AWC) with a view to consolidating of all his lending relating to the properties and accessing further funds.

Mr Blair brokered two commercial loans between Northern Rock PLC (now NRAM Plc) (NR) and Mr Nelmes, totalling £2.85m, in April and July 2007. The arrangements between Mr Nelmes and AWC were that Mr Nelmes would pay AWC an arrangement fee of 0.75%.

The formal loan offers disclosed arrangement fees which were to be paid by Mr Nelmes to NR, £21,483 in respect of the loan in April and £8,500 in respect of the loan in July. NR paid half of these arrangement fees on to AWC as procurement fees. However, this was not disclosed to Mr Nelmes.

Over the course of 2008 to 2013, Mr Nelmes fell behind on his loan repayments. NR served two formal demands in July 2013 and appointed receivers on 31 July 2013.

Mr Nelmes brought proceedings against NR in which he claimed that his relationship with NR was unfair under section 140A of the Consumer Credit Act 1974.  Mr Nelmes alleged that the relationship was unfair as the result of a number of factors, including the terms in the loan offer, NR’s conduct during the negotiation of the loan agreement, the relationship between NR and the broker and NR’s conduct after formation and leading up to enforcement.

Decision

Save for two instances, the Court of Appeal found that Mr Nelmes’ claims of an unfair relationship were not made out. The two instances where the Court did find that NR’s conduct was unfair are as follows.

1. Relationship between NR and the broker

The Court’s view was that Mr Blair and AWC were acting as agent for Mr Nelmes in his dealings with NR, so Mr Nelmes was entitled to their undivided loyalty. Mr Blair/AWC’s acceptance of the commission which was kept secret from Mr Nelmes was a breach of the duty owed by the broker to him. This breach was brought about by NR in paying the commission.

Despite the fact that a classic breach of fiduciary duty / Hurstanger claim was not brought (presumably because of a potential time bar), the fact that NR would have been liable for such a claim seems to have been a persuasive factor for the Court.

The Court was satisfied that the relationship was unfair on account of the following: (i) the term of the credit agreement that Mr Nelmes should pay NR an arrangement fee; (ii) the related agreement that NR should pay commission of half that amount to Mr Nelmes’ broker; (iii) the payment of that commission; and (iv) the failure of NR to tell Mr Nelmes about the payment. Specifically, it said that a payment of this nature deprives a borrower of the disinterested advice of his broker and is, for that reason, unfair. The fact that such undisclosed commissions were not uncommon at the time did not alter the position.

On this basis, the Court required NR to account to Mr Nelmes for all the commission it paid to the broker (roughly £15,000) together with interest from the date of the payment.

6. Appointment of receivers

The Court of Appeal also held that it was unfair to appoint receivers immediately after the deadline for Mr Nelmes to provide a proposal to repay his debt and six days before the date NR had itself set for enforcement; and to have done so while information on the basis of which a proposal might have been formulated was being sought.

However, the Court went on to say that, even if receivers had not been appointed until a reasonable time later, it would have made no substantial difference. Accordingly, this unfairness did not call for any order under section 140B.

Noteworthy/ Novel points

A repackaged breach of fiduciary duty / Hurstanger claim appears to now be capable of providing underlying cause for a section 140A unfair relationship claim, where a secret commission deprives a borrower of the disinterested advice of his or her broker.

For further information, please refer to our article "Court of Appeal finds unfair relationship where secret commission deprives borrower of broker’s independent advice".