FML Timeline: Northern Rock (Asset Management) plc v McAdam

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A large number of loans issued by NRAM wrongly stated (in a number of places) that they were “regulated by” the Act.

If a loan agreement is regulated by the Act, the borrower is entitled to a number of rights, remedies and protections arising under it. Some can be far reaching and punitive for the lender. The rights include those under section 77A of the Act, which states that borrowers are to be provided with periodic statements of particular form and content. Failure to comply with section 77A results in the borrower having no liability to pay any interest or default sum in respect of the period in which a lender fails to comply.

In 2012, NRAM realised that it had failed to implement section 77A correctly, resulting in borrowers receiving non-compliant annual statements.

NRAM did not provide any redress to the borrowers under unregulated loans. Having received a number of complaints from the affected borrowers, NRAM brought a “test case” to determine whether or not the borrowers had any rights under the Act.

Decision

The Court of Appeal allowed NRAM’s appeal and held that the borrowers had no rights under the Act.
In the light of the highly technical provisions of the Act, including in particular the role of the court in enforcing regulated agreements, it would require very clear words to contract into the Act (if it is possible at all). The loan documentation in this case stated that the agreements were "regulated by" the Act. This was a statement of fact rather than a word of incorporation. The Act was not expressly incorporated into the agreements.

NRAM did not expressly or impliedly agree that the borrowers were to have some or all of the protections of the Act irrespective of whether the agreements were regulated or not.

There was no estoppel because there was no shared assumption that the agreements would be treated as if they were regulated by the Act.

The statements made in the documentation that the agreements were regulated by the Act were representations and contractual warranties. Therefore, the borrowers were entitled to sue for misrepresentation under the Misrepresentation Act 1967 and for breach of contractual warranty. However, the breach would occur at the time the borrowers entered into the agreements and, therefore, any claims would potentially be time-barred.

Noteworthy/ Novel points

This is a commercially sensible decision and good news for the lenders.

The fact that a loan agreement wrongly states that it is regulated by the Act does not make the borrower entitled to any rights or protections under the Act.

The borrower will potentially have the right to sue the lender for misrepresentation and breach of contractual warranty. However, any breach would have occurred at the time of entry into the agreement, so many (if not all) such claims will be time-barred.

For further information on the first instance decision, please refer to our article here.