Bank slammed over 'sloppy' mortgage

The Appeal Court has sent out a warning to lenders as it slams a bank for using confusing contracts, writes Roger Pearson.

An Appeal Court ruling in which a bank was slammed for "disgracefully sloppy" mortgage documentation is being viewed as a clear warning to lending institutions to clean up their acts.

London solicitor Katy Sillett of Johnson Sillett Bloom, who represented the borrowers and successfully challenged possession by the bank in the case of Governor & Company of the Bank of Scotland v Ladjadj & anor, says the decision is good news for both borrowers and the legal profession.

The case involved an appeal against a High Court possession order obtained by the bank from Nigel Davis QC in December 1998, on the basis of intermittent payments and arrears.

In allowing the appeal, Lord Justice Laws said that there had been concern over how much was owed in arrears. The bank had put arrears at more than £80,000, while the borrowers put them at £40,000.

He said one of the main problems was the bank's paperwork, which he branded as "disgracefully sloppy and well capable of creating confusion".

He said there were four separate contractual documents in the 23-year loan transaction – which gave the bank a legal charge over property in Acton, London W3 – but some points were by no means easy to reconcile with each other.

"What a lay person would be supposed to make of them I cannot begin to imagine. I regard it as nothing short of scandalous that a major lending institution should foist this jigsaw puzzle of a contract on the borrowing public," he said.

Another of the judges, Lord Justice Robert Walker, said that Lord Justice Laws had used "strong language" to describe the mortgage documents.

But he added: "To my mind that language is justified. It is deplorable that the defendants' right to their home should depend on t0he interpretation and combined effect of no fewer than four contractual documents, which do not use, as they should, a clear and consistent terminology."

He added that the problem of establishing the true state of affairs between the bank and the borrowers had been exacerbated by the bank's "confused evidence".

The court ordered a retrial of the case in the light of its conclusions as to the proper meaning of the contract, but expressed the hope that the parties would attempt to square their differences out of court.

Sillett says: "During the 1990s the mortgages offered in the residential market have become increasingly complex with interest rate caps, fixed capital repayment holidays and other variations.

"While in the vast majority of cases these merely represent sophisticated borrowing arrangements, the complexity of their terms can leave some borrowers baffled by the documentation.

"My clients' case represented a residential mortgage deal that was so riddled with inconsistencies that its proper construction was challenging, even for the Court of Appeal.

"The case is particularly topical at the moment as a result of interest in possible regulation of mortgage business and recent media campaigns against what some might consider bad practice among mortgage lenders."

The Bank of Scotland was represented in the case by Underwood & Co.