Pepper Finance Corporation (Ireland) DAC and Others v McKenny and Another
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Twomey |
| Judgment Date | 21 July 2023 |
| Neutral Citation | [2023] IEHC 440 |
| Court | High Court |
| Year | 2023 |
| Docket Number | Record No. 2022/950P |
[2023] IEHC 440
Record No. 2022/950P
THE HIGH COURT
COMMERCIAL
JUDGMENT OF Mr. Justice Twomey delivered on the 21 st day of July, 2023
. This is one of the many unfortunate cases which have been heard by our courts in recent years dealing with people who borrowed money to buy property but who were unable to repay the loan in full.
. The defendants are a married couple who live in Portmarnock (the “ Borrowers”) who borrowed €1.127 million in 2007 in order to finance three buy-to-let properties in Dublin as an investment for their financial future — a two-bedroom apartment in Swords (at The Elms, Boroimhe), a three-bedroom house in Malahide (in Kileen Park) and a three-bedroom house in Clarehall (in Templeview Avenue) (together the “ Properties”).
. During most of the 15 years since borrowing the money in 2007, the Borrowers have been unable to meet the repayments, even when they were interest-only. This was for a variety of reasons, including the 2007/2008 property crash, the reduction in rents, the loss of tenants, the Covid-19 pandemic, the loss of employment by one the Borrowers, the effect of the rent-freeze zone restrictions on the income from the Properties, etc.
. They are now facing the harsh realisation that, back in 2007, in order to persuade their bank at the time, IIB Homeloans Limited (“ IIB”), to lend them €1.127 million (“ Loan”), they had to grant it very extensive powers to sell the Properties, in the event that they did not meet their repayments. The successor to the lending bank is the plaintiff (“ Pepper”) and in these proceedings it is seeking orders pursuant to its powers to sell the Properties.
. What is understandably disappointing for the Borrowers is that if the Properties are sold by Pepper, this will result in no return to the Borrowers on the repayments of €950,000, which sum they received from the tenants of the three properties over 15 years and used to pay down, in part, the Loan. There will be no return because, having borrowed €1.127 million on a 30-year term and after having made very significant repayments ( albeit not full repayments) over a period of 15 years, there still remains circa €1.4 million unpaid on the Loan. Combined with this is the fact that the three properties are currently advertised for sale for a total value of €1.16 million. Accordingly, if the Properties are sold, not only will there be no return to the Borrowers on their investment, but they could owe approximately €250,000 to Pepper, depending on the price obtained.
. This has led to a feeling of injustice on the part of the Borrowers. It is summarised by the first defendant (“ Ms. McKenny”) in her Witness Statement at para. 16 where she states:
“We bear no ill will towards the Bank however given that the values of the properties are almost at par with the loan amount remaining it appears that all our repayments since 2007 are in effect useless if this application succeeds. I say, and I believe this would be unjust for the reasons of having spent all of our income to retain the properties for our old age and retirement. In succinct language we borrowed €1.150 million. We have repaid €950,000. Our current balance is circa €1.4 million. Had we placed our monies into a pension scheme we would be in a far better position. It is indeed difficult to place the relief sought within the parameters of justice given the entire circumstances.” (Emphasis added)
. It is difficult not to feel considerable sympathy for Ms. McKenny and the second defendant (“ Mr. Reid”), particularly in light of the honest approach of Ms. McKenny to their obligations. This is illustrated by the fact that, although the rent which they obtained from the Properties did not meet their loan repayment obligations over the years, the Borrowers always used whatever rent they were getting to pay-off the mortgage every single month. She also candidly admitted that a factor in the Borrowers falling into arrears was the introduction of rent-freeze restrictions in 2016 which affected them as landlords — the implication being that if they had been able to do so, they would have increased the rents and therefore this would have meant that the arrears in their repayments would have been reduced/eliminated.
. The fact that the Borrowers were anything but ‘strategic defaulters’ is also evidenced by the fact that even after a receiver was appointed to the Properties on 1 st November, 2021 and after these proceedings were issued on 9 th March, 2022, the Borrowers continued, in the words of Ms. McKenny, to ‘ do the right thing’, since they continued to use the rental income to discharge their loan obligations. They also instructed the tenants to obey the letters received from Pepper (through its agent Kroll) to pay the rent to the receiver. The honest approach of the Borrowers is illustrated by the fact that, less than three weeks before this hearing, which commenced on the 20 th June, 2023, the Borrowers had made a payment (in the sum of €3,500) in reduction of the outstanding balance on the Loan.
. For its part, Pepper in its submissions acknowledged that the Borrowers had made significant efforts over the years to meet their repayment obligations. For this reason, Pepper had decided not to pursue its claim for damages for interference with its economic interests, which claim was originally contained in the Plenary Summons issued by Pepper.
. However, it also must be observed that the reason for these proceedings is that, after a receiver was appointed to the Properties by Pepper, Mr. Reid entered into possession of one of the Properties and changed the locks. This has led to Pepper bringing this application for various court orders to enable it to enforce its security, including an order restraining the Borrowers from trespassing upon the Properties.
. While this Court does have considerable sympathy for the Borrowers who have made 15 years of monthly repayments of €950,000 without any return ( albeit this is less than the amounts due). However, it is not the role of this Court to make decisions based on sympathy. Rather, it is the role of this Court to reach a decision based on the law and, in particular, the contractual terms to which the Borrowers agreed, when they took out the loan.
. In this regard, as noted in further detail below, from the very first day in 2007 when the Borrowers took out the 30-year loan, it was stated in clear terms in the facility letter that the ‘amount of credit advanced’ was €1.127 million, but that on that loan of €1.127 million, the ‘total amount repayable’ was €2.252 million. This point was further emphasised by the fact that it was also stated in the facility letter that the difference between these two amounts was €1.125 million, which was stated to be the ‘ cost of this credit’. This simply highlights that the mathematics of the application of a relatively low interest rate of 5.41% on a large sum over a long period of time is that one ends up paying back to a bank a multiple of the amount borrowed.
. It appears to this Court that because the Borrowers perceive that this results in their getting no return on €950,000 of loan repayments, which they say is ‘unjust’, they are resisting Pepper's application on a number of legal grounds presented by their legal team (i.e. their solicitor, Mr. Geoffrey Nwadike, who issued the written legal submissions, Ms. Tara Sallar B.L. who drafted the pleadings and Ms. Ruschitzko B.L. who made oral submissions at the hearing).
. For the reasons set out below, this Court has found that these legal claims are unsustainable. Unfortunately from the Borrowers' perspective, this means that their decision to litigate in the High Court means that in addition to the shortfall of circa €250,000 on the loan (for which they are liable to Pepper), it is likely that the Borrowers will be liable to Pepper for the costs of the hearing. This is because, as noted below, the normal rule is that the loser pays the legal costs of the winner. When lawyers lose cases (and in most cases one set of lawyers will lose), it is not the lawyers who pay the legal costs, but the clients. Since Ireland ‘ ranks among the highest-cost jurisdictions internationally’ (see the Review of the Administration of Civil Justice in Ireland at p. 267 chaired by Kelly P.), this is likely to add tens/hundreds of thousands of euro to the amount owed by the Borrowers to Pepper. While this Court does feel additional sympathy for the Borrowers as a result, it is important to point out that no criticism is being made of the lawyers in this regard, since the lawyers are simply acting on the instructions of their clients in pursuing legal claims which this Court has found to be unsustainable.
. In this regard, at the very opening of the hearing, this Court raised the fact that the sale of the Properties would not clear the Loan and for this reason, it raised for consideration by the parties the additional costs involved in a four-day hearing in the High Court, which the losing party would have to bear. It enquired about whether there was any prospect of those costs being saved and in particular whether attempts had been made to settle the matter. It was advised that there had been some discussions but not between counsel. Accordingly, at the end of the first day, this Court asked the parties to consider whether there might be further efforts to resolve the dispute, in order to save the tens/hundreds of thousands of euro in costs, which one party would be likely to have to pay. At the commencement of the second day, it was clear that there had been no resolution of the dispute. However, the case did at least reduce from four days to two days of hearing (with a...
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