Philip Thomas and Another v Triodos Bank NV
| Jurisdiction | England & Wales |
| Judge | His Honour Judge Havelock-Allan |
| Judgment Date | 02 March 2017 |
| Neutral Citation | [2017] EWHC 314 (QB) |
| Docket Number | Claim No A40BS029 |
| Court | Queen's Bench Division |
| Date | 02 March 2017 |
[2017] EWHC 314 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BRISTOL DISTRICT REGISTRY
MERCANTILE COURT
His Honour Judge Havelock-Allan Q.C.
Claim No A40BS029
James Counsell (instructed by Roythornes Ltd) appeared for the claimants
Olivier Kalfon (instructed by TLT LLP) appeared for the defendant
Approved Judgment
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
His Honour Judge Havelock-Allan Q.C.
Introduction
This case raises once again the question of the extent of the duty of care which a bank owes to a retail customer to whom commercial borrowing facilities have been extended. There was no hedge sold to the claimants in the present case. The transactions in question simply involved switching borrowing from a variable rate to a fixed rate for a term of 10 years.
The circumstances of the present case are most unfortunate. This judgment chronicles the breakdown of a flourishing banker-customer relationship which could and probably would have continued to prosper if it had not been for the unprecedented fall in the Bank of England base rate following the collapse of Lehman Brothers in September 2008.
The claimants, Mr and Mrs Thomas, are partners in an award-winning organic farming business which they have built up from scratch. They transferred their borrowing to the defendant, Triodos Bank, in 2006 because the bank had a reputation for supporting businesses with strong green credentials. The bank was delighted to win the claimants' custom. It regarded their business as a "flagship enterprise" which was a "valuable addition" to its portfolio.
The dispute arises from the fact that in the summer of 2008 the claimants decided that they wanted to switch a sizeable proportion of their borrowing from a variable rate to a fixed rate. Like others who fixed the rate of their borrowing before September 2008, the claimants found themselves tied to a far higher rate of interest than the current market rate, once base rate reached 0.5% in March 2009. No one foresaw that base rate would fall so low and so fast. More importantly, no one foresaw that base rate would remain at that level for more than 8 years. For many the pain was short-lived. In the mortgage market, fixed rate loans lasting more than 5 years were then rare. Most fixed-rate mortgages were for 2 or 3 years' duration. However commercial borrowing at fixed rates for longer periods was more common. The claimants switched the greater part of their borrowing to a fixed rate in June 2008. They did so in two tranches, at 6.71% and 7.52% per annum respectively. In each case the fix was for a term of 10 years.
The claimants maintain that they are not blaming the bank for not predicting that interest rates would fall. But they do blame the bank for not explaining the financial consequences which would flow if they tried to get out of the fixed rate before the expiration of the 10 years. They go further and say that the bank positively misrepresented what the financial consequences would be.
The chronology of events
The claimants began farming in partnership at Linscombe Farm in Devon in 1996, trading under the name of Linscombe Organic Vegetables. Linscombe Farm consisted of about 70 acres of land, of which 25 acres was useful for growing organic vegetables, a farmhouse and two 10,000 sq ft barns. The claimants grew the business by selling vegetable boxes of organic produce to subscribing customers and through having a stall at farmers' markets. In 2001 they won The Soil Association's "Box Scheme of the Year" Award. In 2003, they expanded the acreage under production by renting two other parcels of land a few miles away. But they wanted to expand further. By 2006 the claimants had substantially restored the farmhouse at Linscombe and were looking for a new challenge.
The claimants found Bidwell Barton in 2006. It was a farm of around 120 acres about 10 miles from Linscombe but closer to Exeter so better positioned for the Exeter market. The soil was more fertile and there was a larger (5 bedroomed) farmhouse in need of renovation. They decided to try to buy Bidwell Barton. Bidwell Barton was not organic. The process of conversion to organic status takes two years. So the claimants planned to operatetheir business from both sites to begin with.
The purchase of Bidwell Barton, whilst retaining Linscombe, was going to involve a substantial increase in borrowing. The claimants were banking with NatWest. They felt that now was the time to switch banks. They chose the defendant for its green credentials. It had a reputation for supporting businesses with a good ecological profile. As organic farmers the claimants thought that the defendant would lend them a sympathetic ear – and they were right. They had already been in contact with the defendant when they were considering buying another farm in the autumn of 2005. At the suggestion of The Soil Association they had spoken to Ian Price, who was a Senior Manager in the bank's food, farming and trade team. They got in touch with Mr Price again in March 2006. The bank agreed to lend them £300,000 with which to repay their borrowing with NatWest and £1,150,000 to fund the purchase of Bidwell Barton.
The claimants transferred their banking from NatWest to the defendant in April 2006. Mr Price became, in effect, their Relationship Manager. They initially entered into two loan agreements with the defendant. The first was for the sum of £300,000 (Loan 06/3057 on Loan A/C 20072007) for a term of 20 years at a variable rate of interest of 1.25% over base rate. I shall refer to this as "Loan 1". The loan agreement was signed on or about 15 June 2006 and the loan was drawn down around 26 June. It was used to repay NatWest and provide an overdraft for the farming business. The second loan was for the sum of £1,150,000 (Loan 06/3064 on Loan Account 20077009) for a term of 25 years at a variable rate of interest 1.75% over base rate. I shall refer to this loan as "Loan 2". The loan agreement was signed on or about 20 June 2006. It was used for the purchase of Bidwell Barton. The purchase was completed on 13 September 2006 for a price of £1,050,000.
Loan 1 was to be repaid in 240 monthly payments of interest and capital, starting with drawdown. Loan 2 provided for an initial interest-only payment period of 36 months, followed by 264 monthly payments of interest and capital. Both loans were secured by mortgages of the land and buildings at Linscombe Farm and at Bidwell Barton. The loan agreements incorporated the defendant's standard conditions, to which I will return presently. Both also contained an express clause stating as follows:
"If all or part of the Loan is repaid early as a result of refinancing through another lender or through a sale of Property forming the Bank's security or a sale of a Property purchased with the loan a fee is payable equivalent to the amount of interest indicated, at the Rate of Interest then prevailing, on the amount repaid early."
The amount indicated as the early repayment fee was 3 months' interest. However, the bank agreed to waive the early repayment fee altogether in the case of Loan 1 and agreed to waive it in respect of Loan 2 if the early repayment was made out of the proceeds of sale of any part of Linscombe Farm. The reason for this latter concession was that the claimants had conceded from the outset that they would probably have to sell the farmhouse at Linscombe, and perhaps the land, in order to reduce the level of their borrowing.
This is in fact what happened. The farmhouse at Linscombe was sold in November 2007 for £695,000 and £600,000 out of the net sale proceeds were used to reduce Loan 2. At that point the claimants' thinking was that the land at Linscombe Farm could be sold to pay off the rest of Loan 2 as and when they were ready to give it up. However they were now facing a period of uncertainty due to the fact that, in January 2007, Mr Thomas had been diagnosed with viral hepatitis. This is a degenerative disease which can permanently damage the liver if left untreated. The only known treatment is long-term chemotherapy combined with an anti-viral drug. Mr Thomas had been told that if the virus was not eliminated by this treatment, his chances of survival were no more than 40%. He embarked on an 11 month course of chemotherapy in October 2007. It ended in September 2008. Subsequent tests suggested that it had worked; but Mr Thomas was told that he would not know for certain whether he had been cured for 5–6 months. He was eventually given the "all clear" in February 2009.
The significance of Mr Thomas' illness is two fold. First, it placed a question-mark over long-term plans for the farming business. The claimants could not be sure that they would be able to keep Bidwell Barton, or the land at Linscombe for as long as they would like, until they were confident that Mr Thomas was cured. They stuck to their immediate strategy of developing Bidwell Barton so that it became organic and was capable of operating profitably on its own but made no definite decisions about the future. Second, it affected their status as borrowers. The bank was likely to regard them as less of a good risk if it knew that Mr Thomas had a life-threatening condition. The question is what Mr Price knew about the illness. The issue is said to be relevant to his credibility and that of Mr Thomas and I will return to it.
The claimants restructured their borrowing from the defendant in February 2008. The balance of Loan 2 (£550,000), plus an additional advance of £15,000, was re-packaged as a loan of £565,000 (Loan Agreement No. 08/3489 on Loan Account...
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