Standard variable rates after transfer: mandatory or permissive?

The Court of Appeal has considered whether a bank acquiring a portfolio of residential mortgages was obliged to charge borrowers its own standard variable rate or whether it could maintain the separate, higher rate for the acquired loans.

“Mortgage prisoners”?

Loans to a group known as the Whistletree borrowers originated with Northern Rock. Some years after Northern Rock’s nationalisation during the 2008 financial crisis, TSB Bank acquired the mortgages. At acquisition, the applicable standard variable rate was 4.79%, being 4.29% above the Bank of England base rate.

TSB maintained this rate as a separate Whistletree rate for these borrowers, whilst charging other customers its own standard variable rate at only 2% above the base rate. The Whistletree borrowers argued they were “mortgage prisoners” trapped into paying unduly high rates and sought damages for breach of contract.

Interpretation dispute

The Whistletree borrowers argued that TSB was required to charge them the same rate as it did to its other borrowers because the contractual language referred to rates on “its variable rate mortgage loans”. They also relied on the expectation that transferred borrowers would benefit from being charged the same rate as the lender’s other customers (also known as “herd protection”).

TSB maintained that it had stepped into Northern Rock’s shoes and could exercise the same rights to vary the inherited rate. Whilst TSB could have elected to charge its own standard variable rate, it was not obliged to do so.

Two distinct mechanisms

The Court of Appeal dismissed the appeal, holding that TSB did not breach the mortgage contracts. The court identified two separate mechanisms: one permitting the lender to vary rates and another permitting (but not requiring) a transferee to adopt its own standard variable rate. Upon transfer, TSB acquired all of Northern Rock’s rights. Nothing in the contractual language required TSB to adopt its own standard variable rate before exercising those rights.

In reaching this conclusion, the court rejected the attempt by the Whistletree borrowers to rely on the so-called contra proferentem rule because it did not think there was any doubt as to what the language meant.

The court also observed that the Whistletree borrowers were not actually worse off as a result of the transfer since the margin above the base rate remained unchanged. The root complaint was that the Whistletree borrowers had not received the advantage of a lower rate enjoyed by a different cohort of TSB borrowers.

Finally, the “herd protection” argument failed as being inconsistent with the wording of the contracts, with the court noting that the Whistletree borrowers were free to remortgage if they wanted to.

Judgment: Donna Breeze & Ors v TSB Bank