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A reminder to unregulated lenders - Kumar and others v LSC Finance Ltd [2024]

The case had to determine the enforceability of various loan agreements and in particular whether loan agreements with individual borrowers secured against residential properties constituted regulated mortgage contracts (RMCs) or investment property loans (IPLs)

LSC Finance Ltd (LSC), provided short term finance and was not authorised by the Financial Conduct Authority to enter into RMCs. In 2017 and 2018, LSC entered into a series of loan agreements to facilitate the purchase and development of various plots of land. The loans were secured by mortgages on the land. The Court looked at whether the loan agreements were RMCs, which would have made them unenforceable against the borrowers under section 26 of the Financial Services and Markets Act 2000 (FSMA).

Whilst the Court found that the loan agreements were IPLs and therefore enforceable in this case, the Court did state the following:

  1. Whether loan agreements are RMCs or IPLs depends on a fact sensitive enquiry, which looks at the borrower’s intended use for the property and whether the loan is made wholly or predominantly for business purposes. Both those enquiries relate solely to the time at which the loan agreement is made, and so if the intended use or purpose changes after that time, any change will be immaterial.
  2. FSMA does not require the use of business exemption declarations in loan agreements. However, this is common practice for bridging lenders to satisfy the statutory presumption that the loan is for business purposes.

What does this mean?

Lenders who aim to remain outside the regulatory parameters when lending to individuals must ensure that their loans qualify for the business exemption under FSMA.

Lenders must demonstrate they meet the following criterion for the business exemption:

  1. That the borrower does not intend to use more than 40% of the mortgaged land as a dwelling for themselves or by a related person. 
  2. That the loan is for business purposes. The Court held that the business exemption declaration will not be treated as conclusive evidence that the purpose of the loan is for business purposes under the RCM regime, if the lender knows or suspects that the agreement entered into by the borrower is not for business purposes.

What do lenders need to consider?

This case serves as a reminder that a disgruntled borrower may attempt to contest the enforceability of loan agreements, and a business exemption declaration cannot operate as an estoppel or preclude the borrower from adducing evidence that the statements in the declaration were factually incorrect.

The loan agreements in Kumar each contained a declaration that the loans were for business purposes, but these did not comply with 60C of Financial Services and Markets Act 2000 (Regulated Activities) Order 2001  (i.e. did not include a statement that the borrower understood that they would not have the benefit of the protection and remedies that would be available to the borrower under FSMA). Lenders should carefully review their documentation to ensure that they are compliant with the Act.

Lenders should also maintain comprehensive records of meetings and conversations with borrowers to ensure all communications and documentation align with the loan's intended business purpose. In the event of a borrower's challenge, lenders may need to justify and produce evidence to the court that the loan was indeed for business purposes.

Additionally, in certain cases, lenders will need to demonstrate that the borrower intended to use less than 40% of the mortgaged land as a dwelling for themselves or a related person. If a lender suspects potential issues in evidencing compliance with this part of the criteria, they should seek advice from their valuer and solicitor.

Please do get in touch if you have any further questions or would like to discuss further.

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