Lawyers at Beauchamps say that a recent High Court judgment has highlighted the need for clarity in loan agreements.

The proceedings concerned an agreement commonly referred to as a ‘lifetime loan’ or a ‘reverse mortgage’, where no repayments are due on the loan until the death of the borrower.

Upon the death of the borrower and a subsequent demand, the entirety of the loan (together with interest) becomes repayable. The plaintiff sought an order for possession of a residential property in Sligo on foot of a 2007 mortgage.

Interest calculation

In a note on the firm’s website, Beauchamps associate Aisling Duffy points out that, while the court ultimately found that the lender was entitled to an order for possession, it also raised two issues linked to the fairness of the contract that were not raised by the defendant.

The first concerned the way that the lender had calculated the interest on the loan, by continuing to apply interest after the death of the deceased borrower, up until the date of the hearing.

“The court raised concerns regarding the fairness of the contractual terms due to a possible tension between the provisions regarding interest, which suggested that interest would continue to accrue until the loan was repaid in full, and the provision regarding the period of the loan agreement, which was the date of death of the borrower,” Duffy writes.

The court found, however, that the terms of the loan offer were set out in “plain, intelligible language" and, as a result, fell outside the scope of an EU directive on unfair terms in consumer contracts.

Solicitor’s error

The second issue arose from errors made by the lender’s solicitor, which meant that the demand issued for was a figure that was significantly more than the sum actually due.

“Having comprehensively considered the applicable case law in Ireland (and outside of Ireland), the court found that an overstatement of a sum due in a demand does not render the demand invalid or ineffective, save where the terms of the loan provide otherwise, or it is unclear what is to be done on foot of the demand,” Duffy notes.

She concludes that the case highlights the importance for lenders to ensure that the language used in letters of loan offer should be “clear, plain, unambiguous, and intelligible”.

Duffy adds that lenders should be aware of the court's obligation to consider the fairness of the terms in a consumer contract, irrespective of whether the fairness of the terms has been put in issue by the consumer.