Watchtower Investments Ltd v Payne
Court of Appeal 20 July 2001 New Law Digest, 20 July 2002

A secured loan of £11,300 was made over a ten-year period at an APR of 38%. Of this, £1,776.89 was used to pay off the borrowers' arrears on their first mortgage. There was some dispute as to whether the borrowers had authorised the disbursement but they made no objection to what was done and part of the contractual documentation provided for arrears on a first mortgage to be cleared before completion.      
The argument on behalf of the borrowers in the County Court was that the sum used to pay off the debt to the building society was a charge payable under the transaction within the Consumer Credit (Total Charge for Credit) Regulations 1980. The judge agreed and declared that the consequential misstatement as to the amount of credit rendered the entire agreement irredeemably unenforceable. The lender appealed to the Court of Appeal.
Court said that the question was not straightforward, because one had to start by deciding whether the sum in question was a 'charge' within the Regulations at all and the word was not defined. The crucial question was whether the sum can fairly be regarded as the credit itself or whether it is the cost or charge for the credit. The payment in respect of the arrears was part of the purpose of the credit and not part of the cost of the credit. In particular, the loan application form had said that the purpose of the loan was to clear arrears.  Consequently, the appeal was allowed and the loan was enforceable.