Insights

In a preliminary ruling delivered by the Court of Justice of the European Union (the “CJEU” or the “Court”) on the 24 October 2024 in the case of LB & JL (the “Plaintiffs”) vs Getin Noble Bank S.A (hereinafter the “Bank”), the Court had to consider whether a natural person who enters into a mortgage loan agreement in order to finance the purchase of a single residential property to be leased for commercial purposes falls under the definition of ‘consumer’, within the meaning of Article 2 of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (the “Directive”).

Article 2(b) of the Directive defines “consumer” as any natural person who, in contracts covered by the Directive, is acting for purposes which are outside his trade, business or profession. Article 2(c) of the Directive defines “seller or supplier” as any natural or legal person who, in contracts covered by the Directive, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned.

The facts of the case are as follows. The Plaintiffs were a married couple residing in the United Kingdom where they were not carrying out any particular trade, business or profession. The Plaintiffs entered into an agreement with the legal predecessor of the Bank for a mortgage loan indexed to the Swiss franc, which agreement provided for a variable rate of interest and repayment of that loan in Polish zlotys (the “Mortgage“). The purpose of the Mortgage was to acquire a residential property, situated in Warsaw, to be leased for consideration. The rent received was used primarily to repay the monthly instalments under that mortgage loan agreement. The Plaintiffs did not lease any other properties.

In 2019, the Plaintiffs repaid the entirety of the mortgage loan and sold that property. Subsequently on the 27 December 2019, the Plaintiffs made an application to the Regional Court, Warsaw, Poland (the “Referring Court”). The Plaintiff sought reimbursement of all the sums paid in performance of that mortgage loan agreement on the ground that the Mortgage contained unfair terms, rendering it invalid and unlawful.

The Referring Court noted that the terms of the Mortgage provided for the indexing of the Mortgage to the Swiss franc exchange rate, which terms were unfair on the grounds that they were not individually negotiated, were not drafted in plain, intelligible language, and thus contrary to the requirement of good faith. This caused a significant imbalance in the parties’ rights and obligations arising under the Mortgage, to the detriment of the Plaintiffs.

Notwithstanding the above, the Referring Court was not convinced that the Plaintiffs classified as ‘consumers’ under the Directive. If this was in the affirmative the provisions of the Directive would kick in resulting in the possibility of declaring the Mortgage invalid. The Referring Court decided to stay proceedings and referred the following question to the Court for a preliminary ruling.

‘Must Article 2(b) and (c) of the Directive be interpreted as meaning that a natural person who concludes a mortgage loan agreement in order to raise funds to purchase a single property to be rented for consideration (buy-to-let) is to be regarded as a “consumer” within the meaning of that Directive?’

As a preliminary point, the Court noted that the tenth recital of the Directive provides that the uniform rules of law in the matter of unfair terms should apply, subject to the exceptions listed in that recital, to ‘all contracts’ concluded between sellers or suppliers and consumers, as defined in Article 2(b) and (c) of the Directive.

The Court noted that in order to determine whether or not contracting parties were acting for the purposes relating to their trade, business or profession, one must refer to the capacity of the contracting parties. Therefore, the status of ‘consumer’ of the person concerned consists in an assessment of whether the contractual relation at issue arose in the course of activities outside a trade, business or profession.

Generally speaking the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his or her bargaining power and his or her level of knowledge. This leads to the consumer agreeing to terms drawn up in advance by the seller or supplier without being able to influence or negotiate the content of those terms. In previous judgments, the Court determined that a broad definition of the concept of ‘consumer’ for the purposes of Article 2(b) of the Directive allows the protection granted by it to all natural persons finding themselves in the weaker position vis-à-vis the seller or supplier.

The Court held that in the context of a loan agreement concluded with a seller or supplier, since the co-debtor is in a situation analogous to that of the debtor, in terms of contractual obligations, vis-à-vis the seller or supplier with whom they have signed a contract, there is no distinction to be made between the debtor and the co-debtor in so far as concerns the application of the Directive to that specific contract. Accordingly, a natural person in the situation of a co-debtor also falls within the concept of ‘consumer’ within the meaning of Article 2(b) of the Directive since he or she is acting for purposes which are outside his or her trade, business or profession.

Where two natural persons enter into a mortgage loan agreement in order to finance the acquisition of a residential property, it is for the national court to establish, taking into consideration, inter alia, the nature of the property which forms the subject matter of that agreement, whether those natural persons acted within their trade, business or profession or acted for purposes outside that trade, business or profession.

In the present case, it is apparent from the request for a preliminary ruling that the Plaintiffs in the main proceedings are natural persons who, at the time when they entered into the Mortgage were employed, respectively, as a police officer and as a school principal. Furthermore, they were not carrying on a trade, business or profession in a professional capacity in the field of property management. It is also apparent that they entered into that Mortgage in order to finance the acquisition of a single residential property, situated in Warsaw, to be leased for consideration, and that the rental income was used primarily to repay the monthly instalments in respect of that loan.

Accordingly, it is apparent, subject to the verifications (which are for the Referring Court to carry out), that the conclusion of the Mortgage at issue did not, for the Plaintiffs pursue a professional purpose, but rather was intended to consolidate their private assets, since the acquisition of the residential property financed by that loan was a form of investment for them.

In replying to the preliminary reference raised by the Referring Court, the Court held that Article 2(b) of the Directive should be interpreted as meaning that a natural person who enters into a mortgage loan agreement in order to finance the purchase of a single residential property to be leased for consideration comes under the concept of ‘consumer’, within the meaning of that provision, where that natural person acts for purposes that are outside his or her trade, business or profession. The mere fact that that natural person seeks to earn income from the management of that property cannot, in itself, lead to the exclusion of that person from the scope of the concept of ‘consumer’, within the meaning of that provision.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report. This article was first published in ‘The Malta Independent’ on 13/11/2024.