R(is) 2/99
(Guest v. Chief Adjudication Officer)
CA (Hirst, Hutchison and Thorpe LJJ)	CIS/14402/1996
2.4.98 	
		
Housing costs – interest payments on a charge required as a condition of an advance to cover the purchase price – whether “eligible interest”
The interest on a mortgage of £235,000 was being met as eligible interest. The claimant owed some £450,000 to the building society and they agreed that he should move to a smaller house. They advanced the £85,000 purchase price of the new house on the condition that a further charge of £30,000 was also attached to it. The Commissioner held that the interest payments on this further charge did not constitute eligible interest. The claimant appealed to the Court of Appeal arguing that the interest on the loan was eligible under both limbs of paragraph 7(3) of Schedule 3 to the Income Support (General) Regulations 1987.
Held, dismissing the appeal, that:
1.	the £30,000 charge for part of the appellant’s existing liabilities was an attempt by the building society to recoup some of their losses made on the sale of the appellant’s previous home and did not, therefore, represent a loan taken out for the purpose of purchasing the new property;
2.	even on the assumption that without it the acquisition could not have taken place, the charge was not a necessary expense incurred in connection with the purchase of the property for the purposes of paragraph 7(3)(a) of Schedule 3 to the Income Support (General) Regulations 1987, nor was it “paying off another loan” for the purposes of paragraph 7(3)(b);

3.	this conclusion was not inconsistent with regulation 5A which, in any event, could not be prayed in aid to alter the meaning of paragraph 7(3) as it stood before regulation 5A was inserted.

DECISION OF THE COURT OF APPEAL

Miss K. Markus (instructed by Messrs. Hudson Freeman Berg, London, W11) appeared on behalf of the Appellant.

Mr. J. R. McManus (instructed by the Department of Social Security, Leeds) appeared on behalf of the Respondent.

LORD JUSTICE HIRST:
This is an appeal by the appellant, Mr. Roger William Guest, from the order of Mr. P. L. Howell, sitting as a Social Security Commissioner, dated 11 June 1997, by which he ordered that the claimant’s weekly applicable amount for income support from 18 May 1995 was to include the appropriate figure in respect of interest on his mortgage advance of £85,000 from the Nationwide Building Society used towards the purchase price of his house, but not the additional £30,000 of mortgage liability described as a further advance.
The appellant is a solicitor who unfortunately fell on bad times when his partnership broke up, and who was also seriously caught up in the problem of negative equity with which we are all familiar.
The relevant factual background is as follows.  In December 1988 the appellant and his family were living in a house at 41, Colborn Avenue, Pinner, Middlesex, which he purchased by means of a mortgage from the Bank of Scotland in the sum of £135,000.  In December 1988 he purchased a house at 15, Lytton Road, Hatch End, Pinner, Middlesex, with the benefit of a bridging loan from  Lloyds Bank in the sum of £206,500, pending the sale of 41, Colborn Avenue.  By May 1989 41, Colborn Avenue had not been sold.  15, Lytton Road was remortgaged for the sum of £235,000 with the Nationwide Building Society, subject to a condition that the appellant sold No. 41 Colborn Avenue and paid the proceeds of sale to reduce the mortgage on 15, Lytton Road.
Subsequently the appellant became unemployed and dependent on income support.  Despite the ultimate sale in August 1994 of 41, Colborn Avenue, the appellant’s debts to the Nationwide Building Society increased, and by late 1994 were in the sum of approximately £450,000. The Department of Social Security was paying mortgage interest pursuant to regulation 17(1)(e) and paragraph 7(3) of Schedule 3 of the Income Support (General) Regulations 1987 in respect of eligible interest of £235,000.  I shall be referring in detail to those regulations in due course.
In or around September 1994 the Nationwide Building Society agreed that the appellant should move to a smaller and cheaper property with the benefit of a mortgage of one hundred per cent on the purchase price on condition that an additional sum of £30,000 was also charged against that property.  This agreement was made with the concurrence of all the appellant’s creditors pursuant to a scheme whereby 15, Lytton Road would be sold and the proceeds used towards paying his creditors, save for the sum of £85,000 which was to be used to purchase the new property.
Pursuant to that agreement, the appellant purchased Springwells Cottage, 1, Springwells, Billingborough, Sleaford, Lincolnshire in or around May 1995 for the sum of £85,000.  On 17 May 1995 the Nationwide Building Society made an advance of £85,000 for the purchase of the property which, as I have already noted, was a one hundred per cent mortgage, and the appellant also charged the £30,000 as stipulated on Springwells Cottage.  It is that charge of £30,000 which raises the critical issue in the present case.  In the meantime, Lytton Road had been sold for £172,000.  After redemption of the first and second mortgages, payment of legal costs and estate agent fees, the total loss on Lytton Road was over £377,000.
On 3 July 1995 the adjudication officer decided that interest payments due on the mortgage of £85,000 constituted “eligible interest” within the meaning of the regulations which would be included as part of the appellant’s weekly applicable amount for income support from 18 May 1995, but that interest payments on the £30,000 did not constitute eligible interest and so would not be included in the applicable amount.
The appellant appealed against this decision to the Social Security Appeal Tribunal which, on 22 March 1996, overturned the adjudication officer’s decision. The Chief Adjudication Officer then appealed to the Commissioner whose decision is presently under appeal before us.  On 11 June the Commissioner allowed the appeal, set aside the decision of the Tribunal as erroneous in law, and in effect reinstated the original decision of the adjudication officer.
The Income Support (General) Regulations 1987, SI 1987 No. 1967, provide for a scheme for income support pursuant to the Social Security Contributions and Benefits Act 1992.  Regulation 17 provides for the amount to which the claimant is entitled (“the applicable amount”) which includes (e):
“any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule.” 

Paragraph 1 of Schedule 3 of the regulations, as they stood at May 1995, provides that, subject to the following provisions of the Schedule, the following are prescribed housing costs:
“(a) mortgage interest payments.”

Paragraph 7(1) of Schedule 3 provides that where the claimant or his partner are aged under 60, and the claimant has been in receipt of income support in respect of a continuous period of not less than 16 weeks, 100 per. cent. of the eligible interest will be paid.  Paragraph 7(3), which is the critical paragraph for present purposes, defines “eligible interest” as:
“the amount of interest on a loan, whether or not secured by way of mortgage . . .  taken out to defray money applied for the purpose of ‑
(a) 	acquiring an interest in the dwelling occupied as the home; or
(b)	paying off another loan but only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off.” 

The Social Security Commissioner rejected the appellant’s contention that the interest on the £30,000 is eligible interest under both sub‑paragraph (a) and sub‑paragraph (b) of paragraph 7(3).  In a very clear and robust judgment, he stated, so far as relevant, as follows.  I start by reading paragraph 8:
“This ‘further advance’ (i.e. the £30,000) did not in fact represent any further advance made by the Nationwide to the claimant at all, but simply represented an attempt to recoup a further £30,000 of the losses they had already suffered by adding it to the security on the new house in case its value should in due course improve.  The appeal results from the claimant’s application to have the interest payable to the Nationwide on that further £30,000 of liability paid for him out of income support in addition to that on the £85,000 actually needed to buy his new smaller house, on the ground that the whole liability of £115,000 had really been the result of one transaction without which he would not have been permitted by the Nationwide to make the purchase at all...” 

He then summarised the course of the proceedings hitherto and the arguments and proceeded at paragraph 12 as follows:
“I have carefully considered the written submissions in the papers and the detailed oral submissions made to me by the claimant at the hearing.  However it seems to me that the adjudication officer’s appeal in this case is unanswerable.  In the first place I find it difficult to see how the extra £30,000 of liability added to the security on the new house can be described as “a loan taken out” on the new purchase at all.  There was in fact no question of the building society making a loan or handing over another £30,000 in any real sense at this stage at all. All that happened was that out of the total sale proceed of £172,000 from the previous house, the whole of which and more belonged to the Nationwide because it fell far short of the amount for which they were secured, the claimant solicitor’s was permitted to retain £85,000 and apply it to the new purchase instead of paying it over to the lender with the remainder of the sale proceeds in reduction of the previous mortgage.    The imposition of the further £30,000 secured liability on the mortgage of the new property simply reflected a decision that instead of the unpaid balance of over £200,000 due under the earlier mortgage, only the drastically reduced amount of £30,000 would be added to the security on the new house in order to give the claimant a more realistic fresh start, with the balance of unsecured liability for practical purposes having to be written off.  The transfer of this part of the existing liability to the new property was not in my judgment the taking out of a loan for £30,000 in any relevant sense for para. 7(3) of Sch. 3.”

I pause there as it is common ground that if that conclusion stands, it is fatal to the entire appeal, because, of course, the “loan taken out” requirement governs both sub-paragraph (a) and sub-paragraph (b).
 The Commissioner continued at paragraph 13 as follows:
“Even if that were not so, I accept as correct the two further submissions made to me by Mr. Hunt on behalf of the adjudication officer, first that the additional £30,000 of liability cannot be described as ‘monies applied for the purpose of acquiring an interest in the dwelling’ so as to bring it within para. 7(3)(a) as an eligible housing cost on the new property;   and second that it cannot qualify under para. 7(3)(b) either.
14.  As to (a), it is in my judgment quite clear that the restriction of loans under para. 7(3) to those taken out to defray monies applied for the purpose of acquiring an interest in the dwelling occupied as the home, or to pay off another loan which would have so qualified, means that a loan only qualifies in so far as it is of money in fact applied in effecting the purchase itself or in discharging expenses necessary and incidental thereto.  In other words, it is restricted to the payment of provision of the purchase price and the expenses of the sale and conveyancing costs:  see decision CIS/563/1991 at para. 35, with which I respectfully agree.”

In the next paragraph he summarises that decision.  As I shall be citing it myself in a moment, I will not read paragraph 15.  Lastly, paragraph 16:
“Secondly,  I accept Mr. Hunt’s submission that the transaction of providing additional or substituted security for £30,000 of pre‑existing liability does not amount to ‘paying off another loan’ so as to fall within para. 7(3)(b);  nor would it assist the claimant if it did, because the pre‑existing liability had not been  incurred for or applied in the purchasing of any interest in the present house.”

The first issue is whether the Commissioner was correct in his conclusion at paragraph 12, which is also in line with paragraph 8, and which was fatal to the appellant’s case that the £30,000 was not a loan “taken out” within the meaning of the opening words of regulation 7(3).
Miss Markus, in her most admirable argument presented to us this morning, submits that this conclusion on the Commissioner’s part mischaracterised what was clearly an advance of £30,000 on top of the £85,000.  The charge, she submits, must attach to something, and in effect £30,000 of the loan on the old home was discharged.  It was, she says, in effect, a different loan on a different account on new terms charged on the new property.
In support of her argument, she gained significant support from the Building Society’s own documentation. In particular, there is a document at page 19 of the file headed “DSS Enquiry” which refers to the original amount borrowed as being £30,000, with the purpose of the loan being described as a “further advance”, and a similar description is to be found in the Nationwide’s  notification dated 3rd February 1995, which states  “amount of further advance £30,000, repayment period 25 years”.
However, in my judgment, in order to resolve this question one must ask what is the reality of the transaction rather than confine oneself to the manner it was portrayed in those documents.  To this question I would give the answer that it was essentially the transfer of £30,000 from the much larger outstanding liability on the old house to enable the Building Society to salvage a small proportion of the much larger sum which remained outstanding.  No money passed and, to my mind, no loan as such was “taken out”, to quote the exact words of the regulation, which I think are very important words in the present context.  I would therefore uphold the Commissioner’s decision on this point for the reasons he gave, while at the same time making it clear that my decision is confined strictly to the facts of this present case and is not intended to lay down any more general principle in relation to other cases which might fall close to the borderline on one side or the other.
That is sufficient to dispose of the appeal but I shall, out of deference to Miss Markus’s very able arguments, consider the submissions under sub-paragraphs (a) and (b) on the assumption that I am wrong on the first and main point.  I read paragraph (a) again:
“the amount of interest on a loan . . .  taken out to defray money applied for the purpose of ‑
(a)	acquiring an interest in the dwelling occupied as the home.” 

So far as that provision is concerned, Miss Markus submits that the appellant was not a free agent to obtain a mortgage otherwise than from the Nationwide Building Society, and that the total mortgage advance of £115,000 was an integral part of the purchase without which the acquisition of the property could not have taken place.  The taking out of the entire mortgage, including the £30,000, was therefore a necessary expense of the purchase.
Decision CIS/563/1991, which was also relied upon by the Commissioner in his judgment, as I have already shown, is a decision of Mr. Commissioner Mesher dated 28th June, in which he held as follows:
“I consider that money can only be said to be applied for the purpose of acquiring an interest in the dwelling occupied as the home when it is expended on paying the purchase price directly, meeting the necessary expenses of the purchase or on buying some goods or some interest in property which are themselves to form part of the consideration for the transfer of the interest in the dwelling occupied as the home.” 

In my judgment, the Commissioner in the present case was quite right to apply that decision, and conclude that sub-paragraph (a) is limited to loans for the purpose of effecting the actual purchase of the dwelling house itself, which is to be occupied as the home, together with incidental expenses necessarily incurred in connection therewith, e.g. legal fees, stamp duty etc. The £30,000 does not fall into that category even on the assumption that without it the acquisition of the property could not have taken place.
I turn now to sub-paragraph (b), which I quote again:
“for  the purpose of paying off another loan but only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off.”
Miss Markus under this heading founded her case on two propositions:  (1) the £30,000 falls within the literal wording of sub-paragraph (b); (2) sub-paragraph (b) must be construed consistently with paragraph 5A of the regulations which she says supports her construction. So far as the first of those two propositions are concerned, she submits that there is no basis for importing into sub-paragraph (b) a requirement that repayment of the loan should be in respect of the present house.  She goes on to submit that the question whether the interest on the loan would have been  eligible interest had it not been paid off falls to be determined immediately prior to the time that it was paid off, and that at that time in the present case the interest on the sum of £30,000 was eligible interest because it was interest in respect of the mortgage on the appellant’s previous dwelling house.  She accepts that this may well be a construction which the draftsman did not have in mind when he drafted regulation 7(3)(b), but she submits that any anomaly can only be put right by an amendment to the regulations.  However, in my judgment, sub-paragraph (b) must be read in the light of the essential purpose of the regulations as exemplified by their main provisions, on which Mr. McManus on behalf of the Chief Adjudication Officer particularly relies. Schedule 3 is headed “Housing Costs”.  Paragraph 1 lists as an index the relevant amounts which may be eligible as housing costs.  There is then in paragraph 2 a very important paragraph headed with a significant heading  “Basic condition of entitlement to housing costs”. Paragraph 2:
“Subject to the following provisions of this Schedule, the housing costs referred to in paragraph 1 shall be met where the claimant, or if he is one of a family, he or any member of his family is treated as responsible for the expenditure to which that cost relates in respect of the dwelling occupied as the home which he or any member of his family is treated as occupying.” (emphasis added). 

Then paragraph 4, with another important heading  “Circumstances in which a person is or is not to be treated as occupying a dwelling as his home”. Sub‑paragraph (1) of paragraph 4 reads:
“Subject to the following provisions of this paragraph, a person shall be treated as occupying as his home the dwelling normally occupied as his home by himself or, if he is a member of a family, by himself and his family and he shall not be treated as occupying any other dwelling as his home.” (Emphasis added). 

The same stress on the occupying as the home or similar paraphrases of that word is also to be found in the phraseology of sub-paragraph (a) itself of regulation 7(3), which talks about acquiring an interest in the dwelling “occupied as the home”.
 These paragraphs seem to me to support very strongly indeed the Commissioner’s view which, of course, Mr. McManus supports, that sub‑paragraph (b) is to be interpreted as referable to a loan taken out for the purpose of acquiring the applicant’s present home.  In other words, sub-paragraph (b) should be read as if, after the words “paying off another loan” at the start of (b), there were inserted the words “taken out to acquire such an interest”, or words to that effect.  So that (a) and (b) would read as follows:
“ (a) 	acquiring an interest in the dwelling occupied as the home; or
  (b) 	paying off another loan taken out to acquire such an interest but only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off.” 

Thus sub-paragraph (b) would be apt, for example, if a claimant transferred his mortgage from one building society to another in cases where both loans were otherwise eligible.
Is this conclusion affected by paragraph 5A which is the foundation of Miss Markus’s second proposition?  This paragraph was added by an amendment to the regulations which came into force in 1994, i.e. well after the drafting of regulation 7 (3) but before the present claim was put forward by the appellant.  Regulation 5A is a very complex provision which I shall not quote, though of course it is available to anybody who looks it up; its effect, as Miss Markus helpfully showed, was that it is permissible to take out a new mortgage on a new dwelling provided the amount advanced on the new dwelling is no greater than that advanced under the old mortgage of the old dwelling, save in very narrowly defined and exceptional circumstances, e.g. where it is necessary to make adaptations of the new dwelling for the special needs of a disabled person.  This, she says, shows that regulation 5A anticipates that claimants will  move their home and therefore helps her on her construction of regulation 7(3)(b).
No doubt, regulation 5A does indeed anticipate claimants moving house, but I do not think that helps Miss Markus for three reasons.  Firstly, it does not seem to me that the construction of sub-paragraph (b) which I favour is inconsistent with paragraph 5A whose essential purpose, as Miss Markus accepted, was to prevent applicants trading up their houses with the assistance of income support.  Secondly, in my judgment, the policy provisions of paragraphs 2 and 4(1) (which I have already quoted) are a far more powerful guide than regulation 5A to the construction of regulation 7(3)(b).  Thirdly, regulation 5A was not in force when regulation 7(3) was drafted.  In this context Mr. McManus referred us to a decision of the Court of Appeal in the case of Fulwood v Chesterfield Borough Council 92 LGR 160.  Giving the leading judgment, Hoffmann LJ, with whom Leggatt and Balcombe LJJ agreed, referred to an argument of Lord Campbell of Alloway QC for the tenant, Mr. Fulwood, who was seeking housing benefit under the Housing Benefit (General) Regulations 1987.  Hoffmann LJ stated as follows:
“Since the claims with which this appeal is concerned, the regulations have been amended.” 

Then he quotes the amendment.  He goes on:
“This certainly makes it clearer, but it does not mean that it was not clear enough before.  Lord Campbell submitted that one should construe the Regulations of 1987 on the assumptions that the Regulations of 1990, by using additional words, had changed their meanings.  I do not accept this.   The Regulations of 1987 had a certain meaning when they were made and this meaning cannot be retrospectively affected by Regulations made in 1990.”

Miss Markus seeks to distinguish that case on the ground that there the change took place after the date of the claim, whereas in the present case the alteration was made before the date of the claim.  In my judgment, that is a distinction of no significance.  What matters is not the date of the amendment to the regulations in relation to the claim, but the fact that as a general rule the amendment cannot be prayed in aid to alter the meaning of the regulations as they originally stood.  In the present case, the Income Support (General) Regulations 1987, and, in particular, paragraph 7(3) had a certain meaning when they were made and that, in my judgment, is the meaning which I have upheld, and this meaning cannot be retrospectively changed by the insertion of regulation 5A much later on.

For all these reasons, and while expressing my gratitude to Miss Markus for her cogent and comprehensive  submissions, I would dismiss the appeal.

LORD JUSTICE HUTCHISON:	

I agree.

LORD JUSTICE THORPE:
I agree.

Order:  Appeal dismissed with costs, not to be enforced without leave of the court;  legal aid taxation of the appellant’s costs; application for leave to appeal to the House of Lords refused. (Order not part of the judgment of the court)