DGR/CW/10
				Commissioner’s File:	CIS/14483/1996	

SOCIAL SECURITY ADMINISTRATION ACT 1992

SOCIAL SECURITY CONTRIBUTIONS AND BENEFITS ACT 1992

APPEAL FROM DECISION OF SOCIAL SECURITY APPEAL TRIBUNAL ON A QUESTION OF LAW

DECISION OF THE SOCIAL SECURITY COMMISSIONER

[Oral Hearing]

1.	My decision is that the decision of the social security appeal tribunal given on 5 February 1996 is erroneous in point of law, and accordingly I set it aside.  As it is convenient that I give the decision the tribunal should have given, I further decide that as from 26 May 1995 the claimant has been entitled to housing costs at the weekly rate of £11.28.

2.	This is an appeal by the adjudication officer, brought out of time with the leave of a Commissioner, against the decision of the social security appeal tribunal of 5 February 1996.  In view of the complexity of the case, I directed an oral hearing.  At that hearing the claimant was represented by Mr A Matheson NACAB Welfare Rights Officer, whilst the adjudication officer appeared by Miss C Harold of the Solicitor’s Office of the Department of Social Security.

3.	The claimant had been in receipt of income support since 27 June 1991.  Initially, he had received, as part of his income support, housing costs to cover (a) the service charges and ground rent he incurred in respect of the property he occupied as his home, and (b) certain payments made by him to the Albaraka International Bank Ltd (“the bank”) which were treated as “eligible interest” falling within paragraph 7(3) of Schedule 3 to the Income Support (General) Regulations 1987 [S.I. 1987 No 1967].  However, as a result of a routine review of the claimant’s award the adjudication officer on 26 May 1995 decided that there was no entitlement to “eligible interest” within paragraph 7(3), and that the claimant was only entitled to housing costs in respect of service charges and ground rent.  In consequence, he decided that the claimant was entitled to housing costs only at the weekly rate of £17.19.  Subsequently, he corrected this amount and reduced it to £11.28.  Presumably, the adjudication officer meant this review decision to apply as from 26 May 1995, and was not seeking to apply it retrospectively.  I will proceed on that basis.  

4.	In due course, the claimant appealed to the tribunal, who decided that the adjudication officer had erred in not allowing as “eligible interest”, to be included in the claimant’s housing costs, the monthly payments made to the bank under the description “mesne profit”.  The tribunal directed that the adjudication officer make a recalculation.

5.	The factual position in this case is crucial for a correct determination of this appeal.  On 19 February 1990 the claimant entered into an agreement (described as an “Islamic Trust Funding Agreement”) to enable him to acquire 97 Gladstone House, Saddler Close, Mitcham, Surrey, which, it is not in dispute, became his home.  The purchase price of the property was £19,602, of which the claimant was able to provide from his own resources £3,102.  He required the assistance of the bank to make good the balance of £16,500.  The normal method of dealing with this situation would have been for the bank to have lent the claimant the money on a mortgage, and for the claimant to have made, on a monthly basis, repayments of the capital together with interest thereon, and it would seem that initially the Department proceeded on the assumption that this was the nature of the arrangement into which the claimant had entered.  Moreover, according to the findings of the tribunal, the claimant was at the Land Registry registered as the proprietor of the property, and the bank was registered as having a first charge thereon.  It would seem  that the claimant acquired the property in exercise of his right to buy as a council tenant.  It would also appear, according to the tribunal, that the Inland Revenue treated the “mesne profit” as an interest payment.

6.	However, the agreement entered into by the claimant with the bank was not by way of a mortgage.  The problem was that the claimant was a devout Muslim, and the Koran prohibits the payment or charging of interest on money loaned.  Accordingly, the claimant was not prepared to enter into a normal mortgage transaction, but took advantage of a scheme, having the same commercial effect, made available by the bank to accommodate the religious scruples of Muslims.  It operated in this way. The claimant and the bank agreed jointly to purchase the relevant property, but the legal estate was vested in the claimant, who held on trust for himself and the bank as tenants in common in unequal shares.  The beneficial interest in the property was divided into 19,602 investment shares of £1 each.  On the purchase date, the claimant was the beneficial owner of 3,102 shares, and the bank the beneficial owner of 16,500 shares.  The claimant had the right and duty to acquire the bank’s shares over a period of 15 years, and for this purpose he made to the bank monthly payments.  Accordingly, by means of such payments each month the claimant acquired a certain number of shares from the bank.  In addition, the claimant paid to the bank each month what was described as “mesne profit” to reflect his use of the bank’s share of the property.  As he acquired more shares, the mesne profit was reduced accordingly.  The mesne profit was expressed to be calculated in accordance with the following formula:-

	“‘Mesne Profit’ shall be the equivalent of the sum calculated by multiplying the Purchase Price by a percentage, being 1% above the rate as determined solely (but reasonably) by [the bank] to be the rate at which sterling is offered for property financing in the major Clearing Banks in London at the time of review.”

It is interesting to note that that calculation would seem to be more identifiable with interest than a quasi-rent for occupation.  It should also be mentioned that under the agreement the purchaser covenanted:-

	“E 	Where the title in the property requires to be registered at H M Land Registry that the Purchaser will procure the registration of the Property in the Purchaser’s own name and the registration of a First Legal Charge in favour of [the bank].”

In view of the findings of the tribunal, this covenant was presumably implemented. 

7.	The covenant referred to above would seem to suggest that the parties regarded the agreement as being in the nature of a mortgage with the sole beneficial interest vesting in the claimant.  However, such an interpretation cannot stand in the face of the clear operative words of the agreement, which showed beyond any doubt that the nature of the transaction was one of co-partnership, with the right and duty of the purchaser to acquire the bank’s beneficial interest in the property; and in consideration of the bank’s part in the transaction, the purchaser was obliged to pay “mesne profit”.  Any doubt there could be in the matter is dispelled by the explanatory documents issued by the bank and entitled “Residential Property Purchase through Islamic Trust Funding” where what was intended was expressly set out.  The nature of the transaction is explained under the heading “Contractual Relationship” as follows:-

	“The relationship between the Bank and the applicant (the purchaser) is based upon an agreement under which both jointly purchase a property.  The ownership is determined according to the percentage of shares contributed by each party.  The Bank will make its profit by way of leasing the usage of its beneficial ownership to the applicant.”

8.	In the introduction to the explanatory document it is made clear that the object of the exercise is to avoid interest.  The introduction says as follows:-

	“One of the services Albaraka International Bank Limited London (The Bank) provides is financing the purchase of residential properties for both overseas clients and UK residents.  We do this through an Islamic Trust Funding Agreement, whereby interest (RIA) is not involved.”

Later on in that document the following statement appears:-

	“HOW DOES THE BANK GET ITS PROFIT?

	The client is the one who is making full usage of the property, the Bank leases its beneficial ownership in the property to the client for an amount determined by the Bank.  The amount is called “Mesne Profit” which is defined as follows:-

		‘Mesne Profit’ is a profit derived from the applicant by the Bank between two dates which are the commencing date and the finishing date of the agreement.  The ‘Mesne Profit’ is reviewed at the end of each year of the agreement and the level of financing in the London Property Market is taken as an indication to determine the ‘Mesne Profit’.  The ‘Mesne Profit’ may therefore increase or decrease....”

The document also explains how the applicant buys the bank’s beneficial shares in the property.  Accordingly, in my judgment there can be no doubt that this is a co-partnership arrangement devised specifically to avoid payment of interest, clearly unaffected by the terms of the covenant calling for a registration of a legal charge at the Land Registry.  Presumably, the incorporation into the agreement of the covenant was thought to be a convenient way of satisfying the requirements of the Land Registry even if it did not properly reflect the true arrangement entered into between the parties.

9.	Mr Matheson contended that the “mesne profit” fell within paragraph 7(3) of Schedule 3 to the Income Support (General) Regulations 1987 which reads as follows:-

	“(3)	....., in this paragraph ‘eligible interest’ means the amount of interest on a loan, whether or not secured by way of a mortgage.....taken out to defray money applied for the purpose of -

		(a)	acquiring an interest in the dwelling occupied as the home....”

Mr Matheson argued that the bank had in effect made a loan and the “mesne profit” was simply “eligible interest”.  Moreover, the loan had been taken out to acquire the property.  I reject that contention.

10.	Although, commercially speaking, the co-partnership agreement had the same effect as a conventional mortgage, it was nevertheless a different type of transaction.  The claimant’s religious scruples forbade him to pay interest, and the bank devised a scheme to meet his requirements.  The scheme was to operate by way of co-partnership, and not by way of a loan.  If there was no loan, then clearly paragraph 7(3) simply could not apply, even if the consideration receivable by the bank, i.e. the “mesne profit”, was calculated in a way more appropriate to interest than to a quasi-rent.

11.	It follows from what has been said above that the tribunal erred in point of law in reaching the conclusion they did.  I must therefore set aside their decision.  However, it is unnecessary for me to remit the matter to a new tribunal for rehearing.  I can conveniently substitute my own decision for that of the tribunal.  I understand that it is not in dispute that the claimant is entitled to housing costs in respect of service charges and ground rent amounting to £11.28 per week.

12.  Accordingly, my decision is as set out in paragraph 1.

					(Signed)	D G Rice
							Commissioner

					(Date)	24 June 1997