Mortgage – Undue influence – Constructive notice – Appellant and partner remortgaging property and granting legal charge to respondent bank – Loan repayments falling into arrears – Respondent seeking possession of property – Lower courts holding appellant’s consent procured by undue influence but respondent not fixed with constructive notice – Appellant appealing – Whether court erring in law – Appeal dismissed
In 2011, the appellant met B and they commenced a relationship. The appellant was then living in a property known as 60, Pilford Heath Road, Wimborne, which she owned in her sole name and was mortgage free.
B was in the process of constructing three properties at 32 Beaucroft Lane, including Spectrum (the property). In February 2012, B persuaded the appellant to exchange Pilford and a sum of £150,000 for the property, as built, even though it was subject to an existing charge in favour of H.
The appellant moved into the property in September 2012, and it was put into the joint names of the appellant and B with a declaration of trust stating that the beneficial interest in the property was held by them as tenants in common, in the ratio 99:1 in favour of the appellant.
In October 2013, the respondent bank agreed to remortgage the property. The sum of £384,000 raised repaid the first charge and B paid £142,000 to his wife as a divorce payment.
Following the remortgage, the relationship between the appellant and B ended. The payments on the remortgage loan fell into arrears and the respondent sought possession of the property. B took no part in the proceedings.
The county court held that the appellant’s consent to the legal charge had been procured by undue influence, but the respondent did not have constructive notice of it. The High Court upheld that decision: [2023] EWHC 2386 (Ch). The appellant appealed.
Held: The appeal was dismissed.
(1) The authorities provided for two different categories of case relating to secured borrowing by two persons in a relationship. First, there were “surety” cases which covered non-commercial situations where a wife stood surety for her husband’s debts; or where one borrower guaranteed the debts of the other or of a company, or where the borrowers took secured borrowing on jointly owned property to pay off the debts of only one of them. In such circumstances, the lender would normally have constructive notice of the possibility of one borrower being unduly influenced by the other and would be put “on inquiry”: Barclay’s Bank plc v O’Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44; [2001] PLSCS 216; [2002] 2 AC 773 considered.
Secondly, there were “joint borrowing” cases where a loan was taken for the joint non-commercial purposes of two borrowers in a relationship (whether husband and wife or not). In such circumstances, the lender would not normally have constructive notice of the possibility of one borrower being unduly influenced by the other and would not be put on inquiry: CIBC Mortgages plc v Pitt [1993] EGCS 66; [1994] 1 AC 200 considered.
There was no third test for hybrid cases such as the present which concerned the situation in which the borrowers sought a loan partly for their joint non-commercial purposes and partly for the benefit of one borrower only.
(2) A creditor was put on inquiry when a wife offered to stand surety for her husband’s debts by the combination of two factors: (a) the transaction was on its face not to the financial advantage of the wife; and (b) there was a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband had committed a legal or equitable wrong that entitled the wife to set aside the transaction.
It followed that, unless the creditor who was put on inquiry took reasonable steps to satisfy himself that the wife’s agreement to stand surety had been properly obtained, the creditor would have constructive notice of the wife’s rights. A bank was put on inquiry whenever a wife offered to stand surety for her husband’s debts.
Those principles also applied to cohabitees, where the creditor was aware of the cohabitation of principal debtor and surety.
(3) The question whether a bank in surety cases, joint borrowing cases and hybrid cases was put on inquiry was to be ascertained through the lens of the lender. The only matter that might have put the respondent on inquiry was the fact that the transaction entailed paying off some £40,000 of debts in the sole name of B. The evidence established that that was not an uncommon situation.
O’Brien imposed a clear test for the low threshold for the risk that was required to put a bank on inquiry: every non-commercial case where a wife (or other borrower in a relationship) stood surety for the debts of a husband (or another borrower in a relationship). As regards the identification of a surety case, a joint borrowing case only put a bank on inquiry if the bank was aware the loan was being made for the husband’s purposes, as distinct from their joint purposes.
(4) This was a case where the transaction was on its face not to the financial disadvantage of the appellant, and the court was looking only at a hybrid transaction, where part of the loan was being used for one party’s purposes.
The test in Etridge had to be applied to the facts as found by the trial judge. Etridge did not demand that, in a hybrid case, a lender was put on inquiry unless the element of the transaction that was for the sole benefit of one of the borrowers was trivial. Instead, it required the court to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes. In this case, the loan was, looked at as a whole and from the point of view of what the respondent knew, a joint borrowing made for their joint purposes.
The fact that some 10% of the advance was to be used to pay debts in B’s sole name did not, as a matter of fact and degree, turn the transaction from a joint borrowing case (where the respondent bank was not put on inquiry) to a surety case (where it would have been put on inquiry).
Marc Beaumont (instructed by Direct Access) appeared for the appellant; Antonia Halker and John Ditchburn (instructed by Equivo Ltd) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of One Savings Bank plc v Waller-Edwards
