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 allowed
In 2011, the appellant commenced a relationship with B. 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 building a property in Beaucroft Lane (the property), valued at about £750,000 on completion. 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.
The appellant moved into the property and it was put into their joint names 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 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 ex-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 lower courts 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: [2023] EWHC 2386 (Ch). The Court of Appeal dismissed the appellant’s appeal: [2024] EGLR 23. The appellant appealed.
Held: The appeal was allowed.
(1) The law regarded banks and other lenders as put on inquiry (that one party’s agreement to the transaction might have been obtained by undue influence) whenever on the face of a three-way transaction, the wife (or other vulnerable partner in the relationship) was offering to stand surety for her husband’s debts (or vice versa). By contrast, where on the face of the transaction the lending was advanced to husband and wife jointly, the bank was not put on inquiry unless the bank was aware that the loan was being made for the husband’s purposes as distinct from their joint purposes: Barclay’s Bank plc v O’Brien [1994] 1 AC 180, CIBC Mortgages plc v Pitt [1993] EGCS 66; [1994] 1 AC 200 and Royal Bank of Scotland v Etridge (No 2) [2001] PLSCS 216; [2002] 2 AC 773 applied.
There might be less straightforward transactions involving non-commercial loans sought by a husband and wife that were, on the face of it, partly for their joint benefit and partly for the sole benefit of one and, to that extent, apparently to the financial disadvantage of the other (a hybrid transaction).
(2) The issue for resolution was to identify the correct legal test for deciding when a lender was put on inquiry in a non-commercial hybrid loan.
The rationale for the principle in O’Brien, Pitt and Etridge No 2 was the recognition that such transactions were more likely than others to be tainted by undue influence or misrepresentation. A tripartite non-commercial surety transaction carried with it an increased risk of undue influence having been exercised because on the face of the transaction, the vulnerable partner assumed a legal liability that they would not otherwise have (whether under a guarantee or charge) for the borrower’s debts but received no apparent financial benefit in return. The transaction was one-sided as far as they were concerned, which was apparent on the face of the transaction and so known to the lender.
(3) All that was required to put a lender on inquiry was that the lender knew or ought to have known that the relationship between the vulnerable partner and the borrower was non-commercial and that the transaction involved the partner acting as surety for the borrower’s obligations to the lender. Once that had occurred, an improperly procured surety transaction would be set aside as against the lender unless it could show that it took the modest steps known as the Etridge protocol.
It had to communicate directly with the partner, informing them that for their own protection it would require written confirmation from a solicitor, acting for them, to the effect that the solicitor had fully explained the nature of the transaction and its practical implications; and that the purpose of that requirement was that they would not be able to dispute that they were legally bound by the transaction once the surety documents were signed.
It then had to ask the partner to nominate a solicitor they were willing to instruct to advise them, separately from the borrower, and act for them in giving the necessary confirmation to the bank; that solicitor might be the same solicitor who was acting for the borrower but if a solicitor was already acting, the partner should be asked whether they would prefer a different solicitor.
(4) The approach adopted by the court in Etridge 2 was a binary one: Either the creditor was on notice of the risk of undue influence, or it was not; and if the creditor was on notice, the Etridge protocol had to be followed.
Moreover, as a matter of fact and logic, the level of risk presented by a surety transaction was the same whether it was accompanied by joint-borrowing or not. The hybrid element did not reduce that risk. In any event, the level of risk was infinitely variable, and not for the lender to judge on some fact-specific basis.
(5) Therefore, a creditor was put on inquiry in any non-commercial hybrid transaction where, on the face of the transaction, there was a more than de minimis element of borrowing which served to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other. The transaction had to be viewed from the bank’s perspective. Such a transaction, if viewed in that way, should be regarded as a “surety” transaction and the creditor placed on inquiry of the possibility of undue influence. The steps set out in the Etridge protocol then had to be taken.
In the present case, the Court of Appeal wrongly adopted the fact and degree test and focussed on the purpose for which the loan was used.
Julian Malins KC and Marc Beaumont (instructed by Howard Kennedy LLP) appeared for the appellant; Joanne Wicks KC an Antonia Halker (instructed by Equivo Ltd, of Northampton) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Waller-Edwards v One Savings Bank plc