Good news for lenders following the Court of Appeal decision in Waller-Edwards v One Savings Bank Plc [2024] EWCA Civ 302

25th April 2024

Senior Associate, Daniel Adcock-Kirsh discusses below.

The Court of Appeal has provided welcome clarity for lenders in respect of whether they are constructively “put on inquiry” (i.e., could have uncovered, if they had taken reasonable steps to enquire) about the possibility of one borrower being unduly influenced by another borrower where the borrowers’ relationship is non-commercial. It is well-known in lending circles that if a transaction is found to have been procured by undue influence, it is at risk of being set aside.

The legal position following ‘Etridge’ and ‘Pitt

The current legal position identifies two separate categories of case relating to secured borrowing by two persons in a non-commercial relationship: ‘surety’ cases and ‘joint borrowing’ cases.

Typically, ‘surety’ cases are situations where either (i) one borrower guarantees the debts of the other or of a company, or (ii) where borrowers take secured borrowing on jointly owned property to discharge the debts of only one of the borrowers.

The law in this area has been clear since the case of Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773 (Etridge). Put simply, in surety cases, a bank is put on inquiry whenever a spouse offers to stand as surety for the other spouses debts.

The case of C.I.B.C. Mortgages plc v. Pitt [1994] 1 AC 200 (Pitt) dealt with joint borrowers, typically where a loan is taken for the joint non-commercial purposes of two borrowers in a relationship (whether spouses or not) – for example, the purchase of a joint holiday home. In such cases, the lender is not put on inquiry, unless the lender is aware the loan is being made for only one of the borrower’s purposes, which is separate from their joint purposes.

The recent (second) appeal decision in the case of Waller-Edwards v One Savings Bank Plc [2024] EWCA Civ 302 (Waller-Edwards) has now clarified the situation for lenders as to whether they are put on inquiry where joint borrowers seek a loan partly for their joint non-commercial purposes and partly for the benefit of one borrower only.

Facts in Waller-Edwards

Briefly, Waller-Edwards was a case where Ms Waller-Edwards exchanged her own mortgage-free property (worth circa £585,000) and £150,000 of her savings for another property (expected to be worth c.£750,000 when complete), to be held in joint names, subject to a declaration of trust, for her (99%) and her then partner, Mr Bishop (1%). Upon completion of the transaction, Ms Waller-Edwards was persuaded to accept two charges on the new property, which were later replaced by a further loan and charge in favour of a third party’s company.

Ms Waller-Edwards and Mr Bishop moved into the new property and around 10 months later, acting under Mr Bishop’s undue influence, approached the bank to remortgage, secured on the new property.

As far as the lender knew at the time of the mortgage transaction, the mortgage advance of £384,000 was to be used as follows: £40,000 to pay off Mr Bishop’s car debt and credit card debt, and the rest was to be used for joint purposes.

When the transaction was completed, £233,801.76 was used to pay off the existing charge and most of the balance was in fact used to pay Mr Bishop’s ex-wife. The latter payment being another transaction where Ms Waller-Edwards acted under Mr Bishops’ undue influence.

Ms Waller-Edwards and Mr Bishop’s relationship subsequently ended. He moved out the property and stopped paying mortgage payments. Consequently, the lender commenced possession proceedings. The Court found that while the mortgage had been entered into as a result of Mr Bishop’s undue influence, the lender bank did not have notice of it and so was not put on inquiry.

Clarification of the legal position following Waller-Edwards

The Court of Appeal in Waller-Edwards concluded that, in line with the decision in Etridge, it is necessary to look at the transaction as a whole and to decide whether the loan was being made for the purposes of the borrower with the debts, entirely separately as to their joint purposes.

That was not the case in Waller-Edwards and it was decided that, looked at as a whole and from the point of view of what the lender knew at the time, the loan was a joint borrowing made for Ms Waller-Edwards’ and Mr Bishop’s joint purposes.

Advice for lenders

Waller-Edwards provides some much-needed clarity (and no little relief) for lenders where undue influence is asserted in attempting to set aside a financial transaction such as a mortgage loan in circumstances where there are clear joint purposes for the borrowing. Absence any evidence to the contrary, the lender will not be put on inquiry of the possibility of undue influence in such cases.

Lenders should still ensure that in lending situations where there are joint borrowers in a non-commercial relationship and one borrower guarantees the debts of another, or where borrowers take secured borrowing over jointly owned property to pay the debts of only one borrower, or where the lender is aware that joint borrowing is being made for one of the borrowers separate to their joint purpose, the well-established guidance in Etridge is followed.

If you require any advice in respect of the legal position following these developments or have any enquiries relating to loan enforcement, please contact Daniel Adcock-Kirsh, Senior Associate in the Litigation Department.

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