The Supreme Court has considered whether a lender is put on inquiry as to undue influence exerted on one of the borrowers in a residential loan transaction where part of the loan is applied to discharge the other borrower’s debt. It allowed an appeal by W, the former partner of B, a property developer against a decision of the Court of Appeal that a loan under a remortgage when looked at as a whole and from the point of view of what the Bank knew was joint borrowing made for their joint purposes.
This is a continuation of a line of cases culminating in Royal Bank of Scotland v Etridge (No 2) (“Etridge”) about the level of enquiry a Bank should make about the risk of undue influence exercised by one partner over the other.
Etridge is authority for the proposition that whenever a spouse (husband, wife or civil partner) stands as surety for their partner’s debts a bank is put on inquiry that there is a risk of undue influence. The rationale is that the transaction is not for the benefit of the partner who stands as surety.
If undue influence is established, the loan is set aside unless the bank has taken steps to ensure that the at-risk partner is aware of the nature of the transaction and has received independent legal advice.
This case concerned a relationship between W whom the Supreme Court described as emotionally vulnerable but financially independent, and B, a property developer. B was developing a property which the couple moved into and persuaded W to sell her home and invest her savings. The property was put into joint names, with W holding 99% of the beneficial interest. B later remortgaged the property under a buy to let mortgage.
The loan was in the sum of £384,000. The bank was told that £233,000 was to be used to pay off the existing mortgages; £100,000 to buy a home for the couple and £39,500 to pay off debts owed by B. It was therefore a transaction where part of the funds were to be used for the joint benefit of the borrowers but the remainder to pay off debts of one of them.
The relationship ended. W continued to live at the property but the mortgage fell into arrears. The bank started proceedings to possess the property, but W claimed that it should have been put on inquiry of the risk of undue influence and therefore the mortgage should be set aside. The bank was aware that part of the loan was intended to be used to pay off B’s debts. In fact he had deceived the Bank and used £142,000 of the loan to pay his ex-wife pursuant to orders made in his divorce proceedings.
The County Court held that although W had been subject to undue influence, the bank was not put on inquiry because the transaction should be categorised as a joint borrowing, rather than a surety, transaction.
Both the High Court and the Court of Appeal dismissed W’s appeals. They classed the transaction as a hybrid transaction as the bank had understood that the loan was partly intended to be for the couple’s joint purpose of paying off the mortgage on the property and partly to pay off B’s personal debts. They then looked at whether, as a matter of fact and degree, the proportion of surety for the loan (approximately 10%) was sufficient to put the bank on inquiry and concluded that it was not.
The Supreme Court allowed W’s further appeal, rejecting the lower court’s “fact and degree” approach to whether a lender is put on inquiry and preferring a “bright line” approach in accordance with the principles in Etridge. In every non-commercial case where a wife or other vulnerable party offered to stand surety for a loan to pay off her husband’s debts to a more than de minimis extent the bank should be on inquiry. Where there is any exclusive benefit, the transaction moves out of the joint borrowing category and into the surety category so that the lender will be put on inquiry of the risk of undue influence.
The Supreme Court did not accept the argument made on behalf of the Bank that allowing the appeal would damage the UK domestic mortgage market and make it more expensive. Since the banking crisis in 2007-2009, banks are required by the FCA to lend responsibly and the bright line test they imposed in this case is compatible with that regulatory regime.
Waller-Edwards v One Savings Bank Plc [2025] 2WLR 12 63
