Waller-Edwards – taking security over jointly-owned property

Facts

Mr Bishop was a builder and property developer who met Ms Waller-Edwards in 2011 while he was building three houses at Wimborne in Dorset.

They commenced a relationship shortly afterwards and Ms Waller-Edwards exchanged her own (mortgage free) house for one of the houses built by Mr Bishop.

The couple made the house their home.  In 2012, they applied to One Savings Bank Plc (the "Bank") for a "buy-to-let" loan that would be secured by a mortgage over the house.

The application form made no mention, and the Bank was not aware, that Mr Bishop's equity in the house amounted to just 1 per cent.

But the loan was not used for the purpose stated in the application form.  In fact, a substantial proportion was used for Mr Bishop's own benefit.

The relationship ended.  Mr Bishop left the property and the loan went into default.  The Bank commenced proceedings seeking possession of the house and payment of arrears.

Ms Waller-Edwards challenged the Bank's application (insofar as her own interest in the property was concerned).

Law

The actions a bank or other lender should take when lending money on the security of jointly-owned property were laid down in a trilogy of judgments of the House of Lords.¹

Those principles apply in any situation in which there is an emotional relationship between joint owners.  The types of relationship are widely drawn but, for brevity, we use the scenario of a husband and wife in this article.

The cases established that there were two different fact patterns:

• the first is where a wife guarantees the obligations of a husband (this includes a guarantee of the obligations of a company owned by the husband).  The courts have described this as a "surety" case.  In such a case, the lender is required to advise the wife to take independent legal advice as to her obligations under the mortgage; and

• the second is where husband and wife are joint borrowers and the loan is used to benefit each of them.  The courts have described this as a "joint borrowing" case.  In such a case, the lender is under no obligation to advise either party to take independent legal advice because each of them derives a financial benefit from the transaction.

The purpose of requiring a wife to take independent legal advice is to prevent the lender from being infected by constructive notice of an equitable wrong (such as undue influence, misrepresentation or duress) perpetrated by the husband against the wife. 

Legal Debate

Ms Waller-Edwards argued that she was the subject of Mr Bishop's undue influence.  The Bank was aware, or should have been aware, of this.  It had not advised her to take independent legal advice as to her obligations under the mortgage and it was, therefore, prevented from enforcing its legal rights.

The argument raised a novel point of law, namely, that there are "hybrid" cases which fall outside the binary categories recognised in the leading cases.

The Bank replied that there was no need for it to have advised Ms Waller-Edwards to take independent legal advice because her case was not a surety case.  Furthermore, it was unaware that a substantial proportion of the loan would be used for Mr Bishop's own benefit and it was not put on enquiry to the contrary.

Lower Courts

Judges in the County Court, the High Court and the Court of Appeal expressed sympathy for the situation in which Ms Waller-Edwards found herself but said they were bound by earlier judgments of the House of Lords.  It was therefore an issue which could only be decided by the highest appeal court.

Supreme Court

The Supreme Court unanimously reversed the judgments of the three lower courts and allowed the appeal of Ms Waller-Edwards.

While upholding the binary test laid down in the leading cases, the court decided (at para. 57 of its judgment) that "where, on the face of the transaction, there is a more than de minimis element of borrowing which serves to discharge the debts of one of the borrowers, and so might not be to the financial advantage of the other" the transaction should be viewed, from the lender's perspective, as a "surety" transaction and not a "joint borrowing" transaction. 

The consequence is that a bank or other lender should take the steps set out in the leading cases (and in the Etridge No. 2 case in particular, which the court described as the "Etridge protocol)" and advise the vulnerable party to take independent legal advice.

Implications

The implications of the judgment are yet to be fully digested but, at the least, it will require banks and other lenders to be alert to joint lending transactions in which more than a trivial amount is used for the benefit of one borrower.

From an internal policy and procedures perspective, joint borrowing transactions in which there are multiple or phased drawings will require particular scrutiny on a granular level. 

The open question remains whether the judgment may persuade banks and other lenders to re-characterise "joint borrowing" cases as "surety" cases in all those situations in which there is any doubt as to the benefits to be derived by each borrower in obtaining the loan and granting the security.

¹ Barclays Bank PLC v O'Brien [1994] 1 AC 180; C.I.B.C. Mortgages Plc v Pitt [1994] 1 AC 200; Royal Bank of Scotland Plc v Etridge (No. 2) [2001] UKHL 44