Undue Influence in the Hybrid/Partial Surety Case Waller-Edwards v One Savings Bank Plc [2023] EWHC 2386 (Ch) 22 February 2024
In Waller-Edwards v One Savings Bank Plc [2023] EWHC 2386 (Ch) the High Court considered the previously undecided point of whether a lender will be fixed with constructive notice of undue influence, rendering a charge vulnerable to being set aside, in circumstances where only part of a mortgage loan is provided for the sole benefit of one of two borrowers in a non-commercial relationship.
Practical Implications
The decision in this case will met with relief by many lenders who take legal charges as security for loans. It provides some much-needed clarity on the previously undecided point of whether a lender will be fixed with constructive notice of undue influence, rendering a charge vulnerable to being set aside, in circumstances where to the knowledge of the creditor, only part of a mortgage loan is provided for the sole benefit of one of two borrowers in a non-commercial relationship.
The principles derived from three seminal cases in this area: Barclays Bank v O'Brien [1994] 1 AC 180, CIBC Mortgages plc v Pitt [1994] AC 200 and Royal Bank of Scotland plc v Etridge (No. 2) [2001] UKHL 44 [2002] 2 AC 773 were carefully examined. However, those cases dealt with the ‘pure’ scenario where either one borrower stood as surety for the other's debts or where there had been a joint advance. Those cases did not, in express terms at least, contemplate an intermediate case such as that which arose on the facts of Waller-Edwards i.e. where part of the loan functions as a joint advance while in respect of the other part, the loan is advanced for the benefit of one borrower, the other standing as surety for the first borrowers’ debts.
Following the decision in Waller-Edwards however, it is now clear that the principles from the abovementioned cases do not just apply in the pure surety cases (as distinct from joint advance cases), but can also extend to the “hybrid case/partial surety” case.
Factual Background
One Savings Bank (the “Bank”) had, as security for a loan, a legal charge over a property in Dorset known as Spectrum and some adjoining land both owned by the defendants, Mr Bishop and Cathrine Waller-Edwards. The Bank sought and obtained a possession order over Spectrum and the adjoining land (the “Property”).
At the time of the charge, the defendants were in a relationship, having met at a vulnerable period of Ms Waller-Edwards’ life. Mr Bishop was a local builder and developer in the process of constructing a Property which they agreed, once built, would be exchanged for a property which Ms Waller-Edwards owned mortgage-free and a sum of £150,000.
The Property, however, was already subject to a charge. By a series of transactions, further loans were obtained to progress Mr Bishiop’s construction endeavours, and secured against the Property. The loan advanced by the Bank was used to pay: a prior loan with a third party given to Mr Bishop in relation to his construction work, to pay a mortgage in relation to a separate property which Mr Bishop was developing, and £142,000 to pay Mr Bishop’s wife (with whom there were ongoing divorce proceedings).
Ms Waller-Edwards’ case was that her consent to the charge was procured by the undue influence of Mr Bishop and that the Bank was put on inquiry in respect of this undue influence but failed to take any of the steps required to avoid being fixed with constructive notice of the undue influence. Thus she sought to have the charge set aside and possession order overturned.
The Outcome
At first instance, it was decided that Ms Waller-Edwards’ consent was procured by undue influence. The relationship of trust and confidence was abused by Mr Bishop and the circumstances of the transaction called for an explanation. However, the learned Judge held that the Bank was not put on inquiry and therefore did not have constructive notice whether by section 199(1)(ii) of the Law of Property Act 1925 (“LPA”) or at all.
Ms Waller-Edwards appealed on two grounds: that the Judge was wrong to
- find that the Bank was not put on inquiry (the “Inquiry Issue”), and
- reject the argument that the Bank was fixed with constructive notice by virtue of the exempting provision in s.199(1)(ii)(b) LPA (the “s.199 Issue”).
The Inquiry Issue
On the Inquiry Issue, it was held that the fact that the relationship between Ms Waller-Edwards and Mr Bishop was non-commercial was not sufficient to put the Bank on inquiry. As the House of Lords made clear in O'Brien, Pitt and Etridge, what is also required is a relationship of surety and debtor between the borrowers.
In the instant case, not much more than 10% of the borrowing was being used to finance the debts of Mr Bishop. As far as the Bank was aware vast majority of the sums were being used to discharge the existing mortgage which was a joint liability and then the remainder to fund the purchase of another property.
The O’Brien principles were held to be perfectly capable of applying to a partial surety case and whether the principles can legitimately be applied was said to be a question of fact and degree in any given case. Applying those principles, it was held that notwithstanding the fact that the threshold for a lender to be put on inquiry is a low one, that threshold nevertheless was not met. The assessment to be made was not simply a numbers exercise, rather as a hybrid/partial surety case it was necessary to look at the transaction as a whole. In doing so, it could not be said that the mortgage was or should have been perceived by the Bank as a transaction which was not to the financial advantage of the Appellant.
The Section 199 Issue
Section 199(1) LPA operates to protect a purchaser from being prejudicially affected by notice of the matters referred to in paragraphs (i) and (ii). Sub paragraph (ii) is wide in that it provides that a “purchaser shall not be prejudicially affected by notice of ….any other instrument , or matter or any fact or thing unless…” the qualifications in (a) or (b) apply. The (b) qualification relates (among other things) to situations where “in the same transaction with respect to which a question of notice to the purchaser arises, it has come to the knowledge …. of his solicitor … as such…”
A single solicitor, Mr Clake, acted for all three parties in relation to the remortgage. It was held that the capacity in which the knowledge comes to the solicitor is a key factor. As the information first came to Mr Clake in his capacity as solicitor for Mr Bishop, Halifax Mortgage Services Limited v Stepsky [1996] Ch. 207 is authority for the proposition that the information could not be treated as coming to Mr Clake again when later instructed for the Bank. Therefore the exemption in sub-paragraph (b) of Section 199(1)(ii) did not apply on the facts of this case.
Case details
Court: High Court of Justice Business and Property Courts (ChD)
Judge: Mr Justice Edwin Johnson
Date of Judgment: 27 September 2023
This case analysis was written by Tricia Hemans in October 2023, a version of the article was published by Lexis Nexis.
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