The appellant, Catherine Waller-Edwards, was the sole owner of a mortgage-free home worth £585,000 with savings of around £150,000 when she got into a relationship with Nicholas Bishop in 2011.
She was said to be “emotionally vulnerable but financially independent” at the time.
Waller-Edwards said in 2012, Bishop persuaded her to exchange her home and savings for a property he was building, which already had a charge against it. In 2013, this property was remortgaged for £384,000, and the money was to be used to purchase a buy-to-let (BTL) property for the couple and repay an existing mortgage of £200,000.
OSB required Bishop to use the loan to pay off other existing debts, including £25,000 for his car loan and £14,500 for his credit card. However, OSB was not aware that the loan was also used to make a divorce payment of £142,000 to Bishop’s ex-wife.
After the remortgage was complete in October 2013, the relationship ended. Waller-Edwards continued to live in the property, and the two fell into arrears. Possession proceedings began in November 2021 when the mortgage defaulted.
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At a contested trial with just Waller-Edwards present, she said she acted under Bishop’s “undue influence” when taking the remortgage with OSB.
She argued that because she acted as a guarantor for the part of the loan used to pay off her partner’s debts, OSB should have been put on inquiry.
She argued that because the bank did not take steps to ensure her agreement to act as guarantor was made in full knowledge of the liability she was taking on, the remortgage should have been cancelled between her and OSB.
Last year, the case went to the Court of Appeal and the judge ruled that the appellant may have entered the remortgage under undue influence, but OSB was not put on inquiry because it was considered joint borrowing and not a surety transaction, which is where one party agrees to be the guarantor for the second’s debts.
The Supreme Court ruled that a lender should be put on inquiry if more than a trivial element of the loan is used to pay off the debts of one borrower and may not be to the financial advantage of the other. If the lender views it this way, it must be seen as a surety transaction and the lender should be put on inquiry.
The judge said a joint borrowing transaction would be where, on the face of it, both are jointly liable. In this case, the bank would not ordinarily be put on inquiry.
It found that in the case of Waller-Edwards and Bishop, the loan was “on the face of it, partly joint borrowing and partly to discharge Bishop’s sole debt and, to that latter extent, to the financial disadvantage of the appellant”.
It was unanimously ruled that OSB should have carried out checks to see if undue influence was put on Waller-Edwards, as the lender knew the remortgage would not benefit her financially.
A spokesperson for OSB said: “We note the judgement of the Supreme Court today. We are naturally disappointed by the decision, which was based on a very particular set of facts.
“This is a complex case arising from a loan in 2013, and we are assessing the implications of the ruling, although we note that cases involving undue influence are rare. At the same time, we will review our current procedures.”
A landmark ruling
Joel Leigh, partner at Howard Kennedy, who represented Waller-Edwards, said: “The Supreme Court’s decision is a landmark development in the law of undue influence, the most significant since Etridge. It is remarkable that hybrid transactions have gone unrecognised for so long, and that a workable test has only now been confirmed.
“While some lenders may have already adopted a cautious approach, the absence of formal recognition likely left many vulnerable individuals without recourse. These were people who, dependent on a partner who abused their trust, were drawn into transactions that left them financially exposed. Many will have lost homes, creditworthiness, and stability and lacked the means or confidence to challenge it. Even those prepared to challenge such contracts would have faced an uphill battle, because without any legal recognition of ‘hybrid’ transactions, claims were doomed to fail unless (as in Catherine’s case) taken to the highest court in the land. The Supreme Court’s judgment delivers long-overdue clarity and a vital safeguard: from now on, in any non-commercial hybrid transaction, a more than de minimis surety element is enough to put a lender on inquiry and require compliance with the Etridge protocol.
“Catherine’s fight has not only secured justice for her but has reshaped the legal landscape, extending meaningful protection to both men and women at risk of economic abuse within their personal relationships.”
Potential increased liability on lenders?
Jennifer Richardson, financial crime partner at law firm Blackfords LLP, said: “This significantly increases the liability on lenders to undertake checks in respect of those it is lending to, however, the decision also raises a lot of questions about how this will be applied in the case of mortgage brokers, for example. Will this liability extend to them as well? Should this lead to a more stringent regulatory regime?
“Solicitors, for example, are often expected to identify similar situations when dealing with clients, and face regulatory investigations by the Solicitors Regulation Authority if they fail to do so. It may be that we see a similar tightening of regulation amongst lenders as a result of this case.”
Liam Bell, real estate disputes partner at law firm Fladgate, added: “This decision will come as a huge disappointment to lenders, who will have been keenly monitoring the progress of the claim to the Supreme Court and its potential impact on joint borrowing situations.
“In allowing the appeal, the court has confirmed that there is an additional burden on lenders in so-called ‘hybrid’ borrowing cases. These cases arise where a mortgage is made available to joint borrowers for more than one purpose, one of which is to the financial advantage of one borrower only – such as the classic case of a wife guaranteeing repayment of her husband’s debts.”
Bell said: “Lenders will now always be treated as being ‘on notice’ of possible undue influence in such situations – even if that is only one small part of a wider, multi-purpose loan. To prevent the transaction from being set aside, a lender will need to ensure that the ‘surety’ borrower’s consent is being given without improper pressure from the other borrower.
“Until now, lenders were entitled to consider the transaction as a whole when assessing whether a loan was being made primarily for one borrower’s purposes. However, the Supreme Court’s decision now means that any element of surety lending will require the lender to take a number of practical steps – known as the Etridge protocol – to ensure that its security remains enforceable.
“This is likely to place a substantial administrative burden – and additional legal risk – on lenders who are already facing challenging economic and competitive conditions.”
