Britannia Building Society v Pugh and another

Husband and wife charging jointly owned property to secure joint loan — Arrears — Mortgagee seeking possession — Possession order granted — Whether special equity applicable so that creditor unable to enforce security against wife — Court of Appeal upholding decision that mortgagee not fixed with notice of equity to set aside transaction — Appeal dismissedOn October 10 1989 the husband and wife defendants entered into a legal charge whereby they charged Poppylands, Boucher Way, Budleigh Salterton, and two other properties to the plaintiff building society. The purpose of the charge was to secure an initial advance of £970,000 the interest accruing thereon and any further advances. The initial advance was made by the plaintiff to the defendants for the purpose of financing property developments at Lucky Lane, Exeter, and Tedburn St Mary. The advance proved insufficient to finance the developments up to completion and in August 1990 the plaintiff made a further advance of £160,000 on the same security. The houses in the development at Tedbury St Mary were completed, but failed to sell. The defendants fell into arrears with repayments under the charge. Their attempts to refinance the borrowing failed. The bank subsequently brought an action for possession of the property under the charge. The judge held that there were no circumstances attaching to the transaction of which the plaintiff knew, or ought to have known, that should have put them on inquiry as to the propriety of the husband’s conduct towards his wife. The wife appealed against that decision; the husband took no part in the proceedings. Held The appeal was dismissed. 1. Where a wife stood surety for the debts of her husband, the lender was put on inquiry of any rights she might have against her husband to set aside the transaction by virtue of the trust and confidence which a wife often had in her husband in relation to their financial affairs: see Barclays Bank plc v O’Brien [1993] EGCS 169. 2. The position was different where the loan was made to the husband and wife jointly and it appeared to the lender to be a normal advance to the husband and wife for their joint benefit: see CIBC Mortgages plc v Pitt [1993] EGCS 174. 3. If third parties were to be fixed with constructive notice of undue influence in relation to every transaction between husband and wife, such transactions would become almost impossible. On every purchase of a home in joint names, the building society or bank financing the purchase would have to insist on meeting the wife separately from her husband, advise her as to the nature of the transaction and recommend separate legal advice. If that were not done, the financial institution would have to run the risk of a subsequent attempt by the wife to avoid her liabilities under the mortgage on the grounds of undue influence or misrepresentation: see CIBC Mortgages plc v Pitt. 4. The same factors applied where the husband and wife purchased any property together. 5. This was a joint advance case. The loan was made to the defendants jointly and was secured by the charge against their jointly owned properties. The wife was not standing surety for the debts of her husband. On the evidence she was a borrower jointly with him for a development which was intended for their joint benefit. There was nothing in the circumstances of the mortgage application which could fix the plaintiff with notice of an equity in the wife to set aside the transaction against her husband. Edward Bannister QC and Alastair Gunning (instructed by Crosse & Crosse, of Exeter) appeared for the wife; Jonathan Arkush (instructed by Teacher Stern Selby) appeared for the building society.