Mortgages – no third test for hybrid loan situations

Whether or not a lender is on notice of the possibility of undue influence depends on the purpose of the loan, determined from the lender’s perspective. The Court of Appeal has considered this issue dismissing an appeal in One Savings Bank plc v Waller-Edwards [2024] EWCA Civ 302; [2024] PLSCS 66. The case concerned a jointly owned property in Wimborne, Dorset, subject to a declaration of trust that 99% was held for the defendant, Catherine Waller-Edwards, and 1% for her former partner, Nicholas Bishop. In October 2013, the claimant bank made an advance of £384,000 under a buy to let mortgage, believing it was being used to settle a previous mortgage (£200,000); to pay Bishop’s debts (£40,000) and to purchase another property (£142,000). In fact, just under £234,000 was used to settle the previous mortgage and the balance was paid to Bishop’s wife under a divorce settlement. The relationship terminated and the bank subsequently sought possession of the property for mortgage arrears. While it was established that Bishop had exerted undue influence resulting in Waller-Edwards remortgaging the property, it was determined at trial and on appeal that the bank was not put on inquiry of it. It was common ground before the Court of Appeal that there are two different categories of case relating to non-commercial secured borrowing by two persons in a relationship: The surety case, where a wife stands surety for her husband’s debts (Barclays Bank plc v O’Brien [1994] 1 AC 180) or one borrower guarantees the debts of another, or the borrowers take secured borrowing on jointly owned property to pay off the debts of one of them. Here, the lender will normally have constructive notice of the possibility of undue influence by one borrower over the other and be put “on inquiry” requiring it to follow the Etridge protocol (Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773). The joint borrowing case, where a loan is taken for the joint purposes of two borrowers. The lender will not normally have constructive notice of any undue influence and will not be put on inquiry (CIBC Mortgages plc v Pitt [1994] 1 AC 200). There is no third test for a hybrid situation. The judges below were correct to look at the transaction as a whole and decide whether, as a matter of fact and degree, the loan was being made for the purpose of the borrower with the debts as distinct from joint purposes. Looked at as a whole, and from the bank’s perspective, the loan was a joint borrowing made for their joint purposes. Louise Clark is a property law consultant and mediator