The Supreme Court has delivered a significant judgment in Waller-Edwards v One Savings Bank Plc, clarifying the duties of lenders in transactions involving personal relationships and potential undue influence. The case revisits and extends principles from Barclays Bank v O’Brien and Royal Bank of Scotland v Etridge (No 2).
Key takeaways
1. Scope of surety protections expanded
The Supreme Court confirmed that the protective framework for sureties applies even in “hybrid” transactions (i.e. transactions where only part of the loan is used to benefit a third party). This means lenders must be alert to undue influence risks even if the borrower is a co-owner or co-mortgagor of the security assets.
2. Constructive notice still applies
A lender may be “put on inquiry” if the transaction appears to benefit one party disproportionately. In such cases, the lender must take reasonable steps to ensure the other party’s consent is properly informed and free from undue influence.
3. Joint Mortgage does not give rise to automatic protection for a lender
The fact that a mortgage loan is jointly applied for does not absolve the lender of its duty to investigate. Where the transaction is non-commercial and one party is at risk, the lender must ensure independent advice is obtained.
4. Practical implications for lenders
Enhanced Duty of Inquiry
Lenders must be alert to the risk of undue influence in any transaction where:
- the borrower is in a personal (especially domestic) relationship with a co-borrower;
- the loan proceeds are used primarily for the benefit of one party;
- the transaction appears unusual or imbalanced.
In such cases, lenders are “put on inquiry” and must take proactive steps to ensure the other party’s consent is informed and voluntary.
Lenders should review their procedures for identifying and managing transactions involving personal relationships. Where red flags arise, such as (but not limited to) where one party receives no direct benefit from the loan, independent legal advice should be strongly encouraged and documented.
Independent legal advice is NOT OPTIONAL
Where a lender is on inquiry, it must ensure that the potentially vulnerable party receives independent legal advice. This advice must:
- be provided by a solicitor not acting for the other party;
- be based on full disclosure of the transaction’s nature and risks; and
- be documented and retained by the lender.
Failure to do so may render the security unenforceable against that party’s interest.
Review of lending policies and training
Lenders should:
- update internal policies to flag “hybrid” or non-commercial transactions for additional scrutiny;
- train frontline staff and underwriters to identify red flags (e.g., joint mortgages with disproportionate benefit); and
- ensure that systems prompt for legal advice checks where appropriate.
Documentation and audit trails
Maintaining a clear audit trail is critical. Lenders should:
- record the rationale for concluding whether or not a party is at risk;
- retain evidence of legal advice being offered and obtained; and
- document communications with borrowers regarding the purpose and structure of the loan.
5. Implications for enforcement of security
If a lender fails to meet its obligations when it has been “put on inquiry”:
- it may be unable to enforce the mortgage against the vulnerable party’s interest;
- it may face reputational damage or regulatory scrutiny; or
- it may need to reassess its risk exposure in similar existing loans.
Get In Touch
Jay Lafinhan is a Partner and Head of our Real Estate Finance team. He is experienced in managing complex finance matters such as short-term bridging loans, buy-to-let investment loans, short to mid-term development loans, portfolio re-finance loans and more.
If you’d like to get in touch with Jay or another member of our team, call us on 03300 299 419 or fill out our contact form to arrange a consultation.
