Court of Appeal considers Etridge in relation to hybrid mortgage advances

Update (August 2024): The Supreme Court has recently granted permission to appeal the Court of Appeal decision in this case.  We are monitoring the appeal with interest and will provide an update once we have more information.

The Court of Appeal decision in Waller-Edwards -v- OneSavings Bank Plc [1] has provided welcome clarity on the application of Royal Bank of Scotland -v- Etridge [2] (Etridge) to ‘hybrid’ cases (where part of the mortgage advance to joint borrowers is used to repay one of the borrower’s debts).

The case also confirms that in hybrid cases, lenders will not automatically be required to follow the ‘Etridge Protocols’ of obtaining solicitors’ confirmation that the joint borrowers have each been advised on the nature and risks of surety.

The case serves as a reminder to lenders of the importance of understanding both what the mortgage advance will be used to fund, and the borrowers’ relationship to each other, to assess potential undue influence. If the court looks at the transaction as a whole and decides that the loan was for the benefit of only one borrower, the lender may be deemed to have constructive notice of undue influence and the enforceability of the lender’s charge may be affected. Lenders must therefore exercise due diligence in hybrid transactions and carefully consider if they are going to depart from the Etridge protocol.

Background summary

In 2011 Ms Waller-Edwards, during a vulnerable period in her life, began a relationship with Mr Bishop. At this time, Ms Waller-Edwards had a mortgage-free property and savings in excess of £150,000.

On 25 May 2012, Ms Waller-Edwards exchanged her property (worth c. £585,000) plus £150,000 for a property that Mr Bishop was constructing (the Property). By the time the exchange completed, Ms Waller-Edwards had been persuaded to accept two charges over the Property. The couple moved into the Property and it was held in their joint names subject to a declaration of trust that 99% was held for Ms Waller-Edwards and 1% for Mr Bishop.

In mid-2013, the couple approached OneSavings Bank Plc (the Bank) for a mortgage. The Bank agreed to a loan of £384,000 (the Loan) secured by a legal charge over the Property (the Legal Charge). To the Bank’s knowledge at that time, the Loan was to be used to:

• Redeem a previous mortgage of £200,000;
• Repay Mr Bishop’s £24,000 car finance debt and £16,000 credit card debt; and
• Contribute £142,000 towards purchasing another property.

In reality, £233,801.76 of the Loan was used to pay off the previous mortgage and Mr Bishop’s debts, with the remaining balance transferred to Mr Bishop’s ex-wife in respect of a divorce settlement.

Subsequently, the relationship between Ms Waller-Edwards and Mr Bishop ended, Mr Bishop moved out of the Property and stopped paying the mortgage instalments. The Bank issued possession proceedings. Mr Bishop did not defend the possession claim and was not involved at trial or the subsequent appeals. Ms Waller-Edwards sought to set aside the Legal Charge stating that the Bank was on notice of undue influence and failed to take proper steps.

The Bank asserted that:

• It understood that the couple wanted to remortgage the Property on a buy to let basis, with repayment to the Bank funded by letting out the Property.
• It knew that the Loan would be used to pay off £20,000 in car finance and £16,000 for Mr Bishop's credit card (in fact, this was a condition of the mortgage offer).
• It knew that the Property was jointly owned but was unaware that Ms Waller-Edwards owned 99% of the equity in the Property and that £142,000 would be used to pay Mr Bishop’s ex-wife.
• It was not uncommon for a joint application to be made to consolidate debts and for debts to be in one party's name, or greater debt to be attributable to one party than the other. Mr Bishop was the major wage earner in the relationship, so it was not unusual that debts were in his name.

County Court Trial

The Trial Judge gave judgment in favour of the Bank finding that, although Ms Waller-Edwards’ consent to the Legal Charge was obtained by the undue influence of Mr Bishop, the Bank did not have notice of the undue influence.

The Trial Judge accepted the Bank’s submission that it was not uncommon in a joint application for there to be an element of credit debts in the name of one party. Therefore, as a matter of fact and degree, the case was not analogous to the surety situation considered in Etridge. The Bank was entitled to enforce the Legal Charge and a possession order was granted.

Appeal to the High Court

Ms Waller-Edwards’ appeal was dismissed by the High Court who found that the mortgage transaction must be considered as a whole to determine whether the Bank did perceive (or should have perceived) that the Loan was not to the financial advantage of Ms Waller-Edwards. The High Court also considered that the Loan did not to give rise to a relationship of surety similar to that in Etridge.

Permission to appeal to the Court of Appeal was granted, limited to the question of whether a lender is put on inquiry of undue influence where a portion of the loan advance is used to repay the debts of only one borrower (i.e. it is a ‘hybrid case’), unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial.

The Court of Appeal’s approach

The Court of Appeal considered the principles in Barclays Bank plc -v- O’Brien [3] (O’Brien); C.I.B.C Mortgages plc -v- Pitt [4] (Pitt); and Etridge (together, the Authorities).

Sir Geoffrey Vos MR, with whom Jackson LJ and Falk LJ agreed, held that the Authorities provide for two categories of case when two individuals in a relationship enter secured borrowing:

• A “surety case”: a non-commercial situation where one borrower guarantees the debts of the other, or the borrowers take secured borrowing on jointly owned property to pay off the debts of only one of them; and
• A “joint borrowing case”: where a loan is taken for the joint non-commercial purposes of two borrowers in a relationship (epitomised by the facts in Pitt).

In surety cases, the lender will usually have constructive notice of the possibility of one borrower being unduly influenced by the other and will be consequently put "on inquiry" [33]. This is because (as described by Lord Browne-Wilkinson in O'Brien):

• a surety transaction on its face is not to the financial advantage of the other borrower; and
• there is a substantial risk in transactions of this kind that, in securing the consent to act as surety, the other borrower has committed a legal or equitable wrong which could be utilised to set aside the transaction. If a lender is put on inquiry, it is typically required to follow the series of steps described by Lord Nicholls at [79] in Etridge.

In joint borrowing cases, following Pitt and Etridge, the lender is not put on inquiry unless the lender is aware that the loan is being made for only one borrower’s purposes, as distinct from their joint purposes.

Hybrid cases (where the lender knows that part of the loan advance is used for the sole benefit of only one borrower) were not directly addressed in the Authorities. Sir Geoffrey Vos MR rejected Ms Waller-Edwards’ assertion that the Authorities should be interpreted as that the lender is put on inquiry in hybrid cases unless the sole benefit is trivial. He instead concluded that Etridge, “requires the court to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes.” [40] Ms Waller-Edwards’ appeal was therefore dismissed.

What it means for you

Etridge principles remain relevant in cases where an advance to joint borrowers is solely for the benefit of one of them. However, where part of the advance is for joint benefit and part of the advance is for the sole benefit of one borrower, the position is more nuanced.

In hybrid cases lenders may not need to follow the ‘Etridge Protocols’ of ensuring each joint borrower has received independent legal advice on the transaction. However, given the risk to the security, it is important that lenders have clear underwriting guidance in place to ensure that ILA is requested in appropriate cases, particularly where it is not clear that the majority of the advance is for joint purposes. 

The judgment can be found here.

Authors: Neil Franklin, Dawn Webber, Lawrence Thomas, Amy Earlam

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[1] Waller-Edwards -v- One Savings Bank Plc [2024] EWCA Civ 302

[2] Royal Bank of Scotland -v- Etridge (No 2) [2002] 2 AC 773

[3] Barclays Bank plc -v- O'Brien [1994] 1 AC 180

[4] C.I.B.C. Mortgages plc -v- Pitt [1994] 1 AC 200

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.