Lenders Beware! Key ramifications of the Supreme Court’s decision in Waller-Edwards vs. One Savings Bank Plc case

Lenders will be concerned by the recent Supreme Court appeal decision in Waller-Edwards v One Savings Bank Plc. The Supreme Court held that a lender is put on inquiry in a non-commercial hybrid transaction where there is more than a trivial element of borrowing, which serves to discharge the debts of one of the borrowers, which may not be advantageous to the other. In circumstances where a lender is put on inquiry, the lending may be set aside unless a bank can show they took steps to ensure that their borrower was aware of the nature of the transaction and has received appropriate legal advice.

Borrowing and undue influence

This case revolves around the question of whether the bank was put on inquiry that Mrs Waller-Edwards had been unduly influenced by her then partner, Mr Bishop, in respect of a joint loan from the bank, part of which (£40,000) had been used by Mr Bishop to pay off debts accrued in his sole name. The Court of Appeal held in 2024 that the bank had not been put on inquiry and that appeal was duly dismissed.

There are two different categories of case relating to secured borrowing by persons in a relationship which are relevant to this case:

1. A “surety case” covering non-commercial situations where one borrower guarantees the debts of another or, as is relevant here, where the borrowers take secured borrowing on jointly owned property to pay off the debts of only one of them – in this case the lender is normally deemed to have been put on inquiry of the possibility of one borrower having been unduly influenced by the other (Royal Bank of Scotland Plc v Etridge [2001]). “)
2. A “joint borrowing case” covering a non-commercial situation where a loan is taken for the joint purposes of two borrowers in a relationship (whether married or not). In these circumstances the lender will not normally have been put on inquiry that there was a risk of one borrower unduly influencing other (C.I.B.C. Mortgages plc v. Pitt 1994).

The argument for a third category of secured borrowing by people in a relationship

Mrs Waller-Edwards argued that there should be a third category for hybrid cases, as the sum borrowed by her and Mr Bishop had been partly for their joint benefit (90%) and partly for Mr Bishop’s benefit (10%). It was argued that in a “hybrid” non-commercial loan situation, the lender has been put on inquiry unless the portion of the loan advance that is for the benefit of one borrower is deemed to be trivial. The Court of Appeal held on its dismissal of the 2024 appeal that further confusion would be caused by the term “trivial” and what percentage of a loan would be considered to meet this threshold.

It was also argued by Mrs Waller-Edwards that she acted as a surety for the part of the loan benefitting Mr Bishop alone, and hence the case should be considered a “surety case” as outlined above, and the loan transaction should be set aside.

Lenders must now be extra vigilant in ensuring borrowers access legal advice The Supreme Court held that Mrs Waller-Edwards’ appeal was allowed.

A lender is put on inquiry in any non-commercial hybrid transaction where there is more than a de minimis (i.e. trivial) element of borrowing which serves to discharge the debts of only one of the borrowers and that this type of transaction should be regarded by lenders as a “surety” transaction. On that basis, the lender must take steps such as ensuring the borrower has received correct legal advice.

In the previous appeal, the Court of Appeal held as part of its judgment that the redemption of personal loans accrued by one borrower in a remortgage transaction of this type was routine. This alone will concern lenders and banks now that the most recent appeal has been upheld.

Banks and lenders will now need to be extra vigilant about the intended purpose of any loans advanced to customers. Any joint borrower transaction which may formerly have been considered to be a “joint borrowing case” may now face further scrutiny in terms of what the borrowers intend to use the mortgage advance for, and lenders will need to consider what is required in terms of enhanced due diligence to ensure they meet the required standards.

Any case where more than a de minimis sum will benefit one borrower only is likely to be deemed a surety case by lenders. Banks and solicitors will need to ensure that the borrower providing “surety” for the other is advised independently in respect of the element of the loan for which they will see no benefit and that they are satisfied that this borrower has not been put under undue influence by the other.

If you have any questions about the issues raised in this article, our expert Real Estate team can help.