Supreme Court extends duties of lenders

Following a recent Supreme Court decision, greater protection may be offered to life partners who seemingly have suffered undue influence when applying for a joint mortgage. The decision has extended the duties of lenders to assess whether there is any undue influence in non-commercial relationships, where one party benefits more.

We consider what impact this may have going forward for lenders, as well as brokers and advisers.

Summary

In Waller-Edwards v One Savings Bank Plc [04.06.25], the appellant (Waller-Edwards) obtained a joint mortgage with her partner, Mr Bishop, in 2013 from the respondent (One Savings). The applicant had sold her property (which was mortgage free), before applying for the mortgage with her partner. They later jointly purchased another property. Upon completion, there were remaining funds (c.£40,000), which were used to pay off the personal debt of her partner.

The relationship broke down and after the mortgage fell into arrears, the respondent commenced possession proceedings. The appellant argued that the “Etridge protocol” should apply, on the basis she had been unduly influenced by her now former partner. The Etridge protocol puts lenders under a duty to ensure a guarantor receives independent legal advice about the risks of entering the transaction. The appellant alleged the respondent should have taken steps to investigate (given they were aware that jointly held funds would be used to clear the partner’s debts), whilst the respondent’s position was that the appellant was not a guarantor and so no such checks were needed.

Supreme Court decision

The County Court, High Court and Court of Appeal all initially found that the respondent was not subject to the Etridge protocol, on the basis that the appellant was not a guarantor, but rather a joint beneficiary of the mortgage. What the funds were ultimately used for should not be a lender’s concern.

The Supreme Court unanimously disagreed, holding that a lender should be put on notice of potential undue influence, particularly in non-commercial relationships, where the mortgage is for a hybrid purpose (i.e. it benefits both parties jointly and one party separately). The judgment acknowledges that there are difficulties in assessing undue influence in hybrid transactions in non-commercial transactions, compared to commercial transactions. In essence, lenders are being asked to consider and assess personal (more often than not, romantic) relationships to consider if there is any influence – a task much easier in commercial relationships, when contracts will be in place.

The Supreme Court also disagreed with the Court of Appeal’s findings that it does not matter if Party A uses the mortgage to pay off the debts of Party B, because Party A may get other benefits from Party B (the example in the judgment being, using Party B’s car or credit card). Of course, this is common in romantic relationships – one party may pay more of the household bills, but the other helped them clear their debt in years gone by. The Supreme Court’s finding is that this does not matter – a lender will often not be aware of the underlying details of their financial relationship. In the Supreme Court’s view, what matters is that a party has, for no consideration, taken on a legal liability that is not theirs. What benefit they may receive is of no relevance.

Impact on other professions

The decision will inevitably impact brokers and advisers too, who may be considering historic advice they provided. Whilst no reference was made to these professions in the judgment, it is clear the principles can be applied easily.

It is a timely reminder that if there is any suggestion of undue influence, maintaining detailed records and providing clear communication with clients about the purpose of the loan, as well the implications of joint borrowing, is vital. Ensuring that parties receive independent legal advice will also be key.

Comment: a shift in expectations for lenders

The decision will not be welcomed by lenders, given the additional burdens on them to analyse and assess the relationship between borrowers in a non-commercial partnership. Where a joint loan is used to settle one party’s personal debts, this should now put the lender on notice of potential undue influence.

The difficulty is that the decision extends the duties beyond what was previously considered reasonable. Whilst the decision does not mandate regulatory change, the FCA will need to act to ensure that the industry is aligned with the legal expectations following this decision – and that firms are protected from previously unexpected expectations