Can voidable mortgages arise due to undue influence?

The Supreme Court decision represents a significant recalibration of risk in non-commercial joint property finance. 

Background:

Mrs. Catherine Waller-Edwards, who was financially independent and owned a mortgage-free home with substantial savings, commenced a relationship in late 2011 with Mr. Nicholas Bishop, a builder, at a point in her life when she was emotionally vulnerable. She had a modest pension income of £7,000 per annum, savings of £150,000, and her home was valued at about £600,000.

Mr. Bishop persuaded her to sell her home and use her savings to acquire a property he was building, which was already subject to an existing mortgage of £78,000 owed to a Mr. Higgins. The appellant was given a second charge over ‘Spectrum’ to secure her “investment” (of £150,000) pending completion of ‘Spectrum’. The Higgins charge was increased thereafter on three occasions to £220,000. 

In December 2012, the legal title to Spectrum was put into joint names with a declaration of trust stating that the beneficial interest in Spectrum was held by the appellant as to 99% and Mr. Bishop as to 1% as tenants in common.

In 2013, Mr. Bishop re-mortgaged this new property with the respondent bank for £384,000. The bank believed the re-mortgage was for a buy-to-let property for the couple and to pay off an existing mortgage debt of £233,000. The bank required Mr. Bishop to pay off his existing debts so that £25,000 would be used to pay off the loan for Mr. Bishop’s car, and £14,500 to pay off his credit card. These two payments (amounting to £39,500) constituted the asserted suretyship part of the joint loan. Unbeknownst to the Bank, Mr. Bishop actually used the loan to make a divorce payment to his ex-wife of £142,000 and pay off the first charge on the property. 

Shortly after the re-mortgage was completed in October 2013, the relationship ended. The appellant remained in the property, which was by this juncture heavily mortgaged. When the couple fell into arrears, the bank initiated possession proceedings in November 2021. 

The appellant argued that she had entered into the re-mortgage under Mr. Bishop's undue influence. She contended that for the £39,500 portion of the loan used to pay off Mr. Bishop's individual debts, she was acting as a "surety". While the County Court found that the appellant had been unduly influenced by Mr. Bishop, the County Court, High Court, and Court of Appeal all ruled that the bank was not "put on inquiry".

Decision: 

The Supreme Court unanimously allowed the appellant's appeal, holding that a creditor is "put on inquiry" in any non-commercial hybrid transaction where there is a "more than de minimis" (i.e., non-trivial) element of borrowing that serves to discharge one borrower's debts and might not be to the financial advantage of the other. The Supreme Court rejected the "fact and degree" test used by the lower courts in favour of a new ‘bright line’ test. 

The Court noted that surety transactions inherently carry a higher risk of undue influence because one party takes on liability for another's debt without direct personal gain. It is therefore proportionate to require banks to follow the "Etridge protocol" (steps such as providing independent legal advice) to mitigate this risk. The hybrid element does not reduce this inherent risk.

The relevant question for "being put on inquiry" is not about who ultimately benefits from the money loaned. Instead, it's about whether one borrower, for no personal gain, has taken on a legal liability for which they are otherwise not responsible.

The Supreme Court adopted a "bright line" test to ensure clarity and certainty, reflecting the Etridge No. 2 approach. This test must be viewed from the Bank's perspective.

Implications:

This Supreme Court judgement is a seismic shift in how lenders must approach joint borrowing in certain non-commercial contexts. While the core issue is undue influence, its practical implications directly impact secured lending and property transactions.

This case expands the scope of being ‘put on inquiry’. Lenders can no longer assume that a nominally "joint" mortgage or re-mortgage transaction involving a couple or other non-commercial relationship is inherently safe from undue influence claims. The "bright line" test means that if any part of the loan, beyond a "de minimis" amount, is used to discharge the sole debts of one borrower, and thus may not be to the financial advantage of the other, the lender is automatically "put on inquiry". If a lender fails to be "put on inquiry" when they should have been under the new test, and does not follow the Etridge protocol, the mortgage or portion of it can be set aside as against the unduly influenced borrower.

Lenders must now rigorously scrutinise the intended use of all loan funds in non-commercial joint applications. It's no longer enough to simply see "joint names" on the application. They need to understand if any portion is earmarked for the individual benefit or debt repayment of a sole party. This will require more detailed information gathering from applicants.