A recent Court of Appeal decision may mean that lenders may have to go further when assessing whether to lend to a borrower who is offering up a jointly owned home as security for their debts.

The well known case of Royal Bank of Scotland v Etridge (No. 2) established that if, for example, a wife guarantees the liability of her husband and then charges their jointly owned property to a lender in support of that guarantee, then the lender is put on notice that the guarantee may have been procured as a result of undue influence of the husband over his wife.

Therefore, the lender must take necessary steps to satisfy itself that the wife has received appropriate independent legal advice before entering into the transaction. If the wife has taken independent legal advice this would prevent a wife from being successful in asking the court to set aside a guarantee and/or a charge.

In March, the Court of Appeal decided the case of First Plus Financial Group Plc v Hewett. Mr H found himself in financial difficulties and unable to meet his commitments as a result of substantial credit card debts. He persuaded Mrs H to agree to a charge over their jointly owned property to secure a loan from First Plus. Unbeknown to Mrs H, Mr H was having an affair when she agreed to charge their home.

By 2009 Mr and Mrs H were divorced, Mr H became bankrupt and First Plus brought possession proceedings against Mrs H. The Court of Appeal held that a husband owes his wife an obligation of candour and fairness which Mrs H could rely on and could expect her husband to provide all the relevant information so that she could decide whether to enter into the charge.

The result is that the Court of Appeal has set aside the charge in favour of First Plus on the basis that Mrs H was unduly influenced by Mr H’s concealment of his affair, as it was not disclosed to her. This was held to be a highly important fact that she needed to know to enable her to make the decision.

The perhaps unexpected outcome of this case may mean that solicitors advising third party guarantors, as required by lenders, will now have to make sure that wives, or indeed, husbands, understand, and then record their understanding that a lender will still be able to go into possession of the charged property even if their spouse is misrepresenting their relationship to them.
Samantha Hook, Property Finance solicitor, Howard Kennedy
Email: S.Hook@howardkennedy.com