(3 min read)
It is well-known that lenders should always insist on certain parties obtaining independent legal advice ("ILA") in two key scenarios: (1) a third party provides a guarantee or security in support of the debt of another; and (2) joint borrowers in a relationship receive a loan for non-commercial purposes. The recent case of One Savings Bank Plc v Waller-Edwards re-visits this approach and serves as a reminder of the alarm bells that should ring whenever lending to, receiving guarantees or obtaining security from multiple and/or related parties.*
*Please note that on 4 June 2025, the Supreme Court overturned the Court of Appeal decision, holding that a creditor is put on inquiry in any non-commercial hybrid transaction where, on the face of the transaction, there is a more than de minimis (i.e. trivial) element of borrowing that serves to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other.
In this particular scenario, the lender advanced a loan to two borrowers in a relationship, which was secured over a property that they owned jointly. The loan was used for multiple purposes, namely (a) refinancing the existing mortgage on the property, (b) repaying other existing debts of the first borrower (Borrower A) and (c) purchasing another property.
It was later discovered that the second borrower (Borrower B) had been unduly influenced by Borrower A to enter into the mortgage arrangements. The relationship between the borrowers ended and the loan defaulted. Borrower B then sought to defend the lender's enforcement action by claiming that the lender should have (i) been on notice that she was unduly influenced and (ii) required her to obtained independent legal advice separate to Borrower A.
In this instance, the court confirmed that a lender should only assume undue influence (and therefore insist on ILA) in the two scenarios highlighted above. The hybrid facts of this case do not fall within the two scenarios set out above, and the lender was not otherwise aware that the majority of the loan proceeds were being used to cover (uncommercial) debts of Borrower B. As such, the lender should not have assumed undue influence and Borrower B could not defend the enforcement action on this basis.
As always, this judgment is specific to the facts, and it is important for all lenders to ensure the following:
- Transaction Clarity: lenders should interrogate the purpose of all transactions, particularly when transactions involve multiple parties in a relationship;
- Independent Legal Advice: ILA should be sought whenever a transaction falls into the two scenarios detailed above, however there are other occasions where it is prudent to insist on ILA where any transaction might not be to the advantage of one of the parties, including personal, family and employment relationships; and
- Adviser checks: ensure that the adviser providing the ILA is sufficiently qualified experienced to (i) convey the significance of the transaction for their client and (ii) identify where a client may be unduly influenced and provide support accordingly.
Contributors to this article were senior private wealth finance paralegal Twiza Mutambo.
