This judgment reinforces the principles of establishing undue influence as laid out in Royal Bank of Scotland v Etridge (No2) [2002] 2 AC 773 and highlights the extent of knowledge required before a bank is deemed to have knowledge – actual, imputed or constructive, of undue influence.  Additionally, the judgment sets out the level of inquiry required by banks in respect of potential undue influence.

Background

The case concerns a mortgage on the second defendant’s property. In 1999, the property was transferred to the joint names of the second defendant and her son, the first defendant. At this time, the property became subject to a charge, to secure funds totalling £40,000. It is believe that the re-mortgage was obtained to provide the first defendant with funds to run his business. From this point, the first defendant assumed responsibility for the mortgage payments.

Between 1999 and 2008 the property became subject to five further charges, the most recent of which being in favour of the claimant, The Mortgage Business Plc. It was evident that the subsequent re-mortgage transactions were for the purpose of funding the first defendant’s business and that it was the first defendant making the payments due under the respective mortgages.

The defendants failed to maintain payments on the claimant’s mortgage and arrears began to accrue, as a result of which the claimant commenced proceedings for possession of the property. The second defendant submitted that her obligations under the claimant’s mortgage were procured by undue influence on her by the first defendant.  Consequently, the second defendant argued that the claimant’s rights under the mortgage were affected by that undue influence and she was entitled to have the mortgage set aside as against her. Further, the second defendant submitted that the first defendant had no beneficial interest in the property and so, should the charge not be set aside against him, this would not create any equitable charge over the property.

Judgment

The Court reviewed the established case law relating to undue influence, specifically the guidance provided in Royal Bank of Scotland v Etridge (No2) [2002] 2 AC 773, which identifies the questions the Court needs to address in matters where undue influence is raised:

Did the second defendant, at the relevant time, place trust and confidence in her son (the first defendant) in relation to her affairs?
Was the mortgage transaction with the bank such that it called for an explanation which did not involve undue influence?
Has the mortgage transaction been explained in a way which did not involve undue influence?
Whether advice given to the second defendant by her solicitor removed the effect of the earlier presumed undue influence; and
If the preceding questions are answered in favour of the second defendant, is the position of the bank affected by such undue influence? Does the bank have actual, imputed or constructive notice of the undue influence?

The Court concluded that the claimant did not have the relevant knowledge and it held that:

‘It is not necessary for the bank to play detective and to follow up any clue, however slight, which might indicate to them that the information provided was not scrupulously accurate…where one is dealing with constructive notice of undue influence, there is no requirement that [the bank] adopts a high level of prudence and scepticism.’

The Court emphasised that the test for constructive notice established in Royal Bank of Scotland v Etridge involves the bank being notified of the requirement to investigate a matter where ‘it is aware’ that the advance is as a result of undue influence by one borrower against another.

Additionally, the Court reviewed the evidence in light of the second defendant’s alternative submission that the claimant had imputed knowledge of undue influence, as a result of the information provided to the conveyancing solicitors regarding the proposed use of the mortgage advance. Specifically, the Court assessed information that had been provided to the defendants’ solicitors in respect of the application. The Court concluded that this information came to the defendants’ solicitor’s knowledge in their capacity as solicitors for the defendants and not the claimant.  The Court reviewed the retainer between the claimant and the solicitors and concluded that the arrangement with the claimant was that the claimant would pay funds into the client account of the solicitor.  The Court submitted that what happened after the money left the client account was a matter between the solicitors and the defendants and did not concern the claimant. The Court concluded that when acting for the claimant, the solicitors did not need to give the claimant information about what was to happen with the balance of the advance when it left the client account.

Accordingly, the Court concluded that the claimant did not have knowledge of undue influence.

As a result of the Court’s findings in respect of the claimant’s alleged knowledge of undue influence, the Court concluded that it was not required to consider whether the claimant had complied with the requirements in Royal Bank of Scotland v Etridge. Additionally, the Court concluded that the question as to the first defendant’s beneficial interest in the property did not need to be addressed. Ultimately, the Court found that it would be inappropriate to grant anything other than an Order for possession.

Conclusion

This judgment emphasises the high threshold of evidence required to establish that a bank has knowledge – actual, imputed or constructive – of undue influence. Additionally, it highlights that, whilst banks can be as prudent as required in respect of protecting their own interests and making reasonable lending decisions, there is no similar requirement for a high level of prudence in respect of potential undue influence. Accordingly, a high level of evidence is required before the Court will need to assess whether a bank’s position is affected under Royal Bank of Scotland v Etridge.

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