Mum Knows Best, or Did She? – an Update on Etridge

An update on Etridge

Mrs Brown was the legal owner of a welsh farm.  Though registered as the owner to the legal title, the farm was in fact occupied by her son.  Mrs Brown had not lived there since 1987.  She regarded the property as her sons.  So when her son requested her to enter into a mortgage of the property to secure facilities he had obtained from HSBC, she agreed.  Following default by the son, HSBC issued possession proceedings, placing reliance on a certificate of independent legal advice obtained, confirming, that Mrs Brown had received independent legal advice.  The certificate was provided by the solicitor who also acted for the son in connection with the borrowing.

The Law
The doctrine of undue influence allows a Court to intervene where a relationship of trust, confidence, reliance, dependence or vulnerability exists.  Specifically in relation to lending cases, it is common for a party to charge their asset for the benefit of a family member.  Etridge stands as the leading case and main guidance for banks who are said to have been put on enquiry as to risk of undue influence in every case where the relationship between the guarantor/mortgagor of the property and the debtor is a non-commercial one.

The Arguments
Mrs Brown argued that the mortgage was unenforceable by reason of fact that HSBC had failed to meet the minimum requirements set out in Etridge.  She maintained that she had received no direct contact from the Bank, nor the solicitor, before signing up to the charge.  She also maintained that she had received no legal advice notwithstanding the certificate produced.

HSBC argued that having received the certificate from a solicitor which confirmed that independent legal advice had been given they were entitled to rely on it.  Any failings in the advice given, they said, was a matter for Mrs Brown to take up with her solicitors, but having complied with Etridge, they said, the charge was enforceable; Mrs Brown’s claims lay elsewhere.

The Judgment
HSBC’s documentation and records were sadly lacking.  They may well have taken the steps required by Etridge but they were unable to show this.

The charge was determined as being unenforceable by reason of the Bank’s failing to meet or show that it had met Etridge guidelines.  HSBC was unable to obtain possession.  In a helpful judgment, further clarification on Etridge was given, which included the following recommendations which all banks and lenders would be well advised to follow.

1. The lender should engage with the mortgagor directly to obtain details of the solicitor of her choice,

2. The lender should notify the chargor directly that it will require written confirmation from a solicitor that the nature, content and effect of the documents and transaction have been fully explained to her,

3. The lender shall explain directly to the mortgagor that their reason for so doing is to preclude the mortgagor from disputing the legally binding effect of the charge.

4. The lender should record and document all of the above.

5. As regards the solicitor providing certificate, that solicitor should consider all conflicts of duty and confirm, inter alia, that they have explained the reason for the advice, the nature and seriousness of the documents, and alternatives which arise.  The meeting between solicitor and client should take place face to face.

Advice to Lenders

1. Consider internal documentation, and the recording of your contact with mortgagor in these circumstances.  Engagement should take place as early as possible in the process, certainly in advance of execution, and of course any such engagement should be independent of the borrower.

2. Ensure that certificates of advice are up to date, comprehensive, and fit for purpose.

 

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Jonathan Newman

Senior Partner

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