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Lenders Beware!!!
The recent case of Hewett v First Plus Financial Group [2010] EWCA Civ 312 has drawn more attention to the need for lenders to exercise caution when obtaining security from multiple parties to secure loans or facilities granted for the sole benefit of one of the parties or indeed someone who is not party to the security.
In brief, the facts of the case are as follows:
· the bank made a joint loan to Mr and Mrs Hewett in January 2004 which was secured against the couple’s family home and used to consolidate Mr Hewett’s personal credit card debts.
· the bank was fully aware of the purpose of the loan but did not advise Mrs Hewett of the need to obtain independent legal advice prior to the grant of the security.
· Mr Hewett was having an affair with another woman at the time of the loan application and he subsequently left Mrs Hewett in January 2005; they divorced shortly thereafter.
· Mrs Hewett successfully argued that the fact Mr Hewett concealed the affair was an abuse of her trust on his part which amounted to undue influence requiring the mortgage to be set aside and declared unenforceable against her.
The only consolation for the bank is that the court found it had an equitable charge on Mr Hewett’s share of the family home although it must apply for a court order to sell the property in order to realise the equity.
The moral of the story is that lenders have to ensure that the guidelines set out in Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705 are strictly adhered to in all cases involving loans to joint borrowers and third party securities. These guidelines are as follows:
· the mortgagor/guarantor must obtain independent legal advice. In all cases, we recommend written confirmation is obtained that the mortgagor/guarantor obtained independent legal advice prior to execution of the security.
· the mortgagor/guarantor must nominate his/her own solicitor. Where the solicitor providing the independent advice is also acting for the borrower, it is advisable for the lender to inform the mortgagor/guarantor in writing that he/she is free to use a solicitor not acting for the borrower.
· the mortgagor/guarantor and solicitor must be supplied with a copy of the loan agreement (which sets out full details of the amount and terms of any new or increased facility and the purpose of the facility), the security documents and the total amount of the borrower’s indebtedness to the lender which are to be covered by the security. The lender must obtain the consent of its customer to this circulation of confidential information and should not proceed with the transaction if such consent is not forthcoming.