The Mortgage Business Plc v Green

In a domestic mortgage transaction, a lender is put on inquiry as to undue influence only where it is aware that one borrower is effectively standing as surety for another’s debt. It need not investigate every irregularity or adopt excessive scepticism. Information held by solicitors is imputed to the lender under section 199 of the Law of Property Act 1925 only where it came to them in their capacity as the lender’s solicitors. Where the lender was not put on inquiry, its rights are unaffected by any undue influence between the borrowers. A possession order should not ordinarily be suspended to permit a sale where the property has negative equity and the sale would not discharge the mortgage debt.

The claimant lender sought possession of a mortgaged property occupied by the second defendant, whose son was the first defendant and co-borrower. The second defendant alleged that the mortgage and a later advance had been procured by her son’s undue influence and sought to set them aside against her.

The court declined to make a final finding on whether undue influence had occurred because the evidence was unreliable. It instead determined whether the lender had actual, imputed or constructive notice of any undue influence, and whether possession should be suspended to allow a sale.

1. The court applied the principles in Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773. The relevant question was whether the lender was aware that the advance was for the purposes of one borrower, so that the other was effectively a surety. A joint advance to joint borrowers does not ordinarily put the lender on inquiry unless the lender is aware that the loan is for one borrower’s purposes rather than their joint purposes.

2. The information available to the lender did not establish that the second defendant was wholly or substantially a surety. The address information, joint ownership, joint indebtedness, debt-consolidation information, electoral-roll information and payment arrangements did not collectively put the lender on inquiry. The lender was not required to act as a detective or to pursue every slight indication that information might be inaccurate.

3. The solicitors’ knowledge did not create imputed notice under section 199 of the Law of Property Act 1925. Information about the son’s business borrowing, the second charge and the payment of the surplus advance came to the solicitors while acting for the borrowers, not while acting for the lender “as such”. The brokers and mortgage packagers were agents of the borrowers, not of the lender.

4. The same conclusion applied to the later advance. Although it was paid into the son’s account, the lender was not aware that the second defendant was acting wholly or substantially as surety for a debt incurred by her son alone. It was therefore unnecessary to consider whether the lender had complied with the protective steps described in Etridge (No 2).

5. The court rejected an affirmation argument advanced by the lender, but did not decide whether the son had a beneficial interest in the property. The possession claim was transferred to the appropriate county court. Applying section 36 of the Administration of Justice Act 1970, possession should not be suspended to allow a sale because the property was worth less than the mortgage debt and the sale would not discharge the debt.

First-instance decision. The proceedings were transferred from Swindon County Court to the High Court and were ordered to be transferred back to an appropriate county court for consideration of possession.