The properties of modern living

Lending Strategy September 2010

Up until the last couple of years divorce and separation was the most common cause for a possession. The events of the credit crunch have changed this, but as soon as equilibrium returns then this will once again return to the top spot.

For this reason I believe that a review of what’s happening in the world of marriage, cohabitation and divorce is prudent and how a recent legal precedent should create some cause for concern.

Marriage has been in decline since 1862, albeit in recent years there has been some small growth with the number of weddings ; 270,000 in 2008.

As marriage has declined, cohabitation has increased. In 2006, one-in-six couples in the UK were cohabiting - roughly 2.3 million couples. It is estimated that around 25% of children are now born to cohabiting parents. But research in 1997 estimated that the likelihood of these children growing up with both parents as a couple was just 36%, compared with around 70% if their parents were married.

Divorce rates have been falling over recent years, but as a solicitor I’m not convinced this is necessarily a reflection of ’better marriages’, but a whole host of other social and financial issues, ranging from the pure cost of divorce to the fact that spur of the moment marriages are less common. In 2008, the divorce rate in England and Wales decreased by 2.5% to 11.5 divorcing people per 1,000 married people, compared with 11.8 in 2007.

There’s been an interesting case recently, where Mr Hewett, an errant husband, and his wife had taken out a joint mortgage. Mr Hewett (Hewett v First Plus Financial Group plc 2010 EWCA Civ 312), had arranged a joint re-mortgage of the matrimonial home in order that he could pay his debts. Mrs Hewett was persuaded to join him in the execution of the mortgage, although not surprisingly Mr Hewett didn’t mention his affair, which lead to the subsequent collapse of the marriage and divorce. In common with most separation cases, the partner who remains in the mortgaged property does not have the sole finances to afford the mortgage. Their ex-partner typically cannot or will not help as they are now renting elsewhere.

The lesson for lenders is to scrutinise application documents to understand the purpose of the loan, and not to assume that an application for a debt consolidation loan in joint names will benefit both parties

In this case a possession order was issued, but Mrs Hewett appealed, claiming undue influence or misrepresentation. The Court of Appeal found that the husband’s concealment of his affair from his wife amounted to the exercise of undue influence against her, sufficient to vitiate the remortgage transaction, as between them. The appeal was allowed and the mortgage was set aside.

The area of concern for lenders is that remortgaging is often for a partner-specific reason, be it debts, funding a new business or even the wedding of a child from a previous marriage. In this case the lender acknowledges that, having been aware that the remortgage was designed to secure payment of debts owed by Mr Hewett, rather than the Hewetts jointly, they were on notice of the risk of the exercise of undue influence by Mr Hewett against his wife.

So from a legal perspective, what action would we advise lenders to take to avoid similar cases in the future? This case reaffirms the principles laid down by Royal Bank of Scotland v. Etridge [2001] UKHL 44 that, where a lender is aware that the purpose of an advance is to secure payment of debts owed by one party rather than jointly, it is on notice of the risk of the exercise of undue influence. If it is subsequently found that there was undue influence sufficient to vitiate the agreement of the other party then the mortgage is unenforceable against the innocent party. The only way a lender can be immune from the risk is to ensure that the wife, in this case, is independently advised prior to signing. The lesson for lenders is how important it is to scrutinise application documents to understand the purpose of the loan, and not to assume that an application for a debt consolidation loan in joint names will automatically be for the benefit of both parties.

It won’t be in every case that the risk arises as we are talking about situations where one party is using their equity to secure the debts or liabilities of the other. Some lenders may, therefore, take the view that they don’t want to risk losing valuable remortgage business by encumbering the application process with the delay of independent legal advice. That may be a justifiable business decision, but should only be taken in the knowledge that the law will not protect lenders, who take shortcuts to avoid the onerous guidelines laid down in the Etridge case to ensure at-risk borrowers receive independent legal advice, and that the consequences from just a small number of cases can be significant.