Love, loans and legal drama: Supreme Court rules on undue influence in non-commercial hybrid loan transactions

On 4 June 2025, the Supreme Court delivered its judgment in Waller-Edwards v One Savings Bank plc [2025] UKSC 22 (on appeal from: [2024] EWCA Civ 302). The case examined and clarified the circumstances in which a lender is “put on inquiry” where a joint borrowing in a non-commercial loan transaction has been procured by undue influence exerted on one of the borrowers, and part of the loan is applied to discharge the other borrower’s debt.

When is a lender “put on inquiry”?

Prior to this judgment, the general rule of thumb was that for joint borrowing cases – where two borrowers obtain a loan for joint non-commercial purposes secured via a mortgage on jointly owned property – the lender is not typically put on inquiry in respect of undue influence. Conversely, in surety (or guarantor) cases – when one borrower guarantees or gives security for the other borrower – the lender is typically put on inquiry. 

When a lender is “put on inquiry” and in order to protect itself (and prevent the loan and any related security or guarantee being set aside), the lender must follow the protocol and principles set out in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 (the Etridge Principles).

This judgment provides a much clearer test for lenders to apply when determining whether they should be put on inquiry in non-commercial hybrid loan transactions (where the loan benefits both borrowers jointly but is also partly used for one borrower’s own purposes or debts).

Background facts

Ms Waller-Edwards began a relationship in 2011 with Mr Bishop, who persuaded her to exchange her mortgage-free home and savings for a property he was developing, which was already mortgaged in favour of another lender. In 2013, they jointly remortgaged the property for £384,000. Although the lender understood that the remortgaged funds would be used to repay the existing mortgage and purchase another property for investment purposes, the money was actually used to pay off Mr Bishop’s personal debts as well as the existing mortgage on the property.

The relationship ended, leaving Ms Waller-Edwards with a heavily mortgaged property and insufficient income to cover repayments. When the lender began possession proceedings in 2021, she argued that the Etridge Principles should have applied as Mr Bishop had exerted undue influence over her when entering into the remortgage, which was partly used to pay off his personal debts. The initial trial judge agreed, and the case progressed to the Court of Appeal in 2024.

Court of Appeal decision

The Court stated that, in determining whether a lender is put on inquiry as to undue influence where a secured loan agreement is made with joint borrowers and part of the loan may be drawn down for the benefit of only one of them, the transaction should be considered as a whole. The question is whether, as a matter of fact and degree, it was a borrowing for joint purposes.

The Court held that the lender was not put on inquiry (and therefore not obliged to follow the Etridge Principles) as the transaction was considered joint borrowing rather than a surety transaction (where Ms Waller-Edwards would have been acting as a kind of guarantor). Ms Waller-Edwards sought leave to appeal to the Supreme Court.

Supreme Court decision

The Supreme Court unanimously allowed the appeal. The main legal issue was: in a non-commercial hybrid loan transaction, what is the correct test for determining whether a lender is “put on inquiry” as to the risk of undue influence?

Ms Waller-Edwards argued that the proper test is the “bright line” test. In circumstances involving a non-commercial hybrid loan transaction, if it appears on the face of the transaction that one party to the relationship is offering or has offered to stand surety to any extent more than a de minimis amount for the other (and therefore apparently to their financial disadvantage), the lender is put on inquiry.

The Court held that the bright line test is the correct approach for lenders in non-commercial hybrid loan transactions and rejected the fact and degree assessment adopted by the Court of Appeal. The transaction must be viewed from the lender’s perspective. If viewed this way, such a transaction should be regarded as a surety transaction, and the lender is placed on inquiry as to the possibility of undue influence. The steps set out in the Etridge Principles must then be followed.

In this case, Ms Waller-Edwards took on a legal liability for the loan to discharge Mr Bishop’s debt of £39,500. She received nothing in return and the amount involved was not de minimis or trivial.

What does this mean for lenders?

Lenders’ obligations to undertake checks in respect of borrowers will significantly increase. They will need to conduct additional due diligence at the outset and ensure that their internal lending processes and procedures are updated to reflect this judgment. Lenders are now deemed to be put on inquiry in non-commercial hybrid loan transactions where a party stands surety for more than a de minimis amount. This will likely add time and cost to the processing of many joint borrowing applications. Lenders will need to consider whether to absorb these costs or pass them on to their borrowers. If a lender has not previously followed the Etridge protocol in joint borrowing cases where there is an element of the lending for the sole benefit of one borrower, then it would be prudent to review existing mortgage portfolios to identify loan transactions that may be at risk of being unenforceable against the vulnerable party.

Following the Etridge Principles in these additional circumstances is now non-negotiable. Failure to do so will render the loan and security unenforceable against the vulnerable party. If there is any doubt, lenders should err on the side of caution and follow the Etridge Principles. Some lenders may already have been doing so – now they know for certain that they must.

The judgment, unfortunately, does not provide guidance on the meaning of de minimis, which will need to be determined on a case-by-case basis. Prudent lenders should assume that even very small amounts may trigger the need to follow the Etridge Principles. As a result, lenders may choose to apply them in every non-commercial hybrid transaction (regardless of the amount) to avoid any risk.

Lenders intending to issue possession proceedings where there has been joint borrowing in a non-commercial loan transaction should, when complying with the Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property at the pre-action stage, include a detailed review of whether they were put on inquiry and, if so, that the Etridge Principles were followed and can be evidenced.

If there is an indication that the borrower may not have received proper advice or was unaware of the extent of their obligations, especially in cases involving personal relationships and mixed-purpose loans – the lender risks the court setting aside the mortgage or, at the very least, delaying possession proceedings. As a result, lenders may need to reassess their litigation risk and potentially explore alternative dispute resolution or settlement before incurring the costs of proceedings.

Comment

Any uncertainty as to whether the Etridge Principles should be followed in non-commercial hybrid loan transactions has now been removed by this judgment. Lenders must be hyper-vigilant in identifying such transactions, as personal relationships can have legal consequences in joint borrowing scenarios. Failing to act on warning signs may render a joint loan transaction unenforceable.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2025