All lenders and their professional advisors are aware of the seismic impact that the case of Royal Bank of Scotland plc v Etridge (“Etridge”) had on the commercial lending market and which resulted in the Law Society issuing both a guidance note and a model letter of advice for solicitors to follow to ensure that undue influence arguments raised by a borrower’s partner could be rebutted.

What Is a Hybrid Loan and Why Does It Matter?

However, whilst Etridge was clear cut in cases where the purpose of the loan was purely commercial so that the partner of the person seeking the loan for their business (“the Borrower’s Partner”) was acting solely as a surety, the position was less clear in situations where the Borrower’s Partner was also benefitting in some way from the loan – in other words where the loan had a dual purpose so that the Borrower’s Partner was no longer acting purely as a surety but was also a borrower in their own right (“Hybrid Loan”).

When Does Independent Legal Advice Become Necessary?

In brief, where the Borrower’s Partner was acting purely as a surety, they would require independent legal advice prior to entering into the loan documentation, whereas with a Hybrid Loan, there was a sliding scale such that the more the loan was for the benefit of the Borrowing Partner, the less likely that independent legal advice was required.

Supreme Court Ruling in OneSavings Bank Plc v Waller-Edwards

This sliding scale has been swept away by the Supreme Court’s decision in OneSavings Bank Plc v Waller-Edwards (“Waller-Edwards”). The Supreme Court found that the commercial loan element of the loan would have to be de minimis in order for the Borrowing Partner not to be regarded as a surety and so not require independent legal advice. To illustrate the point, in Waller-Edwards, the commercial loan element of the loan was 10%, but the Supreme Court regarded this as more than de minimis.

Key Takeaways for Lenders from the Waller-Edwards Decision

Whilst the impact of Waller-Edwards is not as all encompassing as Etridge, it will nonetheless have a significant impact on lenders going forward due to the following:

1. The Supreme Court relied upon established principles in setting the de minimis threshold so that the amount would need to be “trifling, insubstantial, inconsequential, immaterial, irrelevant or negligible” with the result that going forward, lenders should regard all Hybrid Loans as a loan where the Borrowing Partner will require independent legal advice.
2. As all Borrowing Partners will require independent legal advice, it will reduce the residual risk of undue influence that lenders had in respect of Hybrid Loans, as the Borrowing Partner will now be fully advised of the risks of acting as a surety.
3. All lenders who offer Hybrid Loans will need to review their lending protocols to ensure that they are updated to reflect the Supreme Court’s decision in Waller-Edwards.

Contact Us

If you would like advice on how the Waller-Edwards decision may affect your lending procedures, or require support with updating your protocols, our experienced Real Estate Finance team is here to help. Contact us for an initial informal discussion, in complete confidence and without charge. Call us on 0344 967 0793 or email realestatefinance@la-law.com

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