In Royal Bank of Scotland v Etridge (No.2)  (“Etridge”) the House of Lords considered the obligations and rights of lenders and sureties where the surety is to provide security for the borrowing of another person where that person might be in a position to exert undue influence over the surety.
The common situation is that of a wife mortgaging her interest in the matrimonial home to secure bank borrowing by her husband.
There the House of Lords was concerned to identify the minimum requirements necessary to protect the surety from granting a charge over property without fully understanding the nature and effect of the proposed transaction, and to ensure that the surety took the decision whether to provide security freely and of their own will.
Where a solicitor is advising someone mortgaging property or giving a guarantee to secure another’s debts, the requirements set by Etridge and their responsibilities are:
1. before acting, to consider whether there is any conflict of duty or interest and what is in the best interests of the surety;
2. to confirm the identity of the surety and explain to the surety the reason for the solicitor’s involvement, which is to counter any later allegation of undue influence or failure to understand the transaction and its implications;
3. to confirm that surety agrees to the solicitor so representing and advising the surety;
4. to explain and advise at a face-to-face meeting, without the borrower being present, and in appropriately non-technical language.
1. The bank instructs the solicitor but the solicitor should be chosen by the surety. Cost and the fact a solicitor/client relationship pre-exists are important factors so the same solicitor may act for the borrower, the surety and the bank. BUT, the legal and professional duties that the solicitor assumes when accepting instructions to advise the surety, are owed to the surety alone and the solicitor must be satisfied that he can give the surety the necessary advice fully, carefully and conscientiously. If the provision of that service may be inhibited, the solicitor must cease acting for the surety and so inform the bank; and,
2. the core minimum advice to be given and involvement of the solicitor is:
(a) to explain the nature of the documents and the practical consequences for the surety if (s)he signs them (mainly loss of the property made available as security and/or, where a guarantee is being provided, being bankrupted);
(b) to explain the seriousness of the risk involved entailing:
(i) an explanation of the purpose, amount and principal terms of the new facility,
(ii) an explanation that the bank may increase the facility or change its terms or grant a new facility without referring back to the surety,
(iii) an explanation of the surety’s liability under any guarantee,
(iv) discussion of the surety’s means, the value of any property being mortgaged, and whether (s)he or the borrower have other assets with which to make repayment if the transaction fails). So routinely, the bank must provide the solicitor with financial information about the borrower so that the financial risks to be assumed by the surety may be properly explained to the surety. The relevant information will vary but as a minimum should be the borrower’s current indebtedness, the limit of any current facility, and the limit and terms of any proposed facility;
(c) to explain that the surety has a choice and that the choice is the surety’s alone. This will be informed by the borrower’s and the surety’s present financial circumstances, including their present indebtedness and financial facilities available to them discussed at 2(b)(iv) above;
(d) to ascertain whether the surety wishes to negotiate with the bank (eg to re-prioritise the order in which the bank may call upon securities and/or to fix the upper limit of the surety’s exposure at a lower level) and, if so, whether (s)he wishes to do so directly with the bank or with the bank through the solicitor; and
(e) to verify whether the surety wishes to proceed and, if so, to get the surety’s authority to write to the bank to confirm the explanation the solicitor gave the surety.
Before advising the surety, the solicitor should get any information needed from the bank (if missing from the bank’s instructions).
If the above requirements, are complied with, the bank can accept, rely upon and, if need be, enforce the surety’s security and/or guarantee.
Where the solicitor has been properly retained, the bank can assume that the solicitor has done the job properly.
If the solicitor’s advice is poor that is a matter between the surety and the solicitor.
However, if the bank ought to have realised from facts known to it that the surety has not received the appropriate advice, Etridge says any bank, proceding with the security, would do so at its own risk.
A lender might lose the benefit of security obtained in good faith, if the lender ought to have known that the surety’s concurrence to it had been got by a third party’s misconduct (more often than not the borrower’s).
A bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts as (1) the transaction may well not be to the wife’s financial advantage and (2) such transactions carry a substantial risk of the husband has committing a legal or equitable wrong in getting the wife to stand surety, which may entitle the wife to set aside the transaction.
More generally, a bank is put on inquiry where (1) the transaction is not on its face to the surety’s financial advantage and (2) the relationship between the borrower and the surety causes a substantial risk that the borrower could and did exert undue influence in getting the surety to provide a guarantee or security.
The surety must therefore inform the bank of the chosen solicitor’s identity. There has to be a balance between independence on the one hand and practicality and avoidance of unnecessary financial outlay on the other.
In the High Court case of HSBC Bank Plc v Brown  the court looked behind the solicitor’s certificate and found that he had failed to take any of the steps and to give the core minimum advice specified in Etridge. So the bank’s claim for possession was dismissed and the mortgage was declared unenforceable.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.