Bank challenged on property-based loan

Roger Pearson reports on a bid for the Lords to reject a bank's claim to a charge placed on a property as security for a loan.

A major challenge over the rights of banks and other lending institutions to claw back money by activating legal charges placed on property as security on a loan is heading to the House of Lords.

The problem facing lending institutions arises when one of the parties involved claims that they were coerced into agreeing to the charge by the other party.

Over the years there has been a steady increase in the number of cases, usually involving married couples, in which this sort of challenge has been thrown up.

One of the most important aspects of such cases is the need to prove undue influence and it is the duty of banks to be sure that one of the parties to the deal has not been coerced.

The case of The Governor and Company of the Bank of Scotland v Bennett & anor is now heading for the Law Lords.

It involves a challenge by the Bank of Scotland to a ruling in February 1997 by Deputy Chancery Division Judge James Munby QC, later overturned by the Court of Appeal, that a legal charge of u150,000 on a house in Fulham should be removed.

The property was owned by the wife, but occupied by both her and her husband.

A charge was taken out over the property by the husband as a guarantee for business borrowing.

Initially, the wife insisted that the home should not be used for loan guarantee purposes, but ultimately she agreed to sign the guarantee agreement for her husband.

Last December, the Appeal Court quashed a High Court decision to remove the legal charge.

The bank argued that Deputy Judge Munby was wrong in finding that the wife had been coerced into the agreement by her husband.

It claimed Deputy Judge Munby failed to give sufficient weight to the fact that the wife had initially refused to sign the charge for a period of several weeks.

This, the bank claimed, was not the behaviour of someone vulnerable to coercion.

In reaching the Appeal Court decision, Lord Justice Chadwick said it was impossible to accept that the transaction at the heart of the dispute was one which no competent solicitor who knew the full facts could have advised the wife to enter.

There was a risk which had to be assessed, but a decision to accept that risk could not be stigmatised as irrational.

He said that in the circumstances the bank had been entitled, on the facts known to it, to take the view there was no real risk that Mrs Bennett's apparent consent to the transaction had been obtained by improper conduct on the part of her husband.

In those circumstances, the bank should not suffer the loss of its security, he said.