The recent case of Cooper v Bank of Scotland plc has once again highlighted the problems arising where a lender takes security over a matrimonial home to support the business debts of one of the spouses. In this case, Mrs Cooper argued that she signed the security as a result of misrepresentation by her husband. The Court agreed with this and ordered that the standard security granted by Mrs Cooper over her one half share in the Property was not enforceable.
Facts
In 1994, Mr and Mrs Cooper bought a plot of land on which they built the Property. In 2002, Mr and Mrs Cooper received a loan from the Bank of Scotland plc (the “Bank”). They signed a typical “all sums” standard security (the “2002 Security”) to secure their obligation to repay that loan. Around the same time, the Bank provided Mr Cooper’s company (the “Company”) with an overdraft.
In 2005, Mr Cooper granted two personal guarantees to the Bank to support the Company’s indebtedness. Because the 2002 Security was an “all sums” security, this meant that his guarantee obligations were secured against the Property.
In early 2006, Mr and Mrs Cooper re-mortgaged their 2002 loan with Halifax. The 2002 Security was mistakenly released by the Bank, despite the fact that it still secured Mr Cooper’s guarantee of the Company’s borrowings. In March 2007, the Bank realised its mistake and instructed its solicitors to ask Mr and Mrs Cooper to sign a fresh standard security (the “2007 Security”). The Bank’s solicitors sent out a fresh security for execution with a covering letter explaining that "this replaces the similar document signed by you in 2002". The 2007 Security was duly signed, returned and registered against the Property.
The Court’s Assessment of the Evidence
In this case, the Court accepted the evidence of Mr Cooper that he:- (1) mislead Mrs Cooper about why she was being asked to sign the 2007 Security; (2) intercepted correspondence from the Bank/their solicitor to Mrs Cooper so that she did not receive correspondence regarding her purported agreement to act as a guarantor of the Company and the covering letter from the Bank’ solicitors with the 2007 Security; and (3) persistently mislead his wife about the financing and indebtedness of the Company. The Court concluded that there was no evidence that either the Bank or their solicitors took sufficient steps to bring to the attention of Mrs Cooper the consequences for her of signing the 2007 Security or to advise her to take independent advice.
Legal Obligation
The Court has confirmed that lenders have a good faith requirement to provide advice to potential guarantors where they suspect that the relationship between the debtor and potential guarantor could undermine the validity of any guarantee provided. In these circumstances, a lender must take reasonable steps to either:- (1) warn the potential guarantor of the consequences of executing the standard security; or (2) advise them to take independent legal advice. The Court found that the ‘bland’ letter from the Bank’s solicitors that accompanied the 2007 Security conveyed an impression that the execution of the 2007 Security was something of a formality. That letter did not attempt to explain the significance for Mrs Cooper of granting the 2007 Security; nor was there any mention of her obtaining legal advice. Taken together with the misrepresentations made by Mr Cooper and certain other relevant factors, the Court found that the 2007 Security over Mrs Cooper’s one half share in the Property was not enforceable by the Bank.
Lessons Learned
There is precious little a lender can do to prevent determined parties from misrepresenting the position. However, lenders must ensure that they have complied with their own internal processes and procedures which are designed to protect security providers and the lender, and that they retain evidence of this on file for posterity. Such evidence will be the first line of defence for the lender and so its importance cannot be overstated.