http://www.ncl.ac.uk/~nlawwww/articles3/clement3.html
[1995] 3 Web JCLI  10,156 words
Lending on the Security of Co-Owned Homes, Suretyship and Undue Influence 
by
L.M. Clements
Lecturer in Law, University of Hull.
<L.M.Clements@law.hull.ac.uk>
Copyright  1995 L.M. Clements. 
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary
The purpose of this Article is to examine how the law relating to lending on the security of co-owned homes, suretyship and undue influence has recently been developed, what are the real underlying policy issues and whether a balance is being struck between the competing economic interests and protection of the vulnerable. 

Contents
Introduction 
The Various Policy Issues 
The Background to the House of Lords Decision in O'Brien 
Undue influence 
Agency 
Constructive Notice 
Women who have merely an equitable interest in the home .
Conclusion 
Bibliography 

Introduction
Co-ownership of matrimonial and cohabitation homes is increasingly becoming common place, partly as a result of women entering employment due to better employment prospects; women are therefore increasingly able to play a part in the 'property-owning democracy'. It is also becoming increasingly common for the matrimonial or cohabitation home to be used as security for business debts of one of the parties, usually the husband or male partner.(1) A common occurrence is where spouses jointly own the matrimonial home, both at law and in equity, and the wife's signature is required before any money can be lent to the husband on the security of that home. A variation is where the husband is the sole legal owner, the wife having an equitable interest in the matrimonial home; she may be required to sign a Consent Form, postponing her rights in the home to those of the proposed lender. Less common is where the wife is asked to act as surety for the husband's debts or is a joint principal debtor with her husband. Wives, however, are not the only individuals to get caught up in the debts of others. Female cohabitees are equally at risk in this respect, as indeed are some women living in a lesbian relationship or some males living in a homosexual relationship. Other relationships, such as the elderly parent(s) and their adult child, as in Avon Finance Co. Ltd v Bridger [1985] 2 All ER 281, CA,(2) fall into a similar category, but in practice it is women in a matrimonial or quasi-matrimonial relationship who are most affected. For this reason, it is principally in that context that the guiding legal principles have been developed. A common thread to the above situations involving women is that the wife or cohabitee often places trust in the other partner in relation to business or general financial matters. In times of women's equality, this may be less so of women than in the past. Nevertheless, there are still women who are not as emancipated or as astute in business matters as others of their sex .

A central issue which arises in this context is whether the protection afforded for the benefit of women living in a cohabitation relationship should be any different from that afforded to any other person in financial or security transactions, and if so, in what respects? To what extent should the law protect women caught up in security transactions from the consequences of their own folly or the undue influence or misrepresentation of others? The law's approach has been to treat the problem as depending on questions of misrepresentation and undue influence, and actual or constructive notice of these on the part of the financial institution concerned. What, however, are the real underlying policy issues surrounding this area? Are women in particular deserving of special treatment by law as compared to business partners who are asked to sign a document relating to business debts and who may be under equal moral and financial pressure to sign?

The Various Policy Issues
When women, at the behest of a partner, sign documents which could affect security of occupation of the home, there are important issues of social and economic policy at stake and these cannot be ignored. There are good policy reasons for treating women living in a matrimonial or quasi-matrimonial relationship as a class deserving of the law's special treatment. These are based on what happens in practice in many marital or quasi-marital relationships. Many wives or female cohabitees are placed under pressure from male partners when financial matters are involved so that it is easy for the male to take advantage of a woman's fear that her opposition will destroy the wider emotional and sexual relationship between them. Furthermore, the wife's trust and confidence in the man in matters of business and finance, existing independently of the emotional bonds between couples, leads to a strong possibility of undue influence by the man.

It could be argued that the above factors lead to a protectionist approach ('protection theory') in which women living in a relationship where loyalty, trust and confidence in the other partner is to be expected, should receive special treatment by the law. Vulnerability of the female in the above situations leads to a social policy argument in favour of special protection. The reasons against this special treatment for married or cohabiting women include the anti-paternalistic arguments which regard women, married or single, as equal to men in these circumstances and which would not single them out for 'special treatment'. There are also situations where men are asked to sign documents relating to the security of the home which is owned at law by the female partner. Should men in these circumstances be treated differently merely because they are male? It could be argued that since both the law and society have moved away from the historical approach of regarding married women as subservient to the husband, the equality of the sexes approach should lead to women being treated in this respect as no different from anyone else. However, the ideal and reality rarely correspond; and as Scott LJ pointed out in the Court of Appeal in Barclays Bank v O'Brien [1993] QB 109, CA, the tendency for married women to leave business decisions to the husband still persists. This situation and the resultant likelihood of influence by the husband and reliance by the wife was the original justification for the approach of equity towards a married woman who gave her property to secure her husband's debts. According to Scott LJ, that justification is still valid. Feminists might argue that women ought not to be in situations of vulnerability, but that one has to recognise that there are situations in which women are vulnerable and deal with those accordingly. Women who are asked to sign security documents in relation to the home are vulnerable and are therefore deserving of special treatment to protect them from the consequences of signing.

There is also the economic policy argument to consider. Real property is a source of finance that can be used for business purposes. It is therefore important that the matrimonial or quasi-matrimonial home should continue to supply one of the items of security for the financing of business ventures. If married or cohabitation women are given special protection, this may be a retrograde step for the general economy, because financial institutions may be unwilling to take the extra risks involved in lending to businesses against the security of the matrimonial or quasi-matrimonial home. This consideration would suggest treating married and cohabitation women no differently than any other class of person in the same situation. 

There are therefore two aspects of legal policy in this area which are pulling in opposite directions. The Law Commission (Law Com No 115, 1982, at para 2) pointed to a similar conflict between protection of married women in particular in relation to the family home and the creation of difficulties for mortgagees as a result of the decision in Williams and Glyn's Bank v Boland [1981] AC 487, HL (see also paras 67-69.). Similarly, in the context of trusts for sale, overreaching and the decision in City of London Building Society v Flegg [1988] AC 54, HL, the Law Commission has pointed out the apparently conflicting policy interests of protecting residential occupiers and recognising "the importance of avoiding unnecessary complications in conveyancing" (see Law Com No. 188, paras 3.4-3.7). The Law Commission was nevertheless able, in both of those contexts, to suggest reforms aimed at protecting those with equitable interests, particularly in the matrimonial home, whilst at the same time ensuring certainty, security of titles and the ready marketability of land. 

The task for the law would appear to be seek to achieve a balance between the competing interests of protecting the vulnerable and the need to use the matrimonial or cohabitation home for security in relation to loans for businesses. As pointed out by Lord Browne-Wilkinson in O'Brien one has to keep a sense of proportion in this area and not allow sympathy for a wife or other cohabitee to jeopardise the public interest of using money tied up in the home as security for loans. Where to draw the line, however, in an attempt to achieve the balance is not an easy task and subject to argument.

There are various ways in which this whole area may be approached. One extreme is to treat women as equal to men by regarding the giving of security or signing away of rights in the matrimonial or quasi-matrimonial context as no different from the sharing of responsibility for debts in a commercial partnership, since the 'partnership' of marriage or cohabitation is arguably not essentially different from this. The opportunities for misrepresentation and undue influence and pressures on commercial partners to succumb may be equally great as in the matrimonial or quasi-matrimonial context. Another extreme is to give women legal protection to the extent that all lending institutions would be required to advise women, at a meeting not attended by the other partner, of the implications of what they were signing and suggest or even require the obtaining of independent legal advice.

This article will examine how the law has recently developed in this area and whether a balance between the competing claims referred to earlier is being struck. This will involve an examination of the law relating to misrepresentation and undue influence in the light of the most recent case law. Although it is recognised that there are other relationships in which the same principles should apply, such as elderly parent(s) and adult offspring, the emphasis given here is on the position of women. It is suggested that striking the balance between the economic and the protectionist arguments involves the law taking a fairly neutral approach, positioning itself roughly half way between the two extremes mentioned earlier. It is only on that basis that the principles established by the House of Lords in Barclay's Bank v O'Brien [ 1994] 1 AC 180(3) which equally apply to other relationships than marriage or cohabitation, can be supported. O'Brien, however, has led to uncertainty for financial institutions as a result of subsequent cases. It is also arguable as to exactly what O'Brien did decide, since there has been debate amongst academics concerned with the implications for registered land.(4) It is therefore suggested that O'Brien now requires careful reconsideration and that married and cohabitation women placed in a position of vulnerability when signing security or similar such documents ought to receive protection which is not dependent upon the technical legal issues of undue influence and constructive notice. 

The Background to the House of Lords Decision in O'Brien
The Court of Appeal in Barclay's Bank v O'Brien [1993] QB 109 had thrown the law relating to misrepresentation and undue influence into some uncertainty, especially when applied to wives (see Dixon 1993). A notion of 'informed consent' was developed in transactions where the creditor knew that a surety was likely to be influenced by the debtor. (Such knowledge would arise where the lender knew of the close relationship between the surety and the debtor.) The lack of such 'informed consent' would render the surety transaction unenforceable by the creditor. A distinction was being drawn between cases where, to the creditor's knowledge, the surety stood in some close relationship to the debtor, such as wife or parent, and other situations where no such relationship existed. The implications of this case for potential creditors who lend on the security of matrimonial homes were enormous. 
The case of O'Brien involved a married couple. In order to finance a business interest in a company which banked with the plaintiff Bank, Mr O'Brien sought an overdraft for the company. Mr O'Brien was to guarantee the company's indebtedness to the Bank by executing a second legal charge over the jointly owned matrimonial home. The bank manager gave instructions for the necessary documents to be prepared and included a covering letter in which guidance was given as to how the transaction was to be completed; these were sent to Barclay's Burnham sub-branch for signature by the couple. Mrs O'Brien, who was not a customer of the Bank, signed the legal charge, but she was not given any explanation about the document; the bank clerk did not follow the instructions in the covering letter. Although the document she signed suggested the taking of independent legal advice, Mrs O'Brien did not do so because she had not read the document before signing.

The Court of Appeal ruled that the Bank had not made Mr O'Brien its agent, that there was no undue influence and that even if there had been, the Bank had no knowledge of the circumstances in which Mrs O'Brien had been persuaded to sign. Mrs O'Brien, however, also pleaded misrepresentation by her husband and it was this which caused more difficulty. There were two lines of authority, only one of which appeared to require that the husband should be acting as 'agent' of the Bank in explaining the legal charge to the wife, which was not the case on the facts of O'Brien itself. The agency approach is discussed briefly later. The other line of approach was the 'special equity theory', and it was this approach which led to special protection for a married woman who acted as surety for her husband's debts. In this category, the creditor could not enforce the surety obligation if it knew of the relationship of the surety to the borrower and where the creditor had failed to take reasonable steps to ensure that the surety gave informed consent to the transaction. In addition, any misrepresentation to, or undue influence exercised against the protected class of surety by the debtor would render the surety transaction equally unenforceable (except to the extent which the surety expected to be liable as a result of any misrepresentation, which in O'Brien was £60,000) by the creditor unless the latter had previously explained the true nature and effect of the transaction to the surety. A choice between these two contradictory lines of authority could only be made on policy grounds; the Court of Appeal chose the 'special equity' approach. The House of Lords was then called upon to review the law in this area. In contrast to the Court of Appeal decision, which had held the charge enforceable only to the extent that Mrs O'Brien had expected, the House of Lords ruled that the legal charge on the matrimonial home could not be enforced at all. Their Lordships' reasoning equally differed from that of the Court of Appeal.

At this stage, some discussion of the law relating to undue influence, agency and notice may be worthwhile. The approach of the law has been somewhat technical rather than social policy orientated, seeing the question of protection of women as depending largely on issues of undue influence, agency and notice. If, however, women are deserving of protection on grounds of social policy, then special treatment may be justified which does not necessarily depend upon such technical legal issues at all. 

Undue influence
The law's approach has been to say that in the absence of misrepresentation from the male partner, a women must show that she acted under undue influence when signing a document affecting the home. The requirements of undue influence were set out in Bank of Credit and Commerce International v Aboody [1990] 1 QB 923, CA, where it was held that there are two aspects to undue influence:

(i) undue influence, either in fact or 'presumed'; and
(ii) manifest disadvantage of the transaction to the surety.

Undue influence can be divided into two classes:

(1) 'Actual undue influence', i.e. those cases in which a plea of undue influence cannot be presumed and will only be upheld if positively proved; and
(2) 'Presumed undue influence' i.e. those cases where undue influence can be refutably presumed because of the relationship of trust and confidence between the parties. Rebuttal requires proof that the other party entered into the transaction freely e.g. where independent legal advice was in fact obtained.

There are certain relationships which give rise to such a presumption as a matter of law (e.g. solicitor and client). These are referred to as cases of 2A undue influence; but the relationship of husband and wife is not in this category: National Westminster Bank plc v Morgan [1985] AC 686, HL. However, if the wife proves that there was a relationship under which she generally reposed trust and confidence in the husband, this raises a presumption of undue influence referred to as category 2B.

In Aboody, it was ruled that the requirement of manifest disadvantage applied to both actual and presumed undue influence, but in CICB Mortgages v Pitt [1994] 1 AC 200, HL, the House of Lords stated that manifest disadvantage is only required in cases of presumed undue influence. 

The House of Lords in O'Brien considered that married women in particular were treated more favourably by the courts than others and that this was properly attributable to two factors. First, because many cases of husband and wife would fall into Class 2B undue influence and secondly, as the special ties between husband and wife provide a ready context for undue influence, there was a greater risk of it. According to the House of Lords in O'Brien, enforcement of the equity in favour of the wife (whether due to undue influence or misrepresentation) by the creditor depends on whether the husband was acting as the creditor's agent in the true sense in procuring the surety transaction. If he, in rare cases, was, then the creditor cannot enforce the surety transaction against the wife; otherwise the issue would depend on whether the creditor had actual or constructive notice of the equity in the wife's favour. The same principles would apply, it was said, to other relationships, including cohabitation relationships, whether homosexual or heterosexual, if the creditor is aware that the surety is cohabiting with the principal debtor.

Agency
The agency device is a method by which the actions of the debtor can be legally attributed to the creditor. Any undue influence exercised by or misrepresentation made to a wife or cohabitee by a male debtor would therefore have the same legal effect on a creditor as it would on the debtor himself i.e. make the transaction unenforceable by the creditor. If a financial institution therefore asks a husband to get his wife to sign documents relating to a loan, there is the danger that the husband could be acting as the creditor's agent.

In the Court of Appeal in O'Brien, it was stated that there were two lines of authority, only one of which required that the husband debtor should be acting as the creditor's agent when explaining the legal charge to a wife. Turnbull & Co v Duval [1902] AC 429, PC, formed the foundation of the modern law and the 'agency' approach in the more recent cases prior to O'Brien itself (see e.g. Kingsnorth Trust v Bell [1986] 1 All ER 423, CA). The word 'agency', however, had not been used in Turnbull to describe the relationship between the company's agent in that case and Mr Duval. Neither was there any suggestion that Mr Duval had misrepresented the document to his wife or had used any form of excessive pressure or intimidation to get her to sign. In these circumstances, Lord Justice Scott concluded in O'Brien in the Court of Appeal that the equitable principle(s) claimed to have been identified by the Privy Council in the Turnbull case seemed to be 'somewhat elusive'. Having reviewed the relevant authorities, he stated:

"These authorities seem to leave the developing law, if not at the cross-roads, at least at the junction of two diverging roads." ([1993] QB 109 at p 137.)

One road, he considered, recognised that:

"...equity has in the past treated married women differently and more tenderly than other third parties who provide security for the debts of others....Turnbull & Co v Duval [1902] AC 429, PC; Chaplin & Co Ltd v Brammall [1908] 1 KB 233, CA; Avon Finance Co Ltd v Bridger [1985] 2 All ER 281, CA; Kingsnorth Trust Ltd v Bell [1986] 1 WLR 119, CA and Barclays Bank plc v Kennedy [1989] 1 FLR 356, CA, all, in my opinion, provide support for this road....The choice between the two roads cannot, in my opinion, be made simply by reference to binding authority....The choice should, I think, be a matter of policy." (at p 138-139.) 

The case was subjected to criticism, some academics questioning whether the principles which Scott LJ claimed to have derived from the case-law could in fact be so extracted. Thompson, for example, casts doubt upon whether Scott LJ had correctly analysed the authorities relied upon "for the existence of the wider principle articulated in O'Brien" (see Thompson 1994a, at p 448).

In the House of Lords in O'Brien, Lord Browne-Wilkinson agreed with Scott LJ to the extent that until 1985, there was no decision which indicated that the agency rather than the special equity theory was the basis of the decision in Turnbull v Duval, but that was more attributable to the application of that case than to any analysis of its jurisprudential basis. The only case which clearly appeared to analyse Turnbull in this manner and support the special equity theory was Yerkey v Jones (1939) 63 CLR 649, Aust HC. Cases post 1985 had all been based, in his view, on the agency approach. He added that the present law had been built on the unsure foundations of Turnbull & Co v Duval and that it was the proper application of the doctrine of notice which provided the key to a principled basis of the law. Since O'Brien, what is now required is a true (not a fictitious) agency, which will be hard to establish and therefore relatively rare in practice.

Constructive Notice
It is clear, as Thompson points out (see Thompson 1994a), that the position of second mortgagees is very different from that of first mortgagees. In the case of the latter, decisions in cases such as Bristol & West Building Society v Henning [1985] 1 WLR 778, CA; Paddington Building Society v Mendlesohn (1985) 50 P&Cr 244, CA, Abbey National Building Society v Cann [1991] 1 AC 56, HL, and Equity & Law Home Loans Ltd v Prestidge [1992] 1 WLR 137, CA, have made it clear that the interest of a beneficial owner will not take priority to that of the mortgagee who has provided an acquisition mortgage (or its replacement - See Equity & Home Loans Ltd v Prestidge), irrespective of whether the beneficial interest holder has been consulted. Subsequent mortgages, however, give rise to particular problems for banks and other lending institutions, since the consent or co-operation of a legal or beneficial co-owner may be required; vitiating factors, such as misrepresentation or undue influence, then become possible pitfalls. It is into the second category that O'Brien falls and where issues of constructive notice become relevant.

Constructive notice as a principle applied to equitable interests in land transactions prior to 1925 and still has some relevance even in that context today; but it is of wider application than that. Constructive notice relates to matters of which a person would have become aware if he had made the inquiries which any reasonable man would make. The technical legal approach of using constructive notice conceals the important and often conflicting issues of social and economic policy outlined earlier. If women are deserving of protection and special treatment on grounds of social policy, this objective could equally be achieved by means other than constructive notice. Such means are referred to later in the conclusion. The effect of the decision of the House of Lords in O'Brien, whilst recognising the difficult issues of policy at stake, is arguably to tip the balance only slightly in favour of the cohabitee(5) by the use of the familiar concept of constructive notice. There are, however, also important policy factors involving economic considerations which are pulling in the opposite direction.(6) Is the O'Brien approach justifiable when use of the matrimonial or quasi-matrimonial home as security is an important part of our modern economy? Should more weight be given to the rights of the mortgagee? According to Lord Browne-Wilkinson, the law will now:

"...hold the balance fairly between on the one hand the vulnerability of the wife who relies implicitly on her husband, and on the other hand, the practical problems of financial institutions asked to accept a secured or unsecured surety obligation from the wife for her husband's debts." ([1994] 1 AC 180 at p 197.)

It is suggested here, however, that special protection of women when signing documents relating to the home is justified on grounds of social policy and that such protection ought to extend beyond that offered to others in similar situations. The use of constructive notice, it is contended, gives insufficient weight to the social policy argument.

This leads to a discussion of what would amount to constructive notice in this context. According to O'Brien, the creditor will be fixed with constructive notice if the transaction is not on its face to the financial advantage or is, on its face, to the financial disadvantage, of the wife or cohabitee and there is a substantial risk that the husband or partner has committed a legal or equitable wrong against the wife or cohabitee which entitles her to set aside the transaction. The creditor can avoid this knowledge where he has taken reasonable steps to satisfy himself that the surety entered into the obligation freely and knowing the true facts. The creditor will have taken such steps if he warns the surety, at a meeting not attended by the principal debtor, what are the risks involved and the amount of potential liability of the surety and advises on the taking of independent legal advice. As Thompson points out, (Thompson 1994b, at p 145.) mortgagees may prefer to pass the task of advising the wife on to a solicitor and be prepared to accept a statement from the latter that he has fully advised the wife of the implications of the transaction. 

The taking of such independent legal advice generally relieves the creditor of responsibility; the failure to do so on being so advised is also a matter of no consequence to the creditor. This merely deals with the ordinary case where all that the creditor knows is that the wife or cohabitee is to stand surety. In O'Brien, it was said that in exceptional cases, where the creditor knows of additional facts which render the presence of undue influence probable, it will be necessary for the creditor to insist that the wife or cohabitee be separately advised before the creditor is prepared to give the loan or overdraft facility.

In CIBC Mortgages v Pitt [1994] 1 AC 200, HL, the House of Lords considered whether a mortgagee, who had lent on the security of a jointly owned matrimonial home, had constructive notice of actual undue influence exercised by a husband against a wife who had signed two legal charges but who had read neither and who was ignorant of the amount of the loan. As far as the lender was concerned, the loan was a joint one to the spouses to discharge an existing mortgage and to purchase a second holiday home; this appeared to be an ordinary joint loan for the benefit of both spouses and there was nothing to put the lender on inquiry. The distinction was drawn between a surety case (as in O'Brien, which was also a joint owner case) and the case of a joint loan to spouses. In the former situation, there was not only the possibility of undue influence having been exercised but also the increased risk of it having in fact been exercised:

"...because, at least on its face, the guarantee by a wife of her husband's debts is not for her financial benefit. It is the combination of these two factors that puts the creditor on inquiry." (per Lord Browne-Wilkinson, [1994] 1 AC 200, at p 211.)

Clearly, their lordships were keen to ensure that lending on the security of the matrimonial home does not, in all situations, become so disadvantageous to lending institutions that those institutions would be deterred from lending. This marks an important policy decision, whereby lending by financial institutions is considered of such importance from an economic perspective that preference must be given to the economic argument as against the protectionist argument:

"If third parties were to be fixed with constructive notice of undue influence in every transaction between husband and wife, such transactions would become almost impossible. On every purchase of a matrimonial home in the joint names, the building society or bank financing the transaction would have to insist on meeting the wife separately from her husband, advise her on the nature of the transaction and recommend her to take legal advice separate from that of her husband. If that were done, the financial institution would have to run the risk of a subsequent attempt by the wife to avoid her liabilities under the mortgage on the grounds of undue influence or misrepresentation. To establish the law in that sense would not benefit the average married couple and would discourage financial institutions from making advances." (CIBC Mortgages v Pitt [1994]1 AC 200 at p 211, per Lord Browne-Wilkinson.)

One unfortunate aspect of O'Brien and Pitt is that neither discuss the problem of the implications for registered land involving second mortgages. Constructive notice in its proper sense can only apply in the unregistered land context (see Land Registration Act, 1925 s 59(6) and Lord Wilberforce in Williams and Glyn's Bank v Boland [ 1981] AC 487, at 503). There has been a debate as to whether the mortgage is void because the mortgagee is bound by a pre-existing equity, in which case problems can arise in relation to overriding interests in registered land, or whether an independent equity arises against the mortgagee because, by reason of 'notice', the mortgagee becomes a party to the fraud or undue influence of the husband. It has been pointed out by Thompson (Thompson 1994b, p 144.) that if O'Brien were to apply in the registered land context (it not being made clear in that case whether title was in fact registered or unregistered) the wife's right to have the transaction set aside as against the husband will in theory become an overriding interest, binding on the mortgagee, once coupled with her actual occupation at the relevant dates (for which dates, see Abbey National Building Society v Cann [1991] 1 AC 56, HL). O'Hagan suggests that the equity in favour of the wife to set aside the transaction will equally be a minor interest protectable as such (see O'Hagan 1994), but this means of protection will rarely be used in practice before the chargee has registered the charge. The possibility of an overriding interest in registered land remains, however. The real problem relates to the nature of the interest arising in favour of the wife. If the 'equity' is a mere equity, then it cannot qualify as a 'property' right which could attract overriding interest status (see National Provincial Bank v Ainsworth [1965] AC 1175, HL and Williams and Glyn's Bank v Boland [1981] AC 487, HL). O'Hagan points out that although the wife's right is "in the protean world of equitable interests, a 'mere' equity", it is nevertheless as a right ancillary to an interest in land more than a personal right against the husband: "it is a right in rem" (O'Hagan 1994, p 766.) He adds that, because the wife's equitable claim arises before the mortgage is created:

"a possible explanation of the victory of Mrs O'Brien's prior equity, consistent with the Land Registration Act, 1925, is that Mrs O'Brien was in actual occupation of the premises at the time the charge was given by her and her right to have the transaction set aside thereby constituted an 'overriding interest'. The difficulty with such an explanation...is that Lord Browne-Wilkinson at no time alludes to registration of title and bases the creditor's inability to enforce its charge squarely on the 'doctrine of notice'. Until the matter is clarified we must assume that the ordinary law of registration of title, for a reason yet to be explained, does not apply in such cases." (O'Hagan 1994, at pp 766-767). 

The complexity of the debate relating to registered land has also been discussed by Dixon and Harpum (1994, at p 423.), where they point out that "...'Notice' as used in O'Brien is not the same 'doctrine of notice' so beloved by property lawyers...." They argue that the issue is really as to the validity of the security transaction against the wife, as a matter of equities inter partes, not whether the bank, as a form of purchaser of the land, is bound by some prior third party equitable right i.e. a claim against the husband arising from undue influence or misrepresentation. The wife, they argue:

"is in some way a party to the transaction. To put it another way, C (the chargee) is not bound by W's (the wife's) rights because W's rights are proprietary and take effect either through notice (unregistered land) or as an overriding interest (registered land). C is bound by W's personal equity against her partner because C is tainted by H's (the husband's) actions through 'notice'." (at p 423.) 

The question therefore is whether the transaction is vitiated because the creditor is a party to the husband's conduct through notice of certain facts. On this analysis of the position, it becomes irrelevant whether title to the land in question is registered or unregistered. The nature of this debate supports the view expressed here that O'Brien now requires careful reconsideration.

Pitt raises the question of the degree of financial benefit that a wife or cohabitee should receive from the transaction if the creditor is to avoid being put on inquiry and hence avoid constructive notice of undue influence. Clearly, the amount to the wife or cohabitee has to be more than nominal; but how much beyond that is unclear. Pitt raises the further issue of what will amount to constructive notice in cases where the transaction is sufficiently to the wife's or cohabitee's financial benefit. Will it be necessary, in an area of some uncertainty, for creditors to avoid all risks by taking a 'belt and braces' approach? Should creditors, to be on the safe side, not only call in the wife or cohabitee to inform her of the risk she will run and point out that legal advice should be obtained but actually insist that she obtain that advice before signing any documents relating to the proposed loan? O'Brien suggests that this will only be necessary in the exceptional case where the creditor knows of facts making the presence of undue influence probable; but what these 'facts' are is not addressed. This causes uncertainty from the lender's perspective.

Assistance in answering some of these questions has been provided by Goode Durrant Administration v Biddulph (1994) 26 HLR 625, Ch D, and Midland Bank v Serter, The Independent, 3 March 1995, CA (upholding the decision of the High Court, (1994) 26 HLR 612, Ch D). In the former case, the wife was a joint borrower with her husband of over £300,000 used to finance a new property company in which the wife had only a 2.5% share holding. On the facts, there was a presumption of undue influence; and as the wife held merely a small share holding in the company, the transaction was to her manifest disadvantage. On the issue of constructive notice, Rich J, considered that the categorisation of a transaction (i.e. whether as a joint loan to spouses or a loan to the husband to which the wife stands as surety) is not a final determinant of the 'put on inquiry' issue. One had to look at the matter from the lender's perspective and ask whether in the circumstances the absence of apparent financial benefit to the wife ought to put the lender on inquiry whether the increased risk of undue influence had materialised. On that basis, knowledge of the size of the wife's share holding showed that the potential benefit to the wife was so small compared to her potential liability that it was a sufficient indication to put the bank on inquiry.

This case indicates a preference for a protectionist approach as against the economic argument of favouring lending institutions and upholding the policy of encouraging the use of real property as security for business loans. Clearly, a creditor has to weigh up the financial pros and cons from the wife's or cohabitee's point of view, but where the line is to be drawn between 'put on inquiry' and 'not put on inquiry' in an individual case is not clear. If, in Biddulph, the wife stood to gain from having, say, a 20% share holding, would that have been enough to avoid the 'put on inquiry' issue? Is the issue of financial disadvantage here the same as the requirement of 'manifest disadvantage' for presumed undue influence? In Midland Bank v Serter it was assumed by the Chancery Division of the High Court that these two issues are distinct. In Serter, a charge was placed on the matrimonial home in support of two bank guarantees. The spouses' own solicitor had explained to the wife over the telephone the nature of the legal charge before she signed it. The situation was a combination of a surety and a loan in that in part the legal charge was to the wife's advantage as well as the husband's. The wife attempted to defend proceedings by the bank to enforce its security by arguing that the bank had failed in its duty to take reasonable steps to explain the charge to her. In order to establish presumed undue influence, the wife had to show that she generally reposed trust and confidence in her husband by leaving financial matters to him. On the assumption that the wife could establish this, the Chancery Division of the High Court should have considered whether the legal charge was to the wife's manifest disadvantage; but the court merely assumed that this could be satisfied in the wife's favour without discussion of the point.

Where a lender is put on inquiry by the presence of the two factors mentioned in Pitt, the avoidance of constructive notice by the lender requires the taking of the reasonable steps referred to earlier. In Serter, it was said that it is enough for this purpose if the lender has, in its forms which the wife (and, presumably, the cohabitee) is asked to sign, advised on the taking of independent legal advice and has received a written assurance from the wife's solicitor that he has explained to her the implications of what she is being asked to sign. This is so even though the spouses share the same solicitor. In the Court of Appeal, upholding the High Court decision, it was said that in order for the Bank not to be able to rely on the solicitor's advice and on his certificate, it would have to be shown that the solicitor, when advising the spouse, acted as the true agent of the Bank. Only in this way could the knowledge of the solicitor concerning the circumstances in which the spouse signed the document, be imputed to the Bank.

In Banco-Exterior Internacional v Mann [1995] 1 All ER 936, CA, the Court of Appeal considered that a bank had done enough to avoid constructive notice by requiring the debtor company's solicitor to certify that an explanation as to the nature and effect of the charge had been given to the wife, even though the solicitor was not a truly independent person. The bank was entitled to rely on the fact that the solicitor undertook to give the explanation to the wife; and this fact showed that he considered himself to be sufficiently independent for that purpose.(7) Morritt LJ considered that the position between Mrs Mann and the solicitor was irrelevant, the true question being not how Mrs Mann regarded the transaction, "but how it appeared to the bank and whether the bank should have taken further or other steps" (at p 944). A similar conclusion was reached in Massey v Midland Bank plc [1995] 1 All ER 929, CA, in which the bank did require Miss Massey to be independently advised but was unaware that the solicitor was also acting for the male borrower. This approach of using constructive notice, however, ignores the fact that the solicitor may have a conflict of interest in such circumstances. Should this be a matter alone between the woman and solicitor concerned? 

Hobhouse LJ, in a dissenting judgment in Banco-Exterior Interncional v Mann, pointed to the fact that the bank had never communicated with Mrs Mann, so had not given her any advice. "They did not take any step to see that she was advised by anyone to take independent advice" (at p 948). This, he considered, was fatal to the bank's case because it left open the possibility, which had materialised, that the wife might never receive any independent advice. 'Independent advice' ought to mean independent of all parties involved; it should not be left to the solicitor concerned to decide whether he had a conflict of interest. The latter two cases clearly represent a policy preference for mortgagees as against a protectionist approach for women living in a matrimonial or cohabitation relationship. The woman may, however, have an action against the solicitor if he failed to advise her that she had a choice whether to sign or not.

In Serter it appeared that the combination of the assurance from the solicitor and the statement on the form advising on consulting a solicitor was sufficient to avoid the bank being fixed with constructive notice of the presumed undue influence. The clear implication is that the indication on the form alone would not have been sufficient to discharge the bank's duty. In the Banco case, Hobhouse LJ, dissenting, seems to suggest that the lender must advise, face to face, the woman to take independent advice, which would rule out merely sending to her a form with a statement advising on the taking of independent legal advice.

Another issue which arises is whether the 'manifest disadvantage' requirement for presumed undue influence and the 'on the face' requirement for constructive notice, which were assumed by the Chancery Division of the High Court in Serter to be different, are essentially different requirements in fact. If they are the same, then the 'on the face' requirement introduces via the back door the 'manifest disadvantage' requirement for actual undue influence. Fehlberg discusses this issue in the context of the Aboody case, where she questions how the elements which comprise the 'face' requirement would have been answered in relation to Mrs Aboody (see Fehlberg 1994). That case involved actual undue influence, where it is now no longer necessary to prove 'manifest disadvantage', but had it involved the 'presumed' variety where 'manifest disadvantage' is still required, Mrs Aboody would not have been able to satisfy either the 'on the face' or the 'manifest disadvantage' requirement. In that case, 'manifest disadvantage' was defined as a disadvantage which was obvious as such to any independent and reasonable person who considered the transaction at the time with knowledge of all the relevant facts. In the context of a guarantee or a charge, where there is always a risk, whether such a risk is manifestly disadvantageous to the giver depends on the balancing of two factors, namely the seriousness of the risk in practical terms and the benefits gained by the giver in accepting the risk. As Mrs Aboody had a substantial share holding, at least on paper, in the debtor company and the loans to the company gave the company a reasonable chance of survival, the potential benefits to her were substantial. She stood to gain as much as she stood to lose and this counterbalanced the potential liabilities and risk of loss of the family home. Equally, 'on its face' the transaction was not to her financial disadvantage either. This suggests that the two requirements are not essentially different, in which case 'on the face' resurrects the 'manifest requirement' for actual undue influence. In Serter, however, the transaction was in part for the wife's benefit in that it secured the spouses' joint indebtedness to the bank, and was not 'on its face' for her financial disadvantage; yet 'manifest disadvantage' was simply assumed by the Chancery Division of the High Court. How could the charge on the jointly owned matrimonial home have been both to her 'manifest disadvantage' and 'on its face' not to her financial disadvantage? What does 'on its face' really mean in this context? Any uncertainty here can only be to the disadvantage of both women who have to show both requirements and the creditor who has to reconsider its banking practices.

Women who have merely an equitable interest in the home. 
None of the recent cases, with the exception of Banco-Exterior Internacional v Mann, deal directly with the situation where a wife or cohabitee is not a joint legal owner of the home but is merely an equitable owner. Neither is this situation directly addressed by either Fehlberg (1994) or Arora (1994). What is the legal position if a wife or cohabitee is asked to sign a 'Consent to Further Advance Form', which effectively postpones any rights to occupation that she may have in the home to the rights of the creditor? Are the principles established in O'Brien and Pitt to apply to the signing of such forms?

Most such forms are issued by banks and building societies to avoid the problem of the one trustee for sale and the non-overreaching of the beneficial interest, or the presence of an overriding interest witnessed in Williams and Glyn's Bank v Boland [1981] AC 487, HL (see also Kingsnorth Trust Ltd v Tizard [1986] 1 WLR 783, Ch D, in the unregistered land context). These forms commonly recommend the obtaining of independent legal advice before the person concerned signs. This corresponds to the banking world's own Code of Practice in relation to guarantees and other forms of third party security; but the Code relates only to the situation where the spouse or cohabitee may become liable in addition to or in substitution for the other partner. This is different from where the wife or cohabitee stands for all practical purposes to lose her equitable interest in the home, whether by signing the charge document itself or a Consent Form. After O'Brien, will it be enough for lenders in such cases merely to continue to include the suggestion to take independent legal advice? Or will it be necessary for lenders in such circumstances to require the signatory to attend at the office in order to explain, in the absence of the legal owner of the home, the effect of the document which the woman is being asked to sign? If so, the cost of credit will be correspondingly increased and loans on the security of cohabitation homes may be harder to obtain as financial institutions calculate the costs and the risks involved. 

There are three arguments, however, which may be put forward for extending the principles in O'Brien to the above situation. First of all, the risk of loss of both the home and the equitable interest in it in O'Brien is no different in principle to the risk of the loss of the home to the wife in a situation like Boland. In the latter case, the wife has signed away her occupational rights through a Consent Form or by signing the charge document itself; this inevitably leads in practice on repossession to loss of the equitable interest also. The right to sue the trustee for sale becomes merely a theoretical one on repossession by the lender. The consequences in practice are no different from that where the wife or cohabitee, whether as sole or joint legal owner, uses the home as security for her partner's indebtedness. Secondly, the 'protection theory', referred to earlier, would lead to the conclusion that women living in a cohabitation relationship are open to the risk of presumed undue influence as much when signing a Consent Form as when signing a surety document. Thirdly, if the applicant for mortgage is using the home as security for business debts or interests and the sole reason why the wife or cohabitee is being asked to sign is to avoid the problems of Boland, then there is no financial benefit to the female in signing the form. Unlike Pitt, therefore, the situation is one in which the relationship of the couple should be enough to put the lender on inquiry. The principles of O'Brien should therefore apply; it would thus be insufficient merely to include the warning about taking independent legal advice on a Consent Form. It would be enough, however, following Serter, if the bank were to require of the wife or cohabitee that she obtain from a solicitor a statement that he has fully informed her of her legal position.

Against this line of argument stand two others. First of all, the situation to which the 'Consent Form' relates could be argued to be different from O'Brien et al. In a situation like Boland, the signatory is merely signing away her occupational rights, not acting as surety or guarantor of the loan or as joint principal debtor. There is still the claim to the share of the proceeds of sale, though in practice this may be of no benefit to the woman concerned. Secondly, a beneficiary under a trust for sale is not owed a duty of care by a selling mortgagee in respect of the amount of the proceeds of sale (see Parker-Tweedale and Dunbar Bank [1991] Ch 12, CA). This is an argument against using the principles from O'Brien at the earlier stage when the loan is being made. However, it could equally be argued that the law's favourable treatment at the earlier stage is about protection of the wife or cohabitee from the consequences of entering into the transaction in the first place. If the woman signs despite being fully informed of the possible risks and the amount involved, she has only herself to blame for any consequences that follow thereafter.

On balance, the arguments are in favour of the application of the same principles, regardless of whether the wife or cohabitee is signing a surety document, charge over the co-owned home or a Consent Form. Some support for this can be found in cases decided before O'Brien (see eg Coldunell Ltd v Gallon [1986] QB 1184, CA, Kingsnorth Trust v Bell [1986] 1 WLR 119, CA and Barclays Bank v Kennedy [1989] 1 FLR 356, CA). But of more importance is the Court of Appeal decision in Banco-Exterior Internacional v Mann [1995] 1 All ER 936, CA. The case involved a loan to a company to be secured by a personal guarantee and a second charge over the matrimonial home of the guarantor. His spouse had merely an equitable interest in the home and she signed a declaration waiving her rights in the matrimonial home in favour of the bank after having been given advice by the company's own solicitor. Morritt LJ stated that since O'Brien, cases like this had to be decided by reference to the principles of that case, but then held that the bank did take such steps as were reasonable so as to avoid being fixed with constructive notice of Mrs Mann's rights to have the declaration set aside on grounds of undue influence. It would therefore appear that the principles established in O'Brien are going to apply to spouses or cohabitees of either sex who stand to lose an interest of any kind in the home or who become liable to lose possession of it.

Conclusion
The difficulties inherent in achieving the right balance between the policy of protecting women in a cohabitation relationship from the consequences of wrongs visited upon them by their partners and of not imposing too heavy a burden on lending institutions is obvious. The question remains whether the courts have achieved the objective of getting that balance right. It could be argued that to expect banks and building societies to change their practices in all cases by calling women into the office to sign only after the nature and consequences of the transaction has been explained to them is going too far. The burden and cost to financial institutions of doing this might become excessively onerous. Nevertheless, the requirement of constructive notice (which can be avoided by taking the suggested 'reasonable steps') that the transaction be 'on its face' to the financial disadvantage of the signatory may be too narrow and uncertain. The cost to lending institutions of avoiding constructive notice is time and trouble, which itself costs money that has to be passed on to the customer. The countervailing cost to the financial institution of not changing its practices in all cases involving women signatories may be even higher, given some of the uncertainties surrounding the decisions of the House of Lords in this area.

Leaving such matters of regulation to financial institutions themselves through a voluntary Code of Practice may also lead to uncertainty and inconsistency of application. The Second Edition of the Banking Code of Practice makes no reference to a separate interview requirement, although it does state that the proposed guarantor must be advised on whether the guarantee will be unlimited and if limited, what the amount will be. Given that Codes of Practice are not always adhered to and that wide spread ignorance of the possibility of complaint to an Ombudsman exists amongst the general public, it would seem more appropriate for Parliament to resolve any uncertainties left from the decisions discussed here. Although Banks are themselves welcoming a move towards comprehensible documentation in plain English, better documentation in itself may not be the answer. The Banking Ombudsman has stated that there is a danger that measures to protect spouses could be made so stringent as to make lending unduly costly and also to inhibit responsible lending (see Annual Report of the Banking Ombudsman for 1993 -94). Nevertheless, the Report suggests that the Code is the answer to the questions raised by O'Brien, but does require amendment. The Report suggests that the Code should prohibit unlimited guarantees, require every guarantee to carry a prominent 'health warning', spelling out the risks and require also that the proposed guarantor be given relevant up-to-date information about the debtor to be guaranteed. Whilst this may go a long way towards improving the position as regards guarantees, it fails to deal with the situation in Pitt or the case of the cohabitee asked to sign a Consent Form.

It is suggested that it is legitimate to protect women in the way in which the Courts appear to be moving, but that the correct approach should be to require financial institutions to adhere to what was suggested in O'Brien in all cases where a woman is asked to sign a consent or charge form or other surety document relating to debts of her partner. This ought to be done irrespective of whether the transaction is 'on its face' to the financial disadvantage of the woman, since the requirement of 'on its face' leads to uncertainty. A change of practice could be brought about, where necessary, not by way of a voluntary Code of Practice, backed up by the possibility of complaint to an Ombudsman, but by a statutory scheme akin to the Building Societies Act, 1986, making it compulsory to explain to the woman concerned the nature and full effect of her signature on the document. Only in this way can the law, in its tender treatment of women caught up in the financial affairs of their partners, ensure consistency of approach and certainty for all concerned. This may be reverting back towards the informed consent notion exemplified by the Court of Appeal in O'Brien, but that may not be such a big price to pay when so much is at stake and the social and economic consequences are potentially high. The above suggestion would not require that the woman understood what was being explained to her, merely that the financial institution had taken steps toward that end. The disadvantage of the cost for lending institutions might be offset by the advantage of avoiding the uncertainties left by the case law on this area. 

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