The High Court decision in Rutherford v BNZ serves as a warning for lenders offering mortgages over jointly owned property. Where a loan is given to a husband customer and secured over jointly owned property, a lender cannot rely on a solicitor's certificate where the lender was arguably put on inquiry to the possibility that the wife's solicitors did not know the full extent of the risk secured by the loan.
Background
Mrs Rutherford (wife) and her husband entered into an all obligations mortgage in favour of the bank over their jointly owned home. Unbeknown to the wife or her solicitors, her husband had also simultaneously arranged a further credit facility for his business, secured in part by the mortgage. The same bank manager handled both loans, but different solicitors handled the security documentation for the home loan and the company loan. The bank failed to tell the wife's solicitors of her husband's associated credit arrangements.
When the business defaulted and the bank sought to exercise its power of sale over the jointly owned home, the wife objected. She claimed it would be inequitable for the bank to take the full benefit of the mortgage due to its actual or constructive knowledge of the undue influence exercised by her husband. The bank applied for summary judgment on the basis that the wife's undue influence claim had no chance of success. The bank claimed it was the wife's solicitors who erred by failing to give proper advice. The wife argued that the bank was not entitled to rely on the solicitor's certificate as, in giving instructions to the solicitors concerned, the bank failed to appraise them of the extent of the risk their client was facing.
Outcome
The High Court declined to enter summary judgment for the bank and found that the wife had made out an arguable claim for undue influence on the part of the husband. The Court took into account the limited commercial ability of the wife, that she did not stand to gain from the transaction and a relationship of dependency. The Court found it was arguable that the bank would have been aware that the company loan was being driven solely by the husband and concluded that the bank was put on inquiry as to the risk of undue influence.
Obtaining A Valid Mortgage
The Rutherford case is a reminder that a bank must take steps to ensure that all parties to a mortgage are aware of the full extent of the risk secured by the mortgage. In most circumstances, this will be satisfied by ensuring that the spouse or de facto partner obtains independent legal advice as to the nature and effect of the transaction. This will require that the solicitor providing the independent advice is provided with full details of the facilities to be secured under the mortgage.
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