Etridge Letter - Why is it needed for Independent Legal Advice?

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03/02/2020

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Independent legal advice is most commonly linked to a mortgage where the lender requires a solicitor independent to the transaction to advise a client who is at risk, effected by or doesn't benefit from the mortgage. The process can often be viewed as a 'tick box' exercise that holds up completion however the Etridge case highlights the risk to clients and solicitors from spending too little time during the independent legal advice. The cost to the client was losing their home and to their solicitor an order to pay £67,000.

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What is an Etridge letter?

The Etridge Letter came about following the guidelines provided by the House of Lords after the review of the appeals for the following 8 cases:

ROYAL BANK OF SCOTLAND PLC (RESPONDENTS) v ETRIDGE
BARCLAYS BANK PLC (RESPONDENTS) v HARRIS
MIDLAND BANK PLC (RESPONDENTS) v WALLACE
NATIONAL WESTMINSTER BANK PLC (RESPONDENTS) v GILL
BARCLAYS BANK PLC (RESPONDENTS) v COLEMAN
UCB HOME LOANS CORPORATION LTD (RESPONDENTS) v MOORE
BANK OF SCOTLAND (RESPONDENTS) v BENNETT
KENYON-BROWN (RESPONDENT) v DESMOND BANKES & CO

The eight cases were similar because in each of them a husband had secured a mortgage on a property to fund his business for which the wife did not directly receive any benefit from. In all cases the businesses failed and the mortgage lender looked to repossess the properties to settle the mortgage. The wives claimed that there was undue influence (actual and presumed) on them to sign the mortgage lender's security agreement (mortgage deed/guarantee deed) and as such the contract should be voided and the repossession should not be allowed. The Etridge case failed to prove undue influence however what came from the review of these appeals were the guidelines of what banks and solicitors need to do in cases where the could be actual or presumed undue influence in relation to a transaction - these are the Etridge Guidelines.

The review of these case highlighted what the duties of a solicitor are when they are advising a client on a financial transaction that may not be in their best interests. This has brought about a specific requirement for providing independent legal advice in cases like this and the use of the Etridge letter to confirm the advice provided. Where solicitors don't follow the Etridge Guidelines they could face challenges from their clients as seen in Padden v Bevan Ashford (we explain this case in more detail below).

What happened in the Etridge case?

In 1998 Mr and Mrs Etridge bought a property solely in Mrs Etridge's name. They financed the purchase using another property they owned together. The finance was secured by two mortgages, one to the Royal Bank of Scotland and the other to trustees. Mrs Etridge had no involvement in the arrangement of the mortgages and signed the paperwork trusting her husband.

A few years later the Royal Bank of Scotland sought repayment of its loan and took proceedings for possession of Mrs Etridge's property. Mrs Etridge claimed she relied on “undue influence by her husband" and sought to make the contract with the bank void.

Mrs Etridge's case against the Royal Bank of Scotland failed as the court of appeal held that there was no undue influence and Mrs Etridge should have read the mortgage paperwork and taken independent legal advice.

What must banks/lenders do?

Where a bank accepts a guarantee and they are aware the transaction is non-commercial then they are ’put on inquiry’ to the potential for undue influence on one of the parties. In cases where they are put on inquiry the bank can only agree to the transaction after Independent Legal Advice has been given by a competent solicitor to the party who is giving the guarantee. After the advice has been given the solicitor will provide the bank a certificate to confirming:

"I confirm that I act for CLIENT NAME. I have explained the nature of the Legal Charge and the consequences of signing the first legal mortgage over the property in conjunction with the proposed mortgage application. CLIENT NAME wishes to proceed with this mortgage. I have explained that you (the Bank) require confirmation that I have given this advice so that CLIENT NAME may not dispute being legally bound by the mortgage and I confirm that I have the authority of CLIENT NAME to give this confirmation."

What independent should a solicitor provide - the Etridge Guidelines?

Where a mortgage lender requests for independent legal advice for one of the parties of a transaction for a joint mortgage sole proprietor, joint proprietor sole mortgage, occupier waiver and mortgage guarantee then the advice should include:

the nature of the documents and the risk that the client may lose their home if the borrowers cannot meet the mortgage payments, and even the possibility that the client could be made bankrupt;
the seriousness of the risks involved by reference to the purpose, amount and terms of the mortgage and whether the client understands the value of the property being charged and if there are any other assets out of which repayment could be made if a problem occurs in relation to meeting the mortgage payments;
the fact that the lender may alter the terms of the loan including increasing the amount borrowed without reference to the client;
whether the client is content for the solicitor to write to the bank confirming that they have explained the nature of the documents to them and the practical implications they may have;
providing the independent legal advice at a face to face meeting independently to the borrower and to give the legal advice using non-technical language;
whether the client wishes the solicitor to negotiate with the bank on the terms of the transaction (e.g. limitation on the amount borrowed); and
that the client does have a choice on whether to sign and consent to the mortgage/guarantee with the decision being up to the client alone (without any undue influence). The solicitor must make sure that the client has not been pressured into this transaction in any way.

What happened in Padden v Bevan Ashford Solicitors?

Mrs Padden thought her husband (who was a financial consultant) had taken £200,000 from one of his clients. Her husband’s solicitor advised her that the only way to keep her husband from going to jail was by selling the family house and repaying the £200,000 stolen.

Mrs Padden had a brief meeting with an independent solicitor who had just qualified and for whom informed Mrs Padden not to continue with the transaction and didn’t charge her for the 15 minute advice. Mrs Padden returned to the same law firm for further independent legal advice from a different solicitor, who was an Associate within the law firm. The associate solicitor executed the legal documents, including a second mortgage deed over Mrs Padden’s property.

After the transaction had completed and the second mortgage taken out by Mrs Padden and her husband, it transpired that her husband had misappropriated around £2m from his various clients for which he was found guilty and sent to prison. The defrauded client enforced their right as the mortgagee and forced the sale of Mrs Padden’s family home.

The issue that arose with regards to the independent legal advice was that although the first newly qualified solicitor had told Mrs Padden to not enter into the transaction, the Court of Appeal found that the the Associate Solicitor should have made sure that they fully understood the basic nature of the transaction before witnessing the confirmation. It was noted that the solicitors should have:

Explained so Mrs Padden understood the nature, effect and potential consequences of the transaction
Ensured she was free of any undue influence or misrepresentation
Explored why she was prepared to risk her home and assets to protect H, who was a fraudster
Explored and tested Mrs Padden’s reasoning why she wanted to protect the children from her husband being sent to prison
Emphasised the importance of finding out the full facts from her husband's solicitor
Explained that by signing the document it was not going to stop her husband going to jail
Ensured that Mrs Padden understood a short meeting was simply not long enough to explain the full detail of the transaction she was entering into

Bevan Ashford were ordered to pay Mrs Padden £67,037 in damages and interest of £6,369.

Which solicitors can provide independent legal advice?

The independent legal advice should be provided by a solicitor who feels they have the depth of knowledge and experience to provide the legal advice on the detailed financial information.

We have a solicitor who provides independent legal advice for the following transactions:

Joint Mortgage Sole Proprietor - advice is required for the client not on the legal title but jointly on the mortgage.
Joint Proprietor Sole Mortgage - advice is required for the client not on the mortgage but who is the legal owner (often also requiring advice on an occupier waiver form).
Occupier Waiver (Deed of Postponement) - advice is required for the client who is over 18 and residing at the property.
Guarantee (director guarantee or a parent guarantee) - advice is required for the client who is providing a guarantee to a mortgage that they themselves do not benefit from.

Our solicitor is available to provide fast turnarounds (subject to receipt of papers) and offers competitive prices. For a free quote call us on 0207 112 5388 or email help@samconveyancing.co.uk.

Download an example of an Etridge Letter

Etridge letters use the Etridge Guidelines as written evidence that the solicitor fully understands the transaction and has explained the same to their client. Every Etridge Letter is different as it relates to the individual's transaction and circumstances. If you require an Etridge Letter for Independent Legal Advice then please get in contact.