It was after a referral from a well-known operator in the space when I first met Mrs A — a genuine and trusting individual who was terribly let down by a deceitful husband, an aggressive unregulated lender undertaking bridging finance with onerous terms beyond what is typical in the market, and two sets of lawyers: one front end, the second back end, both professing experience while out of their depth. Between them, they managed to leave this borrower homeless and destitute.

This case represented almost everything that could go wrong with a bridging loan and, so far as the bridging industry is concerned, presents a notable education opportunity for all lenders.

So, this gamekeeper became poacher. The litigation and its various strands ran for more than four years.

Mrs A was wealthy in her own right, but was under the controlling influence of her husband. He needed capital for a business venture and wanted to raise bridging finance on their large, valuable family home that was jointly owned, but the beneficial interest was almost exclusively Mrs A’s. 

The lender with which he intended to take out finance from was unregulated and an outsider to our market; the lending terms were spectacularly unattractive. What started as a relatively small initial balance had the potential to quadruple within 12 months. It displayed all the hallmarks of an unfair credit relationship. 

Mrs A, of course, was not the borrower, but was required to charge her property. She was unaware of the precise terms of the loan and had never seen a loan agreement or knew any details. 

The lender may have been an outlier on terms, but perfectly understood the value and importance of independent legal advice for her, and the protection that gave them against undue influence if, as turned out to be the case, undue influence was present. So, the unscrupulous husband packs his wife into the car and arranges for a solicitor to attend the execution of the mortgage deed. The meeting lasted 10 minutes. There was no advice, she was not seen independently, nor was she presented with terms or an explanation of them. The conveyancer solicitor simply did not understand the importance of his retainer, or the requirements in such circumstances which are well documented by the Law Society. No retainer letter, no advice, no record of what he said or did - nothing.

The loan defaulted and the lender, supported by a very basic certificate, took action to recover the debt, and exorbitant fees, by pursing a possession claim.

Here enters the second solicitor. He’s an old friend of the husband, and an experienced litigation solicitor. The husband did not inform Mrs A of the default or the action being taken, but instructs the solicitor to deal with the possession and money claim. The solicitor does not contact Mrs A, is not engaged by her, and conducts a defence in her name — without authority. He hasn’t bothered to investigate the circumstances giving rise to the mortgage, because he relies entirely on what he is told by the husband, conducting an appalling defence. He has no feel or sense of what an unfair credit relationship is or looks like, and potential issues on regulation go above his head. The defence fails, and the home is repossessed. Mrs A hears of the repossession just days before the bailiffs arrive. The defence may have been hugely lacking, but it resulted in the lender racking up a huge amount of expenses, which fell to be recovered from the sale proceeds — effectively, Mrs A’s equity in the property.

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Instructions came too late to injunct the sale, so how could we right these wrongs?

We had multiple avenues to follow:

1) freeze the sale proceeds and seek to set aside judgments, enter counterclaims, and re-litigate issues which the second solicitor failed to put before the court
2) pursue solicitor one for spectacular breach of Etridge responsibilities
3) pursue solicitor two for breach of warrant of authority and professional negligence, which had contributed to leaving Mrs A in a much worse financial position

The final outcome

As far as the rouge lender’s claim, I was able to achieve improved terms for settlement days before the court of appeal, and much needed substantial compensation from two sets of professional indemnity insurers just before a seven-day trial in the High Court. A happy ending, maybe. A fairer ending, certainly.

Mrs A can now move on with funds sufficient to rehouse herself. A salutary lesson learned by her, but additional ones were learnt:

• by a lender that the unregulated world is not the Wild West 
• by two law firms that now know not to dabble in areas that they do not have the requisite experience for
• by the bridging world, that process needs to be meticulously and professionally observed by all for effective lending without damaging recourse later down the line

What’s the education value for the industry?

This case clearly demonstrates the very important role of independent representation. It is not only a must for lenders — it’s about the right outcome for the customer. It shows what needs to be done and identifies the benefits of not only ILA, but the practical benefit for clear and comprehensive certificates covering Etridge guidelines.

For lenders, it shows how badly things can go when a bridging loan goes wrong, and the financial and resource cost if the process is not handled by professionals who know what they are doing. This lender failed to get the recovery they bargained for. The steps solicitors put in place are not barriers to business, but measures to protect the customer — and this , ultimately, protects the lender. Nobody wants a bad customer outcome, not just for ideological reasons, but because nobody wins when this happens.

For our industry, it illustrates that we must not rest on our laurels. There are rogue players out there who harm and injure the reputation of short-term finance, which so many of us have fought so hard to improve over the years.

It also demonstrates that the two elements of lending, origination and recovery, are inextricably linked. The lighter a lender’s process at the front end, the harder the recovery. It is yet another example of the importance of working with professionals who are immersed in the market daily and completely understand the dynamics of bridging transactions. This experience means that potential issues can be recognised quickly.

I have spoken before about the dangers of ‘skinny lending’, where volume becomes the main driver and every part of the process becomes commoditised and transactional, and risk control and expertise are sacrificed, including the way in which a lender works with its partners, such as its legal advisers. This case is an example of skinny lending, as well as an instance of controlling influence, unfair credit, and negligence. But the issues it raises are the types that can be missed if the importance of investing in the correct checks and balances is underestimated.

The facts are exceptional and extraordinary. That they are so reflects how well the industry takes the interests of the customer and their protection into account. 

This was an important and educational case and, at the end, an appreciably better outcome for the customer. But ultimately, there were no out-and-out winners. Therefore, we, as an industry, can learn much from it.