If PuTTY is configured to treat data from the server as encoded in UTF-8, then by default it disables the older VT100-style system of control sequences that cause the lower-case letters to be temporarily replaced by line drawing characters.
The rationale is that in UTF-8 mode you don't need those control sequences anyway, because all the line-drawing characters they access are available as Unicode characters already, so there's no need for applications to put the terminal into a special state to get at them.
Also, it removes a risk of the terminal accidentally getting into that state: if you accidentally write uncontrolled binary data to a non-UTF-8 terminal, it can be surprisingly common to find that your next shell prompt appears as a sequence of line-drawing characters and then you have to remember or look up how to get out of that mode. So by default, UTF-8 mode simply doesn't have a confusing mode like that to get into, accidentally or on purpose.
However, not all applications will see it that way. Even UTF-8 terminal users will still sometimes have to run software that tries to print line-drawing characters in the old-fashioned way. So the configuration option ‘Enable VT100 line drawing even in UTF-8 mode’ puts PuTTY into a hybrid mode in which it understands the VT100-style control sequences that change the meaning of the ASCII lower case letters, and understands UTF-8.