Lenders suffered serious losses following the last downturn in the property market and, where they are unable to recover from borrowers, or from the proceeds of sale of a security, often try to recoup their losses from the professionals that advised them. When claiming against solicitors, lenders will usually try to frame their claims in equity in order to sidestep common law rules that restrict the damages payable for negligence and breach of contract.
AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58 concerned a claim that solicitors had acted in breach of trust as a result of an oversight during a re-mortgage transaction, which led to an underpayment to an existing lender. The existing lender refused to discharge its charge until it received the outstanding balance in the sum of £309,000. Consequently, the bank had to settle for a second legal charge. In due course, the borrower defaulted and the property, which had been valued at £4.25m, was eventually sold for £1.2m.
The bank claimed that the solicitors, who represented both the bank and the borrower, were liable for the whole of the mortgage advance in the sum of £3.3m – less the proceeds received from the sale of the security. It said that they had failed to comply with their mortgage instructions, which were to hold the mortgage advance on trust until completion of a first legal charge. Consequently, the bank argued that the solicitors were in breach of trust and were liable to reconstitute the entire trust fund.
The solicitors admitted that they had negligently paid too little to the existing lender and too much to the borrower, because they had obtained a mortgage redemption figure from the existing lender that related to only one of two accounts. However, they argued that their liability should be limited to the balance due to the existing lender.
The Supreme Court agreed. It rejected the bank’s argument that the transaction had not been completed because it had not obtained a first legal charge and that it was, as a result, entitled to recover its mortgage advance. The solicitors had not “completed” the transaction in compliance with the requirements of the CML Handbook. However, the commercial reality was that the transaction had been completed when the borrowers became contractually indebted to the bank.
A beneficiary is entitled to have its trust properly administered and to recoup any loss suffered as a result of any breach of duty. The purpose of the remedy will be either to put the beneficiaries in the position that they would have been, had the breach not occurred, or to vest in them any profits made by the trustee as a result of the breach (and which ought therefore properly to be held on behalf of the beneficiary).
In this case, the bank was trying to hold the solicitors responsible for loss that it would have suffered, even if they had complied with their instructions. A monetary award that reflected neither loss caused nor profit gained by the wrongdoer would be penal and it would be wrong to impose or maintain a rule that enables beneficiaries to recoup losses that would have been suffered even if trustees have properly performed their duties. Therefore, the solicitors were not liable for the consequences of the hopeless inadequacy of the bank’s security.
Allyson Colby is a property law consultant