Mortgage – Completion – Remortgage – Appellant agreeing to advance loan to respondent by way of remortgage of three properties to be transferred to respondent by his sister – Properties transferred and loan funds released on receiving completion statement from existing chargee along with undertaking to release charges on payment of redemption moneys – Respondent’s solicitor not in fact paying existing chargee but instead misappropriating loan funds – Whether remortgage transaction completed so as to render respondent contractually liable to appellant for repayment – Appeal dismissed
The appellant agreed to lend nearly £1.87m to the respondent on the security of three properties in Oxford. The respondent’s sister was the registered proprietor of those properties, which were already charged to another lender, but the sister proposed to transfer the properties to the respondent by way of gift with the new loan to be used to pay off the existing charges and provide the respondent with some additional capital.
The mortgage offer was made and accepted on terms that the appellant would obtain a first legal charge over the properties. The appellant instructed a firm of solicitors to act for it on the transaction in accordance with its standing instructions, which included the relevant terms of the CML Handbook. The respondent retained a different solicitor. The appellant’s solicitor obtained undertakings from the respondent’s solicitor governing the payment to it of the mortgage advance in anticipation of completion.
The respondent’s sister subsequently executed the deed of gift to the respondent and registered transfers of the properties in his favour. Meanwhile, the existing lender sent an email to the appellant’s solicitor setting out the redemption details in respect of its charges. The appellant authorised its solicitor to transfer the loan funds to the client account of the respondent’s solicitor for the purposes of completion. The respondent’s solicitor confirmed receipt of those funds and transferred a little over £78,000 to the respondent, representing the balance of the loan funds not required to pay off the existing loans.
The appellant’s solicitor then asked the respondent’s solicitor to forward to it the documents referred to in the undertakings, including a form DS1 showing the discharge of the each of the existing charges, in order to facilitate registration of the appellant’s first legal charge over the properties. However, the respondent’s solicitor did not forward the DS1 forms and, rather than using the remaining loan funds to pay off the existing loans, dishonestly misappropriated those funds. As a result, the existing charges remained in place and the appellant did not obtain the security of a first legal charge over the properties.
The appellant obtained compensation of £1.796m from the Law Society Compensation Fund but also brought proceedings against the respondent to recover the balance of the mortgage loan; it claimed that it was short by £380,000, plus interest. The respondent accepted that he had to account to the appellant for the £78,000 that had been paid to him but argued that he was not contractually liable on the mortgage deed because the mortgage had never actually been completed. In the court below, the judge found in favour of the respondent and dismissed the claim. The appellant appealed.
Held: The appeal was dismissed.
(1) Under the terms of the CML Handbook, completion of the transaction was the time under para 10.3 when the completion moneys could be released free from the trust in favour of the lender. Para 5.8 of the CML Handbook, requiring all existing charges to be redeemed on or before completion, gave content to what constituted completion in a remortgage transaction for the purposes of para 10.3. Although it might theoretically be possible to have a situation in which completion meant something different in the contract between lender and borrower from what it meant in the lender’s instructions to its solicitor, that situation was an unlikely one and did not exist in the instant case. The mortgage offer stipulated that the appellant would obtain a first legal charge which, construed in the context of the particular transaction, required as an essential part of that transaction the removal of the existing lender’s charges. The instructions to the solicitors gave effect to that requirement by requiring the solicitors to discharge the prior charges on or before completion.
(2) The production to the lender’s solicitor or its agent of a suitable undertaking by the existing chargee to release its security on payment of the redemption moneys would be sufficient to enable the lender’s solicitor safely to release the redemption moneys to the existing chargee. However, while the respondent’s solicitor had received a suitable undertaking from the existing lender to release its security on payment of the sums specified in the redemption statement, those sums had not been paid. It was difficult to see how, as a matter of ordinary language, the remortgage transaction could be said to have been completed if, instead of paying the moneys to the existing lender the respondent’s solicitor simply misappropriated its client’s money.
(3) The position as to completion had to be related to the terms on which the parties contracted and the solicitors were instructed in the particular case. In an ordinary house purchase transaction involving the redemption of a prior charge on the vendor’s title, the purchaser’s solicitor, who would ordinarily also act for the purchaser’s mortgagee, would have authority to release the purchase price, including the mortgage advance, to the vendor’s solicitor against undertakings that the moneys would be used to discharge any existing mortgages on completion and the provision of a redemption statement indicating what the existing mortgagee required to be paid. The forms DS1 would then be supplied once the redemption moneys had been paid. Completion would often take place when the vendor’s solicitor provided the purchaser’s solicitor with the executed transfer and a suitable undertaking to use the purchase price after completion to discharge the existing mortgages. There was an obvious risk that the vendor’s solicitor might fail after completion to use the purchase moneys to redeem the vendor’s prior mortgage either wholly or at all but, in those circumstances, the purchaser’s remedy would be to enforce the vendor’s solicitor’s undertaking and obtain compensation for the breach. In the absence of some specific provision in the contract of sale, it would be difficult to contend that completion did not take place until the existing mortgage had actually been discharged.
By contrast, in a remortgage transaction the property which would provide the security for the new mortgage would usually already belong to the borrower. Although that was not so in the instant case, the factual difference was immaterial. The respondent was not a purchaser of the properties, which were instead gifted to him by his sister subject to the existing charges so that, on completion of the re-mortgage, the only additional conveyancing formality was the release to the respondent of the executed transfers of the properties. The completion of a remortgage transaction ordinarily included the redemption of the prior charges. The essence of the transaction was the creation of a new first legal charge to replace the existing charges over the properties. The discharge of the existing borrowings was a critical part of that process and was therefore a necessary component of completion. There was nothing in the terms of the contract or the instructions to the solicitors to displace that position in the instant case. It made no difference to the outcome of the case whether, instead of analysing the position in terms of when the transaction was completed, it was analysed in terms of whether beneficial ownership of the loan advance passed from the appellant to the respondent: AIB Group (UK) plc v Mark Redler & Co [2013] EWCA Civ 45; [2013] PLSCS 51 applied.
Mark Cannon QC and Elisabeth Tythcott (instructed by Kuits Solicitors, of Manchester) appeared for the appellant; Alexander Hill-Smith (instructed by BrookStreet des Roches LLP, of Abingdon) appeared for the respondent.
Sally Dobson, barrister
