Solicitor – Mortgage redemption – Breach of trust – Appellant instructing respondent solicitor firm in connection with remortgage – Respondent only partially redeeming prior mortgage contrary to appellant’s instructions – Respondent admitting negligence – Whether respondent making excessive payment to borrowers in breach of trust – Whether breach of trust extending to whole amount of loan – Appeal allowed in part. The respondent firm of solicitors acted for the appellant bank and its borrowers in connection with a remortgage advance of £3.3m on their home. Their instructions from the appellant required the discharge of the existing mortgage with another bank (B) out of the advance. B’s charge secured borrowings of about £1.5m on two accounts. On the day of completion, the respondent telephoned B and was given a redemption figure of approximately £1.23m. They paid that amount to B and the remainder of the advance to the borrowers. The respondent failed to notice that the redemption figure related to only one of the two accounts and so was insufficient to redeem the mortgage. The respondent admitted negligence. The appellant’s charge was not registered until almost two years later as a second charge with B’s consent. The borrowers defaulted on the loan and the appellant obtained judgment against them for the then balance of some £3.5m and an order for possession. The property was sold for £1.2m, from which the appellant as second chargee received £867,697. The borrowers were then bankrupt. The appellant brought proceedings against the respondent for the losses arising from the remortgage transaction. The appellant contended, inter alia, that the respondent had acted in breach of trust by paying away the advance, which was admittedly held as trust money, without obtaining a first charge so that it was liable to reconstitute the trust fund of £3.3m with interest, credit being given only for the £867,697 actually recovered. The respondent argued that the payment was not a breach of trust or, if it was, its liability was limited to the loss in the value of the appellant’s security caused by the failure to pay off the whole of the secured debt, being about £300,000 paid to B from the sale proceeds. The court determined that the defendant had acted in breach of trust to the extent that it had failed to retain an additional £273,777.42 and apply it to discharge B’s debt and awarded the appellant equitable compensation in that sum. The judge rejected the claim that the release of the entire £3.3m advance had been made in breach of trust. The claimant appealed. Held: The appeal was allowed in part. (1) It was artificial to regard completion as having already occurred before the lender’s solicitor took any steps to utilise the mortgage advance in the redemption of the existing charge. The reference to completion in section 10.3 of the Council of Mortgage Lenders’ Handbook (the CML handbook) had to be construed as including the process of redemption or at least the release of the money to the prior chargee for that purpose. The effect of section 10.3 was that the solicitors had no authority to disburse the money, other than at the express direction of the lender, except upon completion of the relevant transaction: Lloyd’s TSB plc v Markandan [2012] EWCA Civ 65; [2012] PLSCS 27 and Davisons Solicitors v Nationwide Building Society [2012] EWCA Civ 1626; [2012] PLSCS 270 applied. It followed that the judge had been wrong to treat the breach of trust as limited to that part of the mortgage advance which was paid to the borrowers instead of being used to discharge their liability to B. The completion of the remortgage transaction required the respondent to be in receipt of a solicitor’s undertaking, or unconditional confirmation from B that the advance monies would be applied in redemption of its charge, before releasing the advance. Had there been proper completion in this case a subsequent failure by the respondent to pay sufficient monies to B to discharge the existing mortgage would not have been a breach of trust, even though it would have been a breach of their retainer. However, had completion not take place, the respondent would have parted with trust monies without authority regardless of the purpose for which they had been used. The difficulty with the judge’s reasoning was that his finding that only the £273,777.42 was paid in breach of trust had to be based on the premise that there had been completion in respect of the transaction generally. If so, it followed that the trust imposed by section 10.3 was at an end and a finding of breach of trust even in respect of part of the advance was inconsistent with that. (2) Equitable principles of compensation, although not employing precisely the same rules of causation and remoteness as the common law, had the capacity to recognise what loss the beneficiary had actually suffered from the breach of trust and to base the compensation recoverable on a proper causal connection between the breach and the eventual loss: Target Holdings Ltd v Redferns [1996] 1 AC 421 applied. In the present case, the appellant had enjoyed less security for its loan than would have been the case had there been no breach of trust. If the respondent had obtained from B a proper redemption statement, coupled with an undertaking to apply the sum specified in the statement in satisfaction of the existing mortgage, the transaction would have proceeded to complete and the appellant could have obtained a first legal mortgage over the borrowers’ property. In the event, the appellant obtained a valid mortgage from the borrowers which they were eventually able to register as a second charge and use to recover part of their loan from the proceeds of the security in priority to the other creditors. In the light of the judge’s findings it was not open to the appellant to contend that, but for the breach of trust, it simply would have asked for its money back. Accordingly, the judge’s order for equitable compensation would be affirmed. Jeremy Cousins QC and John Brennan (instructed by Moran & Co Solicitors, of Tamworth) appeared for the appellant; Graeme McPherson QC and Sian Mirchandani (instructed by Mills & Reeve LLP) appeared for the respondent. Eileen O’Grady, barrister
Solicitor – Mortgage redemption – Breach of trust – Appellant instructing respondent solicitor firm in connection with remortgage – Respondent only partially redeeming prior mortgage contrary to appellant’s instructions – Respondent admitting negligence – Whether respondent making excessive payment to borrowers in breach of trust – Whether breach of trust extending to whole amount of loan – Appeal allowed in part. The respondent firm of solicitors acted for the appellant bank and its borrowers in connection with a remortgage advance of £3.3m on their home. Their instructions from the appellant required the discharge of the existing mortgage with another bank (B) out of the advance. B’s charge secured borrowings of about £1.5m on two accounts. On the day of completion, the respondent telephoned B and was given a redemption figure of approximately £1.23m. They paid that amount to B and the remainder of the advance to the borrowers. The respondent failed to notice that the redemption figure related to only one of the two accounts and so was insufficient to redeem the mortgage. The respondent admitted negligence. The appellant’s charge was not registered until almost two years later as a second charge with B’s consent. The borrowers defaulted on the loan and the appellant obtained judgment against them for the then balance of some £3.5m and an order for possession. The property was sold for £1.2m, from which the appellant as second chargee received £867,697. The borrowers were then bankrupt. The appellant brought proceedings against the respondent for the losses arising from the remortgage transaction. The appellant contended, inter alia, that the respondent had acted in breach of trust by paying away the advance, which was admittedly held as trust money, without obtaining a first charge so that it was liable to reconstitute the trust fund of £3.3m with interest, credit being given only for the £867,697 actually recovered. The respondent argued that the payment was not a breach of trust or, if it was, its liability was limited to the loss in the value of the appellant’s security caused by the failure to pay off the whole of the secured debt, being about £300,000 paid to B from the sale proceeds. The court determined that the defendant had acted in breach of trust to the extent that it had failed to retain an additional £273,777.42 and apply it to discharge B’s debt and awarded the appellant equitable compensation in that sum. The judge rejected the claim that the release of the entire £3.3m advance had been made in breach of trust. The claimant appealed. Held: The appeal was allowed in part. (1) It was artificial to regard completion as having already occurred before the lender’s solicitor took any steps to utilise the mortgage advance in the redemption of the existing charge. The reference to completion in section 10.3 of the Council of Mortgage Lenders’ Handbook (the CML handbook) had to be construed as including the process of redemption or at least the release of the money to the prior chargee for that purpose. The effect of section 10.3 was that the solicitors had no authority to disburse the money, other than at the express direction of the lender, except upon completion of the relevant transaction: Lloyd’s TSB plc v Markandan [2012] EWCA Civ 65; [2012] PLSCS 27 and Davisons Solicitors v Nationwide Building Society [2012] EWCA Civ 1626; [2012] PLSCS 270 applied. It followed that the judge had been wrong to treat the breach of trust as limited to that part of the mortgage advance which was paid to the borrowers instead of being used to discharge their liability to B. The completion of the remortgage transaction required the respondent to be in receipt of a solicitor’s undertaking, or unconditional confirmation from B that the advance monies would be applied in redemption of its charge, before releasing the advance. Had there been proper completion in this case a subsequent failure by the respondent to pay sufficient monies to B to discharge the existing mortgage would not have been a breach of trust, even though it would have been a breach of their retainer. However, had completion not take place, the respondent would have parted with trust monies without authority regardless of the purpose for which they had been used. The difficulty with the judge’s reasoning was that his finding that only the £273,777.42 was paid in breach of trust had to be based on the premise that there had been completion in respect of the transaction generally. If so, it followed that the trust imposed by section 10.3 was at an end and a finding of breach of trust even in respect of part of the advance was inconsistent with that. (2) Equitable principles of compensation, although not employing precisely the same rules of causation and remoteness as the common law, had the capacity to recognise what loss the beneficiary had actually suffered from the breach of trust and to base the compensation recoverable on a proper causal connection between the breach and the eventual loss: Target Holdings Ltd v Redferns [1996] 1 AC 421 applied. In the present case, the appellant had enjoyed less security for its loan than would have been the case had there been no breach of trust. If the respondent had obtained from B a proper redemption statement, coupled with an undertaking to apply the sum specified in the statement in satisfaction of the existing mortgage, the transaction would have proceeded to complete and the appellant could have obtained a first legal mortgage over the borrowers’ property. In the event, the appellant obtained a valid mortgage from the borrowers which they were eventually able to register as a second charge and use to recover part of their loan from the proceeds of the security in priority to the other creditors. In the light of the judge’s findings it was not open to the appellant to contend that, but for the breach of trust, it simply would have asked for its money back. Accordingly, the judge’s order for equitable compensation would be affirmed. Jeremy Cousins QC and John Brennan (instructed by Moran & Co Solicitors, of Tamworth) appeared for the appellant; Graeme McPherson QC and Sian Mirchandani (instructed by Mills & Reeve LLP) appeared for the respondent. Eileen O’Grady, barrister
