Loan for purpose of discharging old mortgage – Solicitors’ negligence enabling another mortgage lender (X) to obtain priority over new mortgage taken by plaintiff clients – Plaintiffs reaching unfavourable agreement with X – Whether plaintiffs should have mitigated loss by asserting subrogation rights over old mortgage
In 1991 the defendant solicitors were engaged to act for a borrower and the plaintiff mortgagees in respect of an advance for remortgaging a house in Stalybridge, Cheshire, then valued at £330,000. The defendants were instructed, inter alia, to advise on title and to ensure that the funds were applied so far as necessary to discharge a subsisting mortgage in favour of the Bradford & Bingley Building Society (Bradford) so as to ensure that the plaintiffs acquired a first legal charge over the entire property. On June 7 1991 the defendants issued a favourable report on title, stating that the property was registered under title GM 335931, whereupon the plaintiffs made an advance of £207, 886, of which £160,540 was applied towards the discharge of the Bradford mortgage. However, the defendants had failed to note that the building was subject to two registered titles, GM 335931 and GM 108325, the latter relating solely to a small extension. By the time that the defendants had ascertained the true position it was found that a charge on title GM 335931 had been perfected to secure the borrower’s indebtedness to UCB Discounting Ltd (UCB).
In or about 1994 the borrower was declared bankrupt, and in May 1995 the plaintiffs sold the house with vacant possession for £122,000, having agreed with UCB, who insisted on its priority as shown on the register, that 80% of the proceeds should be payable to UCB. Left with a balance of £22,624 and certain insurance proceeds, the plaintiffs sued the defendants for damages exceeding £150,000. The defendants admitted negligence, but contended that because the plaintiffs had paid off the Bradford loan they should have negotiated with UCB on the basis that, by operation of the doctrine of subrogation, they were transferees of the Bradford mortgage and enjoyed the same priority. For that reason, so it was argued, the agreement to pay some £95,000 to UCB amounted to a failure by the plaintiffs to mitigate their loss and the damages should be reduced accordingly.
Held Damages were awarded to the full amount.
1. The duty to mitigate did not require the plaintiff to embark on speculative litigation: see Banco de Portugal v Waterlow & Sons [1932] AC 452; Pilkington v Wood [1953] Ch 770.
2. If the plaintiffs had taken the subrogation issue with UCB their chances of success would have been very poor. Subrogation is an equitable doctrine which is enforced only when reason and justice demand: see Orakpo v Manson Investments Ltd [1978] AC 95, HL. UCB could have forcibly contended that the doctrine does not apply: (i) where it would disturb a statutory regime for regulating mortgage priorities: see by analogy (under the Companies Act 1948) Capital Finance Co Ltd v Stokes [1969] 1 Ch 261 and Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648; (ii) where the aggrieved party had a good remedy at law (here, an action against the defendant solicitors): see Cochrane v Cochrane (1985) 3 NSWLR 403; and (iii) where the court is not concerned to regulate matters as between mortgagor and mortgagee.
3. It would in any event be unconscionable to allow the defendant solicitors to invoke the doctrine. Having brought the situation about through their own negligence, they had failed to raise the subrogation issue when acting on the plaintiffs’ behalf in their negotiations with UCB.
Jonathan Seitler (instructed by Hamlin Slowe) appeared for the plaintiffs; Katherine Dunn (instructed by James Chapman & Co) appeared for the defendants.