Lenders have suffered serious losses as a result of the downturn in the property market. Where they have been unable to recover loans from borrowers, or from the proceeds of sale of a security, they often try to recoup their losses from the professionals that advised them.
Claims against solicitors are sometimes framed in equity to sidestep common law rules that restrict the damages payable for negligence and breach of contract. AIB Group (UK) plc v Mark Redler & Co [2012] EWHC 35 (Ch) 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 new lender had to settle for a second legal charge. In due course, the borrower defaulted on the new loan and the property, which had been valued at £4.25m, was eventually sold for £1.2m. The bank claimed that the law firm was 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 maintained that the solicitors had failed to comply with their mortgage instructions. Consequently, they had parted with the mortgage advance in breach of trust and were liable to reconstitute the trust fund.
The solicitors admitted that they had negligently paid too little to the existing lender and too much to the borrower, but argued that they were liable for nothing more than the balance that should have been paid to the existing lender. On a common sense view, the bank had incurred the rest of the loss because its security had been overvalued, or had fallen steeply in value, or because of a combination of both these factors. The firm was not responsible for these problems and should not be liable to make good losses caused by an unfortunate lending decision.
The judge accepted the solicitors’ arguments. They were instructed to obtain a first legal mortgage and needed to use the mortgage advance to do so. They had received a valid form of charge from the borrower and were authorised to redeem the existing charge, before paying the balance to the borrower. They failed to comply to the extent of the shortfall in the amount paid to the existing lender. The overpayment to the borrower was unauthorised and in breach of trust, and they were liable to reconstitute the trust fund to that extent.
The position might have been different, had the mortgage instructions imposed a condition that the solicitors must obtain a release from the existing mortgage, or a solicitor’s undertaking to provide one, before parting with the mortgage advance. The lender could then have argued that any unauthorised payment constituted a breach of trust.
The underpayment here arose because a mortgage redemption figure was obtained on the telephone and related to only one of two accounts. The Council of Mortgage Lenders’ advice on mortgage redemption statements – which acknowledges the difficulties presented by multiple accounts – can be found here: http://www.lawsociety.org.uk/productsandservices/goodpractice/conveyancing/annex25h.page
Allyson Colby, property law consultant
