This recent decision relates to a lender’s professional negligence claim against a firm of solicitors who acted for the lender and the borrowers in relation to a remortgage transaction. The lender brought its claim on a number of grounds and claimed the full repayment of the loan advance on the basis that the solicitors had paid away the loan funds in breach of trust. The defendant, whilst admitting their conduct had been negligent, denied that they had acted in breach of trust. In the alternative, they argued that if they were found to have committed a breach of trust, the damages recoverable by the lender should be limited to £300,000, rather than the full loan advance of £3.3m.
Mark Redler & Co (the “Solicitors”) acted for the lender, AIB Group (“AIB”) and the borrowers in respect of a remortgage of £3.3m, advanced over a property valued at £4.25m. AIB instructed the Solicitors that the existing mortgage in favour of Barclays bank was to be discharged out of the advance. The Barclays’ charge amounted to £1.5m across 2 accounts. However, the Solicitors only obtained the redemption figure for one of the two accounts secured by the Barclays’ charge. Upon completion, the Solicitors paid £1.23m to Barclays and paid the balance of the monies to the borrowers. This effectively meant that the borrowers were paid about £300,000 too much, while the sum of £300,000 remained outstanding on the remaining Barclays account.
As the sum sent to Barclays was insufficient to discharge its secured debt, AIB’s charge was not registered until nearly two years later, only once the parties had independently agreed that AIB would rank as a second charge holder with the Barclays’ charge ranking in first priority.
The borrowers subsequently defaulted on the mortgage payments and the property was repossessed and sold for about £1.2m, at a substantial loss. Of the sale proceeds, AIB received around £860,000 once Barclays’ first ranking charge was paid out of the sale proceeds.
AIB claimed against the Solicitors for breach of trust, based upon the Solicitors paying away the loan advance, which was held as trust money, without obtaining a first charge. As the defences of contributory negligence and failure to mitigate are not available in respect of a breach of trust claim, AIB claimed that the Solicitors were liable to pay the sum of about £2.4m (exclusive of interest), based on liability for the loan advance sum of £3.3m, minus the payment AIB had received of £867,697.
The Solicitors admitted that their conduct amounted to negligence. However, they asserted that payment of the loan advance was not a breach of trust. The Solicitors further asserted that, should the Court find there to be a breach of trust, then their liability was limited to the loss in value of the AIB’s security, which was caused by their failure to pay off the entirety of Barclays’ secured debt. Therefore, the Solicitors argued that their liability was limited to the £300,000.
There were two issues before the Court to consider:-
Did the Solicitors act in breach of trust by releasing the loan advance?
If so, what remedy might AIB be entitled to?
The Court held that whilst the Solicitors had indeed committed a breach of trust by paying out the loan advances in contravention of the lender’s express and implied authority, AIB was not entitled to full reconstitution of the trust fund (of £3.3m). AIB was only entitled to equitable compensation for the amount due to Barclays that was needed to discharge their secured debt. In other words, the Defendant was liable to pay the amount they should have retained to pay off Barclays’ first charge, which in this case was £300,000. Credit was also given for the payments made by the borrowers to Barclays towards the loan amount.
The Court stated that it was not a breach of trust for the Solicitors to have paid the £1.23m to redeem Barclay’s first charge in relation to Account 1; rather, this part payment was seen as being in line with the lender’s instructions. The breach of trust was the difference between what the Solicitors should have paid in order to comply with the terms of the retainer and what they actually paid, which was the £300,000 that they should have paid to Barclays but instead paid to the borrowers.
In reaching its decision, the Court considered and followed the principles laid down in the case of Target Holdings Ltd v Redferns  AC 421, where Rosling King acted for Target, as it had been considered by the House of Lords. The Court held that by paying the loan advance in the manner that they did, the Solicitors had breached the terms of the retainer between the parties in this case, and therefore a breach of trust had occurred.
The Court also applied the ‘but for test’ to determine causation. The Court held that AIB would not have withdrawn from the transaction had it known of the error with the Barclays redemption figures, but would rather have sought to remedy the error and proceed with the loan as the circumstances indicated that AIB was keen to lend to the borrowers.
In cases where there are several factors contributing to the loss suffered, such as the lender’s own questionable lending decision and the volatile conditions of the property market, then the Court may be persuaded that the defendant’s conduct was not fully causative of the lender’s loss and therefore a full reconstitution of the loan advance would be inequitable.
One way of reconciling this decision with previous case law upholding a full recovery of the loan advance where there has been a breach of trust is to examine whether completion has taken place. In the present case, the Court held that completion of the remortgage had taken place as the Solicitors held a signed legal charge and the loan advance. However, in recent decisions, such as Lloyds v Markandan & Uddin, the transactions were held not to have completed and the lender was entitled to recover the full loan amount. Accordingly, this present case does not prevent lenders from recovering the full advance where a transaction has not completed.
For further information please contact Georgina Squire or the Partner with whom you usually deal.