Banking Matters – October 2013
Print newsletter16/10/2013

When is it right to rectify?
Earlier this year the Court of Appeal heard the case of Day & Another v […]
Earlier this year the Court of Appeal heard the case of Day & Another v Day [1], which involved an application seeking the rectification of a conveyance of property that took place in 1985.
The Mistake
The matter followed the death of Mrs Day in December 2008. The appellants were James and Michael Day and the respondent was Terence Day. Both appellants and the respondent were the executors of Mrs Day’s estate. By her last will of November 2008, Mrs Day directed that the property be sold and the sale proceeds be divided between her six surviving children equally (the respondent and appellants were three of those children), however, presumably, during the course of administering Mrs Day’s estate, an issue was discovered.
Mrs Day purchased the property in 1954 with her husband and the property was held by the couple as joint tenants. Upon her husband’s death the property vested in Mrs Day by survivorship and she continued to live there as her home. In May 1985 Mrs Day granted a general power of attorney to Mr Froud, a solicitor. On 6 June 1985 Mr Froud executed a conveyance, as Mrs Day’s attorney, which conveyed the property to herself and the respondent to be held by them as beneficial joint tenants. On the same day the respondent and Mrs Day (Mr Froud acting once again) executed a mortgage in favour of Gateway Building Society to secure an advance of £23,000 which was paid to the respondent. The Gateway mortgage was subsequently discharged and a further charge was executed on 1 November 1988 by Mrs Day (this time with no mention of power of attorney) and the respondent in favour of Midland Bank plc. The Midland Bank charge was also subsequently discharged and at the time of the hearing the property was mortgage free.
Upon Mrs Day’s death the property passed to the respondent as the surviving joint tenant and no longer formed part of Mrs Day’s estate to be distributed in accordance with her will.
Unsurprisingly, the appellants, as executors and beneficiaries under the will, applied to the court for rectification of the conveyance on the basis that Mrs Day had had no intention of transferring a beneficial interest in the property to the respondent. The respondent admitted in his defence that the purpose of the transfer was to enable him to raise funds but said that there was NO agreement that he should NOT acquire a beneficial interest in the property.
At first instance the Recorder found on the balance of probabilities that Mrs Day never intended or understood that the conveyance vested a beneficial interest in the respondent. He confirmed that had Mrs Day executed the conveyance herself then he would have made an order for rectification so as to provide that she remained the sole beneficial owner. In the particular circumstances though, the conveyance had been executed by Mr Froud and the judge found there was no mistake on his part. The court held that the power of attorney was validly granted to Mr Froud; that the conveyance was within the powers granted to Mr Froud; and that there was no mistake on Mr Froud’s part when he executed the conveyance. The Recorder therefore came to what he believed was the unsatisfactory conclusion that there was no mistake that he could rectify. He did, however, give permission to appeal and indicated that such appeal would have reasonable prospects of success.
Recitifcation
The Court of Appeal found that the Recorder’s reasoning was plainly wrong. The absence of a mistake on the part of Mr Froud was irrelevant as he was neither the settlor nor a party to the conveyance – he merely executed on Mrs Day’s behalf. The relevant issue was, instead, the subjective intention of Mrs Day. The Recorder had found that Mrs Day never intended to give, and never thought that she had given, a beneficial interest in the property to the respondent: he should therefore have ordered rectification. The court sought to explain that the Recorder’s confusion appeared to have arisen by incorrectly treating the general powers under the power of attorney as being authorisation for Mr Froud to execute the conveyance on behalf of Mrs Day on such terms as he saw fit and which would then bind Mrs Day. The Court of Appeal confirmed that the solicitor’s actual authority was prescribed by any instructions expressly given by the client. The power of attorney had the effect of giving the transaction the veil of authority for Mr Froud to bind Mrs Day, whereas his actual authority was exceeded. The apparent authority had no bearing on the actual intention of Mrs Day and did nothing to exclude the court’s equitable jurisdiction to rectify.
WM Comment
The jurisdiction of the court to rectify instruments is part of equity’s wider power to relieve against the consequences of a mistake. This case provides a good reminder that, for this equitable remedy to be available, the mistake in question must be by the settlor/donor and it must be either as to the legal effect of the disposition or to an existing fact that is basic to the transaction. Such mistake must also be of sufficient gravity to bring equitable jurisdiction into play. Other factors, such as the existence of a power of attorney for example, can confuse matters, but may not have any bearing on the legal position as regards rectification. The case is, of course, also a helpful reminder as to the importance of understanding the nature and extent of a power of attorney.
Here there was a mistake by Mrs Day as to the legal effect of the transaction in that she did not intend to give away her beneficial interest in the property and it was of sufficient gravity for the jurisdiction to rectify to come into play, namely that it was unjust for the respondent to retain the benefit of the unintended gift. The Court of Appeal permitted rectification of the conveyance to reflect that the beneficial interest in the property was solely Mrs Day’s; it did not set aside the conveyance.
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[1] [2013] EWCA Civ 280

Solicitors’ sigh of relief (from negligence)
A recent High Court decision has confirmed that relief is potentially available for professional mistakes […]
A recent High Court decision has confirmed that relief is potentially available for professional mistakes that amount to a minor departure from the ordinary and proper standards expected of the profession. The decision reinforces the fact that the onus is on the claimant to show a connection between the professional’s breach and the loss suffered by the claimant.
Facts and issues
In Santander UK Plc v R A Legal Solicitors (a firm) [1], the lender commenced proceedings for breach of trust against the firm of solicitors (S1) instructed to act on its behalf (and on behalf of the borrower/purchaser) in respect of a mortgage (the Mortgage). S1 had been the victim of a fraud instigated by a second firm of solicitors (S2), who were purportedly acting on behalf of the seller. In fact, the owner of the property in question had not instructed S2 on the sale and had in fact never agreed to a sale of the property.
Oblivious to the live fraud, S1 transferred over to S2, prior to exchange of contracts, the Mortgage advance with the intention to effect completion of the sale. Completion, however, was never realised and sums paid over to S2 were dissipated. The lender attempted to recover its losses from S1.
The issues in the case were: whether the actions of S1 in releasing the monies amounted to a breach of trust that created a loss for the lender; and, if so, whether S1 would be able to rely on section 61 of the Trustee Act 1925 (the Act) to obtain relief.
S1 was retained on terms that required a fully enforceable first charge over the property for the benefit of the lender. The terms also specified that prior to completion, all monies advanced to S1 would be held on trust for the lender.
A welcome relief
The court clearly established that the monies were held on trust by S1 for the purposes of completion and that S1’s belief that the released monies would be directly applied towards completion did not preclude the breach, since S1 had been wrong in that belief. As such, the court decided that a breach of trust had occurred. The key question became whether relief would be granted under section 61 of the Act.
The court indicated that professionals were only under a duty to act reasonably, which did not require perfection. S1 was held to have acted reasonably within the meaning of section 61 of the Act in that the solicitors had not been guilty of any fault that was: “sufficiently serious or involved such a departure from ordinary and proper standards as to cut them off from the court’s discretion to relieve them of liability” [2]. The court recognised that even if S1 had insisted on answers to requisitions and on separate written undertakings regarding completion, the fraud would, in all probability have proceeded, such that it was the fraud, and not S1’s lapse in best practice, that caused the lenders’ loss. Consequently, relief was granted.
Conclusion
The case is a reminder that professionals are subject to a duty to take reasonable care and skill – they are not under an obligation of perfection – and that the court will be willing to exercise their discretion where mistakes are made that amount to a minor departure only from the ordinary and proper standards expected of professionals. The decision also confirms that, for a lender to recover monies from its solicitors in such cases, there must be clear causation between the solicitor’s breach and the loss suffered by the lender.
Full details of the case can be found here.
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[1] [2013] EWHC 1380 (QB)
[2] per Andrew Smith J, para. 70

Making Assumptions Makes For Dangerous Drafting
Many a young lawyer is taught early on that making assumptions is dangerous. The Buckingham […]
Many a young lawyer is taught early on that making assumptions is dangerous. The Buckingham Gateway litigation is a rare, but valuable, example of a party getting away with what could otherwise have been a very costly mistake in reliance upon incorrect assumptions.
The Litigation
Crowborough Properties Limited (Crowborough), a company owned by Mr and Mrs Kaushal, had borrowed £29 million from Lloyds TSB Bank plc (the Bank) to develop land in Slough. The land would be developed to include a hotel, offices, shops and a basement car park. The overall site was made up of fifteen separate titles, some of which were owned by Crowborough, and some by Mr and Mrs Kaushal. Mr and Mrs Kaushal had given personal guarantees to the Bank in respect of Crowborough’s borrowing worth up to £25 million. The personal guarantees were secured by charges in favour of the Bank over the land owned by Mr and Mrs Kaushal. However, the charges secured only Mr and Mrs Kaushal’s liability as sureties.
Crowborough fell into financial difficulties and the Bank sought to enforce its security. The parties settled those proceedings and entered into a Tomlin Order on 25 May 2011 (the Tomlin Order). One of the terms of the Tomlin Order was that, in return for the payment of £500,000, Mr and Mrs Kaushal would be released from their personal guarantees. The drafting of the Tomlin Order was based on mistaken assumptions that the charges over land held by the Kaushals themselves would remain in place and that the charges secured Crowborough’s indebtedness, not merely the Kaushals’ liability as sureties. Subsequently, the Bank realised that the release of the personal guarantees pursuant to the Tomlin Order would result in the discharge of the charges over the land owned by Mr and Mrs Kaushal.
The Bank sought rectification of the Tomlin Order on the basis that the parties’ common intention was that it was to be entitled, in respect of Crowborough’s indebtedness, to look to the securities over all the charged properties, including those registered in the names of Mr and Mrs Kaushal themselves.
A Narrow Escape
The Bank was initially unsuccessful at first instance. The High Court held that there was no common intention between the parties that the Bank was to have a separate charge to secure Crowborough’s debt.
However in February 2013 the Court of Appeal allowed the Bank’s appeal and granted rectification [1]. Lewison LJ said that: “The Bank’s right was to sell all the charged properties and apply the proceeds of sale towards the discharge of Crowborough’s indebtedness. That on the evidence, and indeed on the judge’s findings, was plainly the right that both parties intended the Bank to retain” [2].
The Court of Appeal considered how to characterise the parties’ rights. At first instance, they had been characterised on the basis that there was only one legal means of achieving the solution that both parties thought was necessary, by creating a fresh charge enabling the Bank to sell the properties and apply the proceeds against Crowborough’s debt. However, the Court of Appeal held that this view was too narrow, as the Bank’s rights could be characterised in more commercial terms. That objective could also be achieved, for example, by changing the wording of the Tomlin Order, or by a covenant by the Bank not to enforce liability under the personal guarantees, except by sale of the charged properties.
Lewison LJ found that the fact that the cause of the drafting error was reliance on erroneous assumptions: “[did] not remove the drafting error from the reach of rectification” [3].
Mr and Mrs Kaushal sought permission to appeal the Court of Appeal’s decision, but the Supreme Court refused because: “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal”. [4].
WM Comment
This case is a good example of the courts adopting a sensible, commercial approach to resolution of a dispute. It will no doubt be reassuring for parties and legal representatives alike, that the Court of Appeal has confirmed that the doctrine of rectification can assist to correct bad drafting – even in a Tomlin Order – where assumptions that are erroneous but easily identified have given rise to mistakes. This reassurance should not give rise to complacency, however. It will be crucial, in such cases, that clear evidence exists as to parties’ intentions in spite of those assumptions, and that workable, commercial solutions can be found to reverse any damage caused.
Whilst not a ‘Jackson’ [5] case per se, this case is also demonstrative of the courts’ ever-increasing tendency, post-1 April 2013, to consider justice in the wider context – not just from the point of view of the parties to discreet litigation. In the post-Jackson litigation landscape, where the Overriding Objective has been amended to include the proviso that cases must be dealt with “at proportionate cost” [6], there is now inevitably an element of trade-off between justice and cost. The weighing of wider interest and efficiency concerns in the assessment of individual cases is a trend which seems set to continue.
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[1] [2013] EWCA Civ 107
[2] paragraph 64
[3] paragraph 69
[4] UKSC 2013/0062
[5] The ‘Jackson Reforms’ to civil litigation, in effect since April 2013 following Sir Rupert Jackson’s detailed review on civil litigation and costs and the Legal Aid, Sentencing and Punishment of Offenders Act 2012
[6] Civil Procedure Rules 1.1 (1)

A helping hand for the property market?
In its 2013 budget, the Government announced various financial support plans intended to invigorate the […]
In its 2013 budget, the Government announced various financial support plans intended to invigorate the residential property market. One of these was the Help to Buy initiative, which includes a mortgage guarantee scheme whereby lenders can offer mortgages which are guaranteed by the Government. The scheme was officially launched, some three months ahead of schedule, on 8 October 2013. High street banks including Natwest, RBS, Halifax and Bank of Scotland have released their rates and already started offering mortgages on properties valued at up to £600,000 with only a 5% deposit and a 95% mortgage, and with up to 15% of the value of the property being guaranteed by the Government (in return for a fee from the lender).
The September 2013 RICS Residential Market Survey charts an almost four-year high in both house prices and the number of properties sold. The survey credits some of that growth to the Help to Buy equity loan scheme which was introduced in April and which has enabled more buyers to access the market. Increasing numbers of buyer enquiries and now the launch of the mortgage guarantee scheme are also pushing price and sale expectations to further highs for the coming three to twelve months.
Whilst it does seem that Help to Buy is contributing to a boost in the residential market, there is concern that the supply of property to the housing market is lagging behind. That could cause a destabilising boom and bust, particularly if the market becomes reliable on the Help to Buy scheme, which is actually due to run for just three years. There is also concern that positive and sustainable growth in the residential market is not currently being seen nationwide, and that the position with particularly sought after areas or types of property are distorting the market overall.
Banks have been preparing for a stampede on Help to Buy mortgage applications, with some even extending opening hours to cater for the rush. Walker Morris will continue to monitor whether what’s good for mortgage business in the short term is good for the residential market overall.

Agent status in structured asset finance
The recent case of Torre Asset Funding v RBS [1] reiterates that the contract is […]
The recent case of Torre Asset Funding v RBS [1] reiterates that the contract is king, especially in the context of complex structured asset finance facilities.
Facts
As part of a six-tiered finance facility put together by the defendant (RBS), the claimant (Torre) loaned money to Dunedin Property Industrial Fund (Holdings) Ltd (Dunedin) to acquire a portfolio of industrial units in late 2005/mid 2006. Dunedin gave market standard contractual covenants to the lenders, including an interest cover covenant regarding the relationship between the income for Dunedin from the portfolio and the interest payments due to be made by Dunedin to the various levels of lender; and a loan to value covenant regarding the relationship between the value of the properties in the portfolio charged as security for the loans and the loan amounts outstanding. Breach of either of those covenants would allow Torre (subject to the priority of other, more senior lenders within the structure) to call in the loans.
In addition to being one of the lenders, RBS acted as agent for Torre, responsible for the flow of certain financial information from Dunedin.
The portfolio did not increase in value. In fact, in July 2007, Dunedin and RBS reviewed cashflows as against those projected in the original business plan and realised that the financing could not be fully serviced. RBS sought consent from Torre to reschedule interest payments by rolling them up to maturity. The reason given was to enable Dunedin to incur expenditure to improve the estate – the fact that the financing could not be serviced was not mentioned. Torre gave consent to the restructuring, but other lenders refused and the restructuring never took place.
In July 2008 a valuation report revealed that all levels of the financing structure were in default. Dunedin appointed administrative receivers and Torre received no funds from the receivership.
Claims
Torre claimed that RBS had been in breach of its duty as agent by failing to report that there had been an event of default as per the relevant contractual covenants and that RBS had been in breach of its duty as agent by failing to pass on to Torre the 2007 cashflow statement. Torre also sued RBS for negligent misstatement in respect of the inaccurate reason given for the interest rescheduling request.
Decision
Although the court agreed that there had been a breach of covenant when the 2007 cashflow statement revealed problems, it rejected Torre’s argument that RBS’ failure to report was actionable. The court looked at the contractual arrangements overall and considered that the contractual agency duties which RBS had assumed to Torre were precisely defined and limited. There was therefore no scope for extending those duties by implying general duties from the common law of agency. Similarly, the court found that the 2007 cashflow statement was not one of the specific financial information documents that RBS had contracted to supply to Torre and so, again, RBS was not in breach.
In relation to the negligent misstatement claim, the judge found that RBS had assumed a duty of care when seeking Torre’s consent to the rescheduled interest arrangements and offering reasons as to why the amended arrangement was required. RBS had breached that duty by failing to take reasonable care to give accurate information. In fact, the judge said that RBS’ reasoning was “materially inaccurate and misleading”. Nevertheless, because other lenders within the scheme had refused consent and the rolling-up of interest payments did not happen, RBS’ breach did not have any relevant impact and did not cause Torre to suffer loss.
WM Comment
There are a number of messages that banks and other financial institutions can take away from this case. The first is, of course, the importance of tightly drafted contracts within complex asset finance arrangements. It is notable that, within the context of a carefully structured contractual framework overall, the court was willing to construe RBS’ duties narrowly (to the bank’s distinct advantage).
The case also highlights the potential risks that a bank can face when it is involved in multi-level lending, and that a clear division of the role of agent from that of lender is essential. This division should be clear both on the face of the contractual documentation and on a practical level, with different departments and staff dealing with the different roles at all times.
Finally, even despite the most well drafted and well deployed agency arrangements, it is important to note that where any arrangements invest an agent with an element of discretion (such as, here, the discretion to give reasons for the amended interest arrangement request), that discretion must be exercised with “honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused” [2].
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[1] Torre Asset Funding Ltd & Anor v The Royal Bank of Scotland Plc [2013] EWHC 2670 (Ch)
[2] Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116 at [60]-[66], as per Mr Justice Sales (Torre Asset Funding) v RBS at [35].

Breach of Trust: AIB v Redler update
In AIB v Redler & Co [1], the Court of Appeal decided that, although solicitors […]
In AIB v Redler & Co [1], the Court of Appeal decided that, although solicitors had acted in breach of trust by failing to obtain a first legal charge against a property in favour of their client, losses were limited to the additional security that a first legal charge would have provided.
You can find the full facts of the case by clicking here but, in summary, AIB sought to recover its full shortfall loss of £2.4m from the solicitors on the grounds that the advance should not have been released in circumstances where there was a failure to redeem the existing charge fully and to secure AIB a first legal charge. AIB argued that in releasing the advance, Mark Redler was in breach of trust and that it was entitled to have the trust fund restored. The property in question was later sold and the sale proceeds were applied firstly to redeem the first charge of Barclays, and then in reduction of AIB’s mortgage. The Court of Appeal held that release of the advance was in breach of trust but that the loss suffered by AIB as a result was only the amount that had to be paid to Barclays to redeem its first charge, as AIB would otherwise have recovered that sum.
AIB has now been granted permission from the Supreme Court to appeal against the ruling, and will again attempt to recover its £2.4m shortfall from the solicitors.
Walker Morris will report on the outcome of the appeal once it has been handed down.
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[1] AIB v Mark Redler & Co [2013] EWCA Civ 45