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Borrower’s liability to lender following fraud by solicitors?

Business Meeting Print publication

14/12/2015

The Court of Appeal has confirmed that a borrower should not be held liable for the repayment of a mortgage advance when completion of the transaction has not taken place following misappropriation of funds by solicitors.

Aldermore Bank plc v Nassir Rana

In this recent case [1], the Court of Appeal considered the situation where remortgage monies are paid out to a borrower’s solicitor, but these funds are misappropriated by those solicitors with the effect that existing charges are not redeemed, and the lender’s new charge is not registered. In those circumstances, does a borrower become contractually liable for the repayment of the mortgage advance?

The facts

Three properties were being transferred to Mr Rana (the Borrower) by his sister, under a Deed of Gift. Each of the properties had existing mortgages registered against them in favor of Clydesdale Bank (Clydesdale), and the properties were to be transferred subject to these charges. The Borrower applied to Aldermore Bank plc (the Bank) for a loan to be secured against the properties so that the Clydesdale charges could be removed and the Borrower would be provided with some surplus funds. The transaction was effectively a remortgage over the three properties. Kuit Steinart Levy LLP (Kuits) was instructed on behalf of the Bank, and the Borrower instructed the firm of Austin Law (AL). Kuits’ instructions included the relevant parts of the Council of Mortgage Lenders Handbook (CML Handbook) and the mortgage offer made to the Borrower also reflected the instructions contained within the CML Handbook and was made on the basis that the Bank would obtain a first legal charge over the properties.

In accordance with their instructions Kuits, investigated the title to the properties and obtained various undertakings from AL, including (but not limited to) the following: that AL were to act as Kuits’ agents on completion; and that AL would procure the discharge of any charges registered against the properties.

The Deed of Gift was executed by the Borrower’s sister and redemption details were provided by Clydesdale to AL, together with an undertaking to provide the requisite DS1 upon receipt of the redemption monies, in readiness for completion. The redemption details were forwarded to Kuits, and the Bank gave Kuits authority to release the remortgage advance monies to AL for the purposes of completion. The following day, the Borrower’s sister executed the transfers in the Borrower’s favour, and the sum of £78,193.64 was remitted to the Borrower out of the completion monies; representing the balance of the loan not required to redeem the Clydesdale charges.

Instead of using the balance of the completion monies to redeem the Clydesdale charges, however, AL misappropriated these monies, resulting in the Clydesdale charges remaining in place, and the Bank not obtaining a first legal charge over the properties.

The judge at first instance dismissed the Bank’s claim against the Borrower, that he should be held liable for the repayment of the mortgage advance over and above the £78,193.64. (The Borrower accepted that he must account for that surplus sum). That decision was made on the basis that the remortgage never completed and therefore the Borrower was not bound by the terms of the mortgage agreement. The Bank appealed.

Court of Appeal clarification

The Court of Appeal dismissed the Bank’s appeal, holding that the Borrower should not be held liable for the balance of the mortgage advance because completion of the remortgage had not taken place.

The Court of Appeal commented that this case could be distinguished from AIB v Redler [2] (AIB), because in that case, the lender’s solicitors had released the mortgage advance without either paying off the existing charges on the property, or obtaining an undertaking from the prior chargee that its charge would be removed on receipt of the redemption monies. The facts of this case differ to those in AIB because an undertaking had been received from Clydesdale to release its security upon payment of the redemption monies. The particular question for the Court of Appeal in this case was whether the provision of a redemption statement and the receipt of Clydesdale’s undertaking to provide a DS1 upon receipt of the redemption monies would be sufficient to constitute completion of the transaction, or whether payment of the redemption monies to Clydesdale was also necessary.

The key factors taken into account by the Court of Appeal in reaching its decision are:

  • A necessary component of any remortgage transaction is the redemption of any prior charges. Completion of the remortgage would not occur until the redemption monies were paid to Clydesdale and DS1 forms were provided (or at least an undertaking was provided by Clydesdale to provide the DS1 forms).
  • As Clydesdale did not receive any part of the redemption monies and did not provide any authority to enable the Bank to register a first legal charge over the properties (which was a term of the mortgage offer), the mortgage advance remained trust money belonging to the Bank in AL’s hands, and never belonged beneficially to the Borrower. The Borrower therefore had no contractual liability to repay the monies not paid out by AL to the Bank.
  • AL held the mortgage monies on trust for the Bank as Kuits’ agents until completion of the transaction. Given that Clydesdale would not provide DS1 forms to Kuits until its charges had been fully redeemed, AL did not have any authority to release any part of the mortgage advance other than for the purpose of redeeming the Clydesdale charges. As no funds were remitted to Clydesdale, AL did not have Kuits’ authority to release any sums to the Borrower. The Borrower was not, therefore, the beneficial owner of, or entitled to any part of the remortgage funds.

WM Comment

This judgment highlights the importance of looking at the facts of each case individually; considering the transaction as a whole; and specifically investigating the conduct of the solicitors and the intention of the parties. The judgment is a welcome clarification of the law in cases of misappropriation of funds due to the fraud of solicitors. However it may present difficulties for lenders seeking to pursue mortgage shortfall claims against borrowers in circumstances where solicitors’ insures may have declined cover or there are otherwise insufficient funds to reimburse the lender.

If you have any queries or concerns arising from Aldermore Bank plc v Nassir Rana, or would like any advice or assistance in connection with any retail lending issue, please do not hesitate to contact Georgina Davis, in Walker Morris’ specialist Banking Litigation team.

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[1] [2015] EWCA Civ 1210
[2] AIB Group (UK) plc v Mark Redler & Co [2013] EWCA Civ. 45.  For further information, see our briefing on this case.

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