Clarification of solicitors' breach of trust claims in a re-mortgage situation
The Court of Appeal on 8 February 2013 in AIB Group (UK) plc v Mark Redler & Co  EWCA Civ 45 has provided further clarification of the necessary ingredients to establish breach of trust by solicitors in a lender's claim.
In 2006 two doctors borrowed £3.3 million from AIB to finance their care home business. AIB wanted a first charge over the doctors' home which was valued at £4.5 million. It already had a charge in favour of Barclays, which secured 2 loans. This was to be redeemed. On the re-mortgage the solicitors (MR) redeemed one Barclays' loan and then paid the balance to the doctors. The situation was resolved in that AIB took a second charge over the property and the Barclays first charge was agreed to be limited to £273,777.42.
The doctors failed to keep up the repayments. Their home was re-possessed and sold. Barclays' charge was paid off but the shortfall on the AIB charge was about £4 million. AIB sued MR for the entire sum. AIB argued that MR failed to obtain a first charge and so MR was in breach of trust, and that they were entitled to the full amount of the mortgage advance plus interest. The judge found that the solicitors were in breach of trust but limited the damages to the amount of the Barclays' charge.
The Court of Appeal upheld the judge's decision on quantum albeit for different reasons. In a re-mortgage transaction, a solicitor had to be satisfied that the new lender would be able to have its charge registered as a first legal charge over the property once the existing charge had been redeemed. That required him to be in possession of a valid charge in favour of the new lender properly executed by the borrowers; to have a redemption statement from the existing lender enabling him know the sum needed to redeem the existing charge; to have control of a sum sufficient to enable the existing charge to be repaid; and (if necessary) to have an undertaking from the existing lender’s solicitors that the re-mortgage monies would be used to redeem the existing lender’s charge or an unconditional commitment from the existing lender itself that the advance monies would be used for such purpose. Once those ingredients were in place, completion of the re-mortgage transaction occurred and the solicitor was entitled to release the re-mortgage monies. It was not necessary for a solicitor to have secured a first legal charge before the mortgage advance was released.
The Court of Appeal rejected AIB’s assertion that, because MR had acted in breach of trust by paying away advance monies without ever obtaining a first legal charge in favour of AIB over the property, AIB was entitled to be repaid the entire shortfall of about £4million- odd losses in order to have the trust fund reconstituted.
The Court of Appeal applied the principle in Target Holdings Limited v Redferns  1 AC 421 that equitable principles of compensation have the capacity to recognise what loss the lender actually suffered from the breach of trust and to base the compensation recoverable on a proper causal connection between the breach and the actual loss. The fact that the lender did not obtain a first legal charge over the property was: "irrelevant to the question of what loss AIB has suffered as a result of the breach."
The Court of Appeal affirmed the damages award to £273,777.42.