Aldermore Bank Plc v Rana

This is an appeal by the claimant in these proceedings, Aldermore Bank plc (“the Bank”), against an order of HH Judge Pelling QC, sitting as a judge of the High Court, dated 16 June 2014. Save in one respect which I will come to in a moment, the judge dismissed the Bank’s claim against Mr Rana for the repayment of the sum of £1,869,988.66 plus interest which was alleged to be due from him under a mortgage dated 16 July 2013. The sole issue on the appeal and before the judge was whether the mortgage transaction was ever completed so as to make Mr Rana legally liable for the repayment of the mortgage loan and interest claimed. In order to understand how that issue has arisen I shall begin by briefly summarising the extraordinary facts of this case as found by the judge.

On 18 January 2013 Mr Rana applied to the Bank for a loan to be secured on three properties at 122, 166 and 168 Cowley Road, Oxford (“the Properties”). The Properties were then registered in the name of his sister and were all charged to Clydesdale Bank as security for existing loans made to her. Mr Rana’s sister was proposing to transfer the Properties to him by way of gift subject to the charges in favour of Clydesdale Bank and the purpose of the loan from the Bank was to pay off the Clydesdale loans and provide Mr Rana with some additional capital. Although, therefore, the new loan would be used to redeem charges in respect of which Mr Rana’s sister was the borrower, completion of the transaction would in effect be a re-mortgage of the Properties by Mr Rana who would become the registered proprietor as part of the completion arrangements.

The Bank instructed the firm of Kuit Steinart Levy LLP (“Kuits”) to act for it in the transaction and Mr Rana retained the firm of Austin Law. Clydesdale Bank did not instruct its own solicitors.

Kuits were instructed by the Bank on 14 May 2013 in accordance with the Bank’s standing instructions. These included the relevant terms of the Council of Mortgage Lenders’ Handbook (“the CML Handbook”). The letter of instruction requested Kuits to carry out what was described as a full title investigation and to make contact with the borrower’s solicitors. Their report on title was to be forwarded to the Bank “as soon as you are ready to complete this transaction”.

The offer of mortgage to Mr Rana was made and accepted by him on terms that the Bank would obtain a first legal charge over the Properties. The mortgage offer document stated that he could “withdraw … before the mortgage is completed” and the agreement to provide mortgage finance was made conditional on the “receipt of a satisfactory redemption statement from the existing mortgage lender”.

The terms of the mortgage offer are reflected in the instructions contained in the CML Handbook which, as I have said, formed part of the Bank’s instructions to Kuits. So far as material, the Handbook stated:

“5.4.1

The title to the property must be good and marketable free of any restrictions, covenants, easements, charges or encumbrances which, at the time of completion, might reasonably be expected to materially adversely affect the value of the property or its future marketability.

. . .

5.8

First Legal Charge

On completion, we require a fully enforceable first charge by way of legal mortgage over the property executed by all owners of the legal estate. All existing charges must be redeemed on or before completion, unless we agree than an existing charge may be postponed to rank after our mortgage. Our standard deed or form of postponement must be used.

. . .

6.1.1

The loan to the borrower will not be made until all relevant conditions of the mortgage offer which need to be satisfied before completion have been complied with and we have received your certificate of title.

. . .

10.3

You are only authorised to release the loan when you hold sufficient funds to complete the purchase of the property and pay all stamp duties and registration fees to perfect the security as a first legal mortgage or, if you do not have them, you accept responsibility to pay them yourself. You must hold the loan on trust for us until completion. If completion is delayed, you must return it to us when and how we tell you (see part 2).

. . .

14.

AFTER COMPLETION

14.1

Application to HM Land Registry

14.1.1

You must register our mortgage at H M Land Registry. Before making your H M Land Registry application for registration, you must place a copy of the results of the Official Search on your file together with certified copies of the transfer, mortgage deed and any discharges or releases from a previous mortgage.”

On 21 May 2013 Kuits had written to Austin Law setting out a number of requirements including that the borrower’s solicitors should provide various undertakings which would govern the payment to them of the mortgage advance in anticipation of completion. These undertakings were provided by Austin Law in a letter dated 1 July 2013 shortly after the Bank had made its formal mortgage offer to Mr Rana on 28 June. The undertakings which followed verbatim those requested by Kuits were in these terms:

“We understand that it is a condition of the Bank proceeding further with the proposed Facility, that Solicitors’ Undertakings are provided on behalf of the Borrower, as follows:

1.

We undertake to advise you of any variations in any enquiries before contract or requisitions on title and replies thereto or of draft documentation supplied as soon as possible of which we become aware prior to completion of this mortgage.

2.

In consideration of you sending us the net mortgage advance in the above matter WE HEREBY UNDERTAKE as follows:

(a)

To act as your agents on completion.

(b)

That the person completing the transaction will hold a current practising certificate.

(c)

That as your agents, we will comply strictly with specific instructions supplied.

(d)

That if the transaction is not completed within three working days of your sending advance monies to us, we will contact you to obtain further instructions (this will normally be that monies be returned to yourselves via telegraphic transfer).

(e)

That we will obtain the documents of title referred to in the schedule of deeds and/or other correspondence supplied during the course of this transaction.

(f)

Following completion we will forward all documents to you within three days of their falling into our possession.

(g)

We will take such steps as are necessary to perfect title including complying with Land Registry and HMRC requirements (including payment of any additional sums required by either or both of them not covered by the deductions made from the mortgage advance).

(h)

To procure the discharge of any charges registered against the Property in particular:

(i)

The legal charge in favour of Clydesdale Bank Plc dated 4 March 2008 in respect of 122 Cowley Road;

(ii)

The legal charge in favour of Clydesdale Bank Plc dated 4 March 2008 in respect of 166 Cowley Road;

(iii)

The legal charge in favour of Clydesdale Bank Plc dated 28 August 2009 in respect of 168 Cowley Road

and thereafter to forward you, within 3 working days of completion, forms DS1 or such other appropriate form of discharge, duly executed by the relevant charge holders.

(i)

To properly complete and submit form SDLT1 together with any supporting forms/information required by HM Revenue & Customs within 5 working days of completion and all SDLT due and to use all reasonable endeavours to respond properly and quickly to any requisitions/enquiries raised thereon by HM Revenue & Customs not to recall either the application or any SDLT paid and to forward to you as soon as practicable following receipt by us the appropriate SDLT Certificate(s).

(j)

That the loan facility will be utilised solely for the purpose set out in the facility letter….”

On 2 July 2013 Mr Rana’s sister executed the deed of gift in his favour and a copy of the deed together with Mr Rana’s declaration of solvency were forwarded to Kuits by Austin Law on 4 July.

On 15 July Clydesdale sent an e-mail to Austin Law setting out the redemption details in respect of its existing charges over the Properties. The e-mail said:

“Please find redemption details as per request:

With reference to the current account overdraft (*826119* -*60009574*), I can confirm that the amount required to redeem as at today’s date is £1,780,085.84. This includes the following:

Outstanding balance: £1,674,632.81

Pre-notified Debit Interest: £4,979.87

Accrued debit Interest: £2,248.16

Security release fee 3*£75 225.00

Residual loan debt reduction: 98,000.00

Total due today £1,780,085.84

Please note that this is a current account mortgage and has an agreed overdraft, therefore the balance can fluctuate on a daily basis. We would therefore advise that you contact us via e-mail on the date of completion in order to obtain an up to date figure.

I can confirm that upon receipt of the redemption funds, DS1’s and all required documentation from the customer we will release our security in favour of Clydesdale Bank PLC”.

The e-mail was forwarded by Austin Law to Kuits and Kuits were asked to confirm when the funds from the Bank would be released. The Bank gave Kuits the authority to release the funds to Austin Law later on 15 July and the monies were then transferred from Kuits’ own client account to Austin Law for the purpose of completion. Austin Law confirmed receipt of the monies on 16 July and were then asked by Kuits to forward to them the documents referred to in their undertaking. These included the DS1 forms in respect of each of the registered Clydesdale charges so as to enable Kuits to obtain registration of the Bank’s first legal charge over the Properties.

On or before 16 July Mr Rana’s sister executed registered transfers in her brother’s favour in respect of each of the Properties and on 16 July Austin Law transferred to Mr Rana the sum of £78,193.64 out of the completion monies which represented the balance of the loan not required to discharge the Clydesdale loans. But Austin Law did not forward to Kuits the forms DS1 executed by Clydesdale Bank. Instead of using the completion monies to pay off the existing loans from Clydesdale they simply misappropriated all but the sum of £78,193.64 which they had sent to Mr Rana.

This extraordinary act of dishonesty has resulted in the Clydesdale charges remaining in place and the Bank not obtaining the security of a first legal charge over the Properties. Austin Law’s insurers have repudiated their cover on grounds of fraud leaving the Bank to seek payment from the Law Society Compensation Fund. It has received £1.796m from the Fund but we are told that this is some £368,000 short of its actual loss.

In these circumstances, it has sought to recover the balance of the mortgage loan and interest from Mr Rana on the basis that there was completion of the mortgage transaction on 15 or 16 July 2013 so as to render Mr Rana liable for the unrecovered balance of the loan. Mr Rana accepts that he must account to the Bank for the £78,193.64 that was paid to him but he denies that he ever became contractually liable on the mortgage deed because there was never any completion of the mortgage transaction.

The judge dismissed the Bank’s claim in respect of all but the £78,193.64. He rejected the Bank’s submission that receipt of the completion monies by Austin Law constituted receipt by Mr Rana and that the mortgage was completed once Austin Law had received the redemption statement from Clydesdale Bank and their undertaking to discharge their security on receipt of the redemption monies. He held that Austin Law remained Kuits’ agent until completion and that completion of the re-mortgage did not take place until the redemption monies were paid to Clydesdale in return for the unconditional release of signed DS1 forms or at least an undertaking from Clydesdale to provide the same. In the present case Clydesdale never received any part of the redemption monies and did not provide Kuits, either directly or through Austin Law, with the necessary authority to enable the Bank to secure the registration of a first charge over the Properties which was a term of the mortgage offer. The mortgage advance therefore remained trust money belonging to the Bank in Austin Law’s hands and never belonged beneficially to Mr Rana. There was no completion of the re-mortgage and Mr Rana has no contractual liability to repay the mortgage advance.

In AIBGroup (UK) plc -v- Mark Redler & Co. [2013] EWCA Civ. 45 this Court had occasion to consider the terms of clauses 5.8 and 10.3 of the CML Handbook and, more generally, what was required in order to constitute completion of a re-mortgage transaction. As the Chancellor pointed out when giving permission for the present appeal, the facts were very different in AIB because the lender’s solicitors had released the mortgage advance before they had either paid off the existing charges on the property or obtained an undertaking from the prior chargee that it would release its security on payment of the redemption monies. In the present case, by contrast, Austin Law had received a suitable undertaking from Clydesdale to release its security on payment of the sums specified in the redemption statement but they had not been paid. The question therefore is whether payment of the redemption monies to Clydesdale was a necessary part of completion.

In AIB this Court recognised that the earlier decision of the Court of Appeal in Nationwide Building Society v Davisons [2012] EWCA Civ 1626 made it difficult to treat compliance with clause 5.8 of the Handbook as an absolute pre-condition to the authorised release of the advance. At [38] I said:

“It is important to emphasise that the lender's claims for breach of trust in the two authorities I have referred to do not turn on whether these solicitors succeeded in obtaining a first legal charge over the property. Although s.5.8 of the CML Handbook states in mandatory terms that all existing charges must be redeemed on or before completion and AIB in paragraph 22 of the particulars of claim elides the obtaining of a first legal charge with the averment that the Defendant was not authorised to release the advance monies except upon completion, this court in Davisons construed that as going no further than to impose an obligation on the lender's solicitors to exercise reasonable skill and care in seeking to produce that outcome: see Sir Andrew Morritt C at paragraph 57. It is not therefore possible to regard s.5.8 as a condition precedent to the authorised disbursement of a mortgage advance so that any failure to obtain the stipulated security would make the solicitors accountable for the entire advance. The trust argument has to turn simply on whether there has been completion within the meaning of s.10.3 in which event the monies cease to be trust monies in the solicitor's hands.”

But clause 5.8 is nonetheless an important term of the solicitors’ instructions when considering what is comprised within completion of the transaction which is the time under clause 10.3 of the CML Handbook when the completion monies may be released free of the trust in favour of the lender. Having considered the earlier decisions of this Court in Lloyds TSB plc v Markandan and Uddin [2012] EWCA Civ 65 and in Davisons, I referred to the passages in the Law Society’s Conveyancing Handbook (13^th Edition) which set out the procedure to be followed in relation to the discharge of an existing mortgage in the context of the completion of a conventional house purchase:

“39…. the Law Society's Conveyancing Handbook (13^th Ed) contains no specific guidance on remortgages but does deal with the discharge of a seller's mortgage on the completion of the purchase. Paragraphs 4.2.13 and 4.2.14 state:-

"4.2.13.

Arrangements for the discharge of the seller's mortgage(s) over the property will have been agreed between the parties at the requisitions on title stage of the transaction. Where the mortgage is a first mortgage of the property in favour of a building society lender, the parties will frequently have agreed to permit the seller to discharge his mortgage after completion takes place by using part of the proceeds of sale to make payment to the lender. In such a case it will have been agreed that the seller's lender's solicitor should hand to the buyer's solicitor on completion an undertaking in the form of wording recommended by the Law Society to discharge the mortgage (F4.2.15) and to forward the receipted deed or Form DS1 to the buyer's solicitor as soon as this is received from the lender.

4.2.14.

An undertaking to discharge the seller's mortgage should only be accepted from a solicitor or licensed conveyancer because of the difficulties of enforcement of undertakings against unqualified persons. The undertaking should also be in the form of wording approved by the Law Society. The current guidance from the Law Society is that it will not normally be advisable to accept an undertaking if the mortgagee is not a member of the CML, and/or where the amount required to redeem the mortgage exceeds the minimum level of solicitors' indemnity insurance (£1 million per claim). In such a case an undertaking should not be accepted and it may be necessary for completion to take place at the lender's solicitors' offices (not the seller's solicitors' offices) or for the lender's solicitor to attend personally at completion in order to discharge the mortgage. If the amount of the mortgage exceeds £2 million consider asking for a warranty from the seller's solicitor that his insurance cover does exceed the amount required to redeem the mortgage. See the Law Society's guidance at Appendix V.15."

I then said this:

“40.

These are the procedures which were confirmed in Markandan and Davisons as an essential part of the process of completion and they seem to me to have equal application in the case of a remortgage. MRC were not therefore authorised, in my view, to release the monies until they had such documents in their hands. I can see no material difference between the need for the lender's solicitor on a remortgage to ensure that the advance will be used to discharge the existing mortgage and the requirement (accepted in Markandan) that the solicitors should have been in receipt of the relevant documents of title, including a certificate of discharge of the existing mortgage or a solicitor's undertaking to produce such documents once the existing mortgage was redeemed. Where the existing lender has instructed a solicitor to act on its behalf in the remortgage transaction, the obtaining of a redemption statement from the bank, coupled with an undertaking from that solicitor that the advance will be applied by the bank in redemption of its charge, guarantees that the bank will use the monies for that purpose. Alternatively, where the existing lender has not instructed a solicitor to act on its own behalf, the obtaining of a redemption statement from the bank, coupled with unconditional confirmation from the bank that that the advance will be applied by it in redemption of its charge, likewise guarantees that the bank will use the monies for that purpose. Without one or other, the new lender has no assurance that the monies will not be used to discharge other unsecured liabilities of the borrower.

41.

It also seems to me to be artificial to regard completion as having already occurred before the lender's solicitor takes any steps to utilise the mortgage advance in the redemption of the existing charge. This is contemplated in s.5.8 of the CML Handbook as occurring either before or on completion, which suggests that the reference to completion in s.10.3 should be construed as including the process of redemption or at least the release of the money to the prior chargee for that purpose. Mr Cousins QC for AIB now accepts that in order for redemption to take place and thereafter for the new lender to obtain a first legal charge the mortgage advance must be released to the existing lender, just as in the case of an ordinary purchase on mortgage it must be released to the vendor's solicitor to be applied in the discharge of the existing mortgage and in the payment of the purchase price. But as in those cases the solicitor's authority to complete and so discharge the trust is, he submits, dependent upon his obtaining an undertaking from the existing lender or its solicitor to use the money to discharge the existing mortgage and to forward in due course the relevant certificate of discharge so as to enable the new charge to be registered. He supports these submissions with a reference to another earlier decision of this court in Knight and Keay v Haynes Duffell Kentish and Co [2003] EWCA Civ 223 where a firm of solicitors paid away their client's money without obtaining in return the assignment of a trade name. But the terms and content of their retainer were very different and I do not regard that decision as of much assistance in construing the meaning and effect of the CML Handbook. The construction of s.10.3 by this court in Markandan and Davisons supports, I think, the lender's contention that the release of the mortgage advance was an essential part of completion and that MRC's authority to disburse the monies depended upon their possession of the undertakings I have referred to. Without these undertakings they would not and did not complete.”

Although, as I have indicated, my views as to whether actual payment of the redemption monies was a necessary part of completion were strictly speaking obiter in AIB, they were concurred in by the other members of the Court. The production to the lender’s solicitors or their agents of a suitable undertaking by the existing chargee to release its security on payment of the redemption monies will be sufficient to enable the lender’s solicitors safely to release the redemption monies to the existing chargee but it is difficult to see in what way, as a matter of ordinary language, the re-mortgage transaction can be said to have been completed if, instead of paying the monies to that chargee, the solicitor simply misappropriates his client’s money.

Mr Cannon QC for the Bank seeks to overcome this obvious difficulty by concentrating on when the trust in favour of the Bank ceases to attach to the mortgage advance in the solicitors’ hands. He submits that when the advance was paid to Austin Law it became Mr Rana’s money although held on the terms of the undertaking of 1 July. Austin Law obtained the redemption statement and undertaking from Clydesdale (unlike in AIB) and therefore had everything necessary for completion. In paying out the £78,193.64 to Mr Rana but in failing to pay the balance to Clydesdale, Austin Law were undoubtedly in breach of their undertakings to Kuits and of any duty they may have owed to the Bank but were not acting in breach of trust.

The essence of this argument is that the release of the mortgage advance in a conventional re-mortgage transaction necessarily takes place prior to the actual redemption of the existing charges and the production by the chargee of the form DS1. Once the money leaves the client account of the lender’s solicitor it ceases to be subject to the trust imposed on the monies in that account and belongs to the payee although the payee may be subject to a contractual or other undertaking as to its future use. The payee’s failure to comply with such an undertaking may amount to a breach of contract but that does not necessarily mean that the transaction has not been completed or that the monies in the payee’s hands do not belong to the payee.

At a relatively high level of generality, I do not quarrel with those submissions but, as ever, one needs to relate them to the terms on which the parties contracted and the solicitors were instructed in the instant case. In an ordinary house purchase transaction involving the redemption of a prior charge on the vendor’s title, the purchaser’s solicitor (who will ordinarily also act for the purchaser’s mortgagee) will have authority to release the purchase price (including the mortgage advance) to the vendor’s solicitors against undertakings that the monies will be used to discharge any existing mortgages on completion and the provision of a redemption statement indicating what the existing mortgagee requires to be paid. The forms DS1 will then be supplied once the redemption monies have been paid. As is clear from the passages in the Law Society’s Handbook quoted earlier, completion will often take place when the vendor’s solicitors provide the purchaser’s solicitors with the executed transfer and a suitable undertaking to use the purchase price after completion to discharge the existing mortgages. Where completion takes the form of a meeting between the vendor’s and the purchaser’s solicitors, the redemption of the charges will necessarily post-date the handing over of a draft for the purchase price against the receipt of the transfer and the undertaking I have referred to. Where completion by post occurs, the vendor’s solicitor will already have the purchase monies in his client account held to the order of the purchaser’s solicitors and on the day chosen for completion will become entitled to use those monies in payment of the purchase price to the vendor and the redemption of any prior charges in accordance with his undertaking. There is an obvious risk that the vendor’s solicitors may fail after completion to use the purchase monies to redeem the vendor’s prior mortgage either wholly or at all but, in those circumstances, the purchaser’s remedy would be to enforce the vendor’s solicitors’ undertaking and obtain compensation for the breach. It would also be a breach of the vendor’s contractual obligation to give a clear title. But, absent some specific provision in the contract of sale, it would be difficult, I think, to contend that completion did not take place until the existing mortgage had actually been discharged.

A re-mortgage transaction is different because the property which will provide the security for the new mortgage will usually already belong to the borrower. The present case is one in which this was not the case but the factual difference is immaterial. Mr Rana was not a purchaser of the Properties. They were, as I have mentioned, gifted to him by his sister subject to the Clydesdale Bank charges so that on completion of the re-mortgage the only additional conveyancing formality was the release to Mr Rana of the executed transfers of the Properties. The critical issue is whether the completion of the re-mortgage transaction required Austin Law not merely to have in their possession the redemption statement and undertaking from Clydesdale Bank but also to have used the Bank’s mortgage advance in the payment of the redemption monies.

Whether one analyses the transaction in terms of whether beneficial ownership of the Bank’s advance passed from the Bank to Mr Rana or in terms of when the transaction was completed makes no real difference to the outcome. It is clear to me, as it was to the judge, that, under the terms on which the monies were sent by Kuits to Austin Law, the borrower’s solicitors held the mortgage advance on trust for the Bank as Kuits’ agents until the mortgage transaction was completed. The undertakings contained in the letter of 1 July stated in terms that Austin Law would comply with Kuits’ specific instructions and would return the advance if the transaction was not completed within three working days. Part of those instructions (see paragraph 2(h)) were that the advance should be used to procure the discharge of the Clydesdale charges and that “thereafter” the forms DS1 executed by the charge holder should be sent to Kuits. Since the unconditional release to the Bank’s solicitors of completed DS1 forms could only take place once the payments required under the redemption statement had been made, it becomes, in my view, impossible to construe the letter of 1 July as giving Austin Law authority to release any of the mortgage advance other than for the purpose of redeeming the Clydesdale charges. That is consistent with the terms on which Kuits were instructed under the CML Handbook and the undertakings demanded from Austin Law as their agents on completion reflect, as one would expect, the terms of the Bank’s instructions to Kuits. I do not accept Mr Cannon’s submission that Austin Law received the Bank’s mortgage advance as Mr Rana’s solicitors.

Clause 5.8 of the CML Handbook requires all existing charges to be redeemed on or before completion and, as I explained in AIB, gives content to what constitutes completion in a re-mortgage transaction for the purposes of clause 10.3 of the Handbook. Although it might theoretically be possible to have a situation in which completion meant something different in the contract between lender and borrower from what it meant in the lender’s instructions to its solicitors, that situation is a very unlikely one and does not, in my view, exist in this case. The mortgage offer stipulated that the Bank would obtain a first legal charge which, construed in the context of this particular transaction, required as an essential part of the transaction the removal of the Clydesdale charges. The instructions to the solicitors gave effect to this by requiring Kuits and Austin Law to discharge the prior charges on or before completion.

In these circumstances, I adhere to the view I expressed in [41]-[42] of AIB that completion of a re-mortgage transaction ordinarily includes the redemption of the prior charges. The essence of the transaction is the creation of a new first legal charge to replace the existing charges over the Property. The discharge of the existing borrowings is a critical part of that process and therefore a necessary component of completion. There is nothing in the terms of the contract or the instructions to the solicitors to displace that in the present case. I would therefore dismiss the appeal.

I agree.

I also agree.