AIB Group (UK) Plc v Mark Redler & Co (A Firm)

A solicitor holding mortgage advance monies on trust commits a breach of trust only to the extent that money is paid out contrary to the authority conferred by the retainer. The retainer must be construed in its commercial context, including ordinary conveyancing practice. An instruction to obtain a first-ranking mortgage may authorise payment to redeem a prior charge before the lender’s charge is registered. Where the solicitor pays too little to redeem that charge, the breach is limited to the shortfall wrongly paid to the borrower, rather than the whole advance. The usual remedy is reconstitution of the trust to that extent, together with equitable compensation for additional sums secured by the prior charge, subject to credit for payments reducing the loss.

AIB advanced £3.3 million to borrowers on the security of a substantial residential property. The defendant solicitors acted for AIB and the borrowers. Their instructions required the existing Barclays mortgage to be redeemed and a first legal mortgage in favour of AIB to be obtained.

The solicitors negligently paid Barclays approximately £1.2 million, although about £1.5 million was required to redeem both secured accounts, and paid the balance to the borrowers. AIB’s charge was later registered as a second charge. The preliminary issues concerned whether the payment was a breach of trust and, if so, the appropriate remedy.

1. Breach of trust. The authority of a solicitor holding client money on trust is determined by construing the retainer. The court considers express terms and proper implications arising from the circumstances, the nature of the transaction and ordinary conveyancing practice. A payment outside that authority is a breach of trust. Terms concerning other contractual duties do not necessarily regulate authority to pay.
2. The solicitors were required to obtain a duly executed mortgage before paying out the advance. They had obtained that document. The charge could not immediately rank first because Barclays’ prior charge remained outstanding. The solicitors therefore had authority to use the advance to redeem Barclays’ charge and pay the balance to the borrowers.
3. The authority required sufficient money to be retained and paid to Barclays to secure redemption. The solicitors instead paid the shortfall to the borrowers. The breach was consequently limited to the amount that should have been retained for Barclays, approximately £308,894.33. The payments properly made to Barclays and the borrowers were not themselves breaches of trust.
4. The reasoning was consistent with Target Holdings Ltd v Redferns [1996] AC 421, which limits equitable relief in commercial conveyancing trusts to compensation for loss caused by the breach once the transaction is complete. It was also consistent with the distinction in Knight and Keay v Haynes Duffell Kentish & Co [2003] EWCA Civ 223: there, no part of the money was authorised to be released because an express precondition had not occurred.
5. AIB was entitled to reconstitution of the trust for the amount wrongly paid to the borrowers. It was also entitled to equitable compensation for additional sums accruing to Barclays and secured in priority, subject to credit for borrowers’ payments. The likely liability at redemption was £273,777.42, with interest to be determined if not agreed.