AIB Group (UK) Plc v Mark Redler & Co Solicitors

Money advanced to solicitors for a remortgage remains trust money until completion. Completion requires arrangements which assure the redemption of the existing charge. A redemption statement must therefore be accompanied by either a solicitor’s undertaking or the existing lender’s unconditional confirmation that the advance will discharge its charge.

An unauthorised pre-completion payment is a breach of trust. Equitable compensation nevertheless restores only loss caused by that breach. It is assessed at judgment with hindsight and a common-sense approach to causation. The beneficiary must give credit for security and other benefits eventually obtained and cannot recover commercial losses which would have arisen even if the transaction had been properly completed.

AIB lent £3.3 million to borrowers on terms requiring a first legal mortgage over their home. Its solicitors, Mark Redler & Co, released the advance after obtaining an incomplete redemption figure for the existing Barclays mortgage. They paid insufficient money to Barclays, paid the balance to the borrowers and failed to obtain the required first charge. AIB eventually registered a second charge and recovered part of its loan when the property was sold.

His Honour Judge Cooke held that only the approximately £273,777 misdirected to the borrowers was paid in breach of trust. He awarded equitable compensation of £323,501.38 including interest. Both parties appealed. The central issues were whether the entire advance had been released in breach of trust, the resulting measure of equitable compensation, and whether relief under section 61 of the Trustee Act 1925 should be considered.

1. Disposition. AIB’s appeal against the order determining the extent of the breach of trust was allowed. Its appeal against the compensation award was dismissed, as was the solicitors’ cross-appeal. Patten LJ gave the judgment, with which Sullivan LJ and Arden LJ agreed.

2. Money in a solicitor’s client account remains the client’s property until it is disbursed in accordance with authority. The contractual instructions forming the wider retainer are not themselves the terms of that trust. A failure to perform the retainer therefore does not ordinarily constitute a breach of trust merely because it affects the security obtained for the client.

3. Under the Council of Mortgage Lenders’ Handbook, the requirement to obtain a first legal charge imposed an obligation to exercise reasonable skill and care. It was not a condition precedent which made every failure to obtain the stipulated security an unauthorised payment. The decisive question was whether completion had occurred so that the authority to disburse arose.

4. Completion of this remortgage required arrangements assuring the redemption of Barclays’ existing charge. Before releasing the advance, the solicitors needed a redemption statement coupled either with an undertaking from Barclays’ solicitors or with Barclays’ unconditional confirmation that the money would be applied in redemption. The solicitors had neither. Accordingly, completion had not occurred and release of the entire advance, rather than only £273,777.42, was a breach of trust.

5. Equitable compensation did not follow automatically in the amount of the whole advance. Applying Target Holding Ltd v Redferns [1996] 1 AC 421, compensation had to reflect the loss which, assessed at judgment with hindsight and on a common-sense view, was caused by the breach. Proper completion would still have exposed AIB to the borrowers’ default. AIB also obtained and enforced a second charge and had discharged part of the prior secured debt. Those benefits had to be brought into account.

6. AIB’s recoverable loss was therefore the deficiency in its security, represented by the amount required to redeem the remaining Barclays debt. The award of £323,501.38 including interest was affirmed. It was unnecessary to determine whether the solicitors should receive relief under section 61 of the Trustee Act 1925.

1. Court of Appeal (Civil Division): By [2013] EWCA Civ 45, allowed AIB’s appeal concerning the extent of the breach of trust, dismissed its appeal concerning the amount of equitable compensation, and dismissed Mark Redler & Co’s cross-appeal.

2. High Court, Chancery Division: His Honour Judge Cooke held on preliminary issues that the solicitors committed a breach of trust only to the extent of £273,777.42 and subsequently awarded £323,501.38 including interest. No neutral citation is stated in the judgment.