On 5 November 2014 the Supreme Court handed down its decision in the appeal case of AIB Group (UK) Plc v Mark Redler & Co Solicitors 2014 WL 5483695.
The Court has made it clear that in cases where the lender would have proceeded with a loan anyway (ie so called 'successful transaction' cases) lenders in successful breach of trust claims will not recover losses which (with the benefit of hindsight) the lender would have suffered even if the solicitors had done their job properly (ie registered a first charge). No-transaction cases (where a lender would not have proceeded but for the defendant's breach) are unaffected, and lenders can still claim their full equitable losses in any such claims.
The decision is not that surprising but nevertheless is disappointing for lenders.
The Redler case concerned a remortgage transaction. The new lender (AIB) advanced £3.3 million against a valuation of £4.25 million. The solicitors acting for the borrowers and AIB ("Redler") negligently failed to redeem all of Barclays' existing charges. The borrowers therefore received a larger share of the balance following the AIB remortgage advance than they should have; and, Barclays naturally refused to remove its first charge for the benefit of AIB.
Following repossession, the property sold for £1.2 million and AIB recovered approximately £0.8 million from the sale proceeds. AIB's loss was therefore £2.5 million.
Decision/assessment of the loss
AIB relied on the equitable remedy of restitution of the trust fund and sought to recover its entire advance less the proceeds of sale (£2.5 million).
Redler argued that the loss to AIB (excluding interest) should be limited to the amount by which the value of AIB's security was reduced as a result of Barclays' unredeemed charge (£275,000).
The Supreme Court held that the assessment of equitable compensation should be based on:
On the facts of the Redler case, it was accepted that AIB would not have withdrawn from the lending. It was therefore not possible for AIB to argue that this was a "no transaction case".
As the vast majority of AIB's loss had been caused by its own decision to lend and the subsequent drop in the market, the Court ordered that AIB could only recover £275,000 (plus interest).
What the Redler decision means for lenders
Breach of trust claims are commonly advanced to avoid arguments around contributory negligence and mitigation. The Redler decision has not changed this position (albeit the Court's analysis may have been different on a different set of facts).
The Redler case has however effectively put a stop to further speculation over whether lenders can recover their entire advance (less sale proceeds), without regard to what the loss suffered would have been but for the solicitors' breach of trust. The lender will only be put back to the position they would have been but for the breach.
In comparison to general negligence claims, breach of trust claims can still be advantageous for lenders to pursue particularly in no transaction cases which are unaffected by the Redler decision.
We recommend that where possible, lenders should continue to pursue breach of trust cases.
We have a significant experience in successfully pursuing breach of trust claims, often linked to title rectification matters. If you would like to discuss the impact of this decision on an individual case or portfolio, please do contact us.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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