The Court of Appeal recently considered when a remortgage transaction was deemed to have completed, giving rise to the borrower’s liability for repayment of the mortgage loan.

Background

In  January 2013, the Defendant borrower applied to Aldermore Bank plc (the “Bank”) for a loan to be secured over three properties (the “Properties”). The Properties were, at the time, registered in the borrower’s sister’s name and were all charged to Clydesdale Bank (“Clydesdale”).  The borrower’s sister was proposing to transfer the Properties to the borrower by way of a gift, subject to the charges in favour of Clydesdale. The purpose of the Bank’s loan to the borrower was to pay off the Clydesdale loans and to provide the borrower with the surplus capital. In May 2013, the Bank instructed Kuits to act for them in the transaction, incorporating the relevant terms of the CML Handbook. The mortgage offer was made to the borrower and accepted by him on terms that the Bank would obtain a first legal charge over the Properties. The mortgage offer stated, amongst other things, that the agreement to provide finance was conditional upon the receipt of a satisfactory redemption statement from Clydesdale.

In May 2013, Kuits wrote to the borrower’s solicitors detailing a number of completion requirements, including that the borrower’s solicitor should provide various undertakings which would govern the payment of the mortgage advance in anticipation of completion. These undertakings were provided to Kuits on 1 July 2013. On 2 July 2013, the borrower’s sister executed the deed of gift in the borrower’s favour.

On 15 July 2013, Clydesdale provided, by email, a redemption statement in respect of its existing charges over the Properties. This email confirmed that, upon receipt of redemption funds, a DS1 would be provided. The Bank subsequently authorised the release of funds to the borrower’s solicitors and the monies were then transferred, for the purpose of completion.  The borrower’s solicitors confirmed receipt of the funds on 16 July 2013 and were asked by Kuits to forward the documentation required to remove the Clydesdale charges, enabling Kuits to register the Bank’s security.

The borrower’s sister executed registered transfers in her brother’s favour and, on 16 July 2013, the borrower’s solicitors transferred the sum of £78,193.64, out of the completion monies, to the borrower. This represented the balance of the loan not required to redeem the Clydesdale loans. Unfortunately, the completion money was not used to pay off the Clydesdale loans, and instead the borrower’s solicitors misappropriated the remainder of the funds. This resulted in the Clydesdale charges remaining in place and the Bank not obtaining the security that they required. The borrower’s solicitors’ insurers repudiated their cover on the grounds of fraud and the Bank sought payment from the Law Society Compensation Fund, receiving £1.76m. This left the Bank with a shortfall of £368,000.

The Bank sought to recover the balance of the mortgage loan, and interest, from the borrower on the basis that the mortgage transaction had completed. The Bank’s argument was that this rendered the borrower liable for the balance of the loan. The High Court dismissed the Bank’s claim in respect of all but £78,193.64 (the surplus monies paid to the borrower), and subsequently the Bank appealed this decision.

The Court of Appeal decision

The Court of Appeal had to consider whether the mortgage transaction had ever “completed”, rendering the borrower legally liable for the repayment of the mortgage loan and interest. The issue to be considered was whether the payment of the redemption monies by the borrower’s solicitors to Clydesdale was a necessary part of completion, or whether it was merely enough for the Bank’s solicitors to have had, in its possession, the redemption statement and the undertakings.

The Court found that the borrower’s solicitors held the mortgage advance on trust for the Bank, until the mortgage transaction had completed. The Court considered that the discharge of any existing borrowing was a critical part of any remortgage transaction and, as such, a necessary part of completion. It held that, in this case, the completion of the remortgage could not occur until the redemption money was paid to Clydesdale and the DS1 forms returned. As this had not occurred, the transaction had not completed and therefore the borrower should not be held liable for the balance of the mortgage advance.

The Appeal Court upheld the High Court’s decision that the borrower must repay the £78,193.64 received. It held that, as completion had not taken place, the borrower’s solicitors had no authority to release any part of the mortgage advance (other than for the purpose of redeeming the Clydesdale charges). The borrower was not the beneficial owner of, or entitled to, any of the mortgage advance until completion had occurred. Therefore, these funds should be returned.

Accordingly, the Court of Appeal dismissed the Bank’s appeal.

Commentary

This is an interesting case for lenders and borrowers, as it clarifies when, in the case of a remortgage, completion is said to have taken place. However, the facts of this case are unusual and unlikely to apply in standard house purchase transactions. Whilst each case must be considered on its own facts, it highlights the importance of carefully considering the precise terms on which a borrower and lender enter into a mortgage contract and the exact terms upon which solicitors are instructed.