The Court of Appeal has affirmed the importance of solicitors acting for mortgagees to ensure payout figures and settlement instructions provided to settlement agents are accurate. Following settlements of refinancing transactions, an outgoing mortgagee will not necessarily be prevented from asserting that settlement funds are insufficient to finalise settlement. Rather, they may demand the return of a discharge of mortgage handed over at settlement on the basis the borrower has not complied with its obligation to pay out the registered mortgagee in full.
This case concerned the negligent settlement of a mortgage finance transaction. The borrower had refinanced a number of mortgages with a new lender using existing properties as security. The refinancing transaction required the borrower to pay out the monies owing to each of the outgoing registered mortgages under the existing loan agreements (using monies advanced by the new lender). Each of the existing registered mortgagees were to provide to the borrower signed discharges of mortgage (giving the borrower unencumbered title to the securities). The new lender was then to be registered as the first mortgagee on each of the properties in order to secure its loan.
The new lender retained the respondent lawyers, Purcell Partners, to act for it in relation to the refinancing transaction. As part of the refinancing transaction, Purcell Partners sought and obtained received written confirmation of the payout figures owing to the existing lender, although one of those parties (the outgoing mortgagee) provided a figure which related to only one of the secured properties instead of two.
Purcell Partners retained Settlement Group to act for it as its settlement agent. Purcell Partners provided Settlement Group with instructions and cheques drawn in favour of the outgoing mortgagees to effect the settlement. At the settlement, a representative of Settlement Group handed over the cheques to each representative of the outgoing mortgagees, and in exchange received signed discharges of mortgage. The representatives concluded the settlement of the transaction.
After the settlement had concluded, the representative of the outgoing mortgagees advised Settlement Group that it had not been provided with sufficient funds to discharge its mortgage over one of the properties provided as security (the Adelaide Terrace Property). The representative of Settlement Group made enquiries with Purcell Partners who advised that settlement had been completed, and the representative was expressly instructed not to do anything. Despite this instruction, the representative of Settlement Group handed back the signed discharge of mortgage relating to the Adelaide Terrace Property. As some of the other outgoing lenders had already banked their settlement cheques, the settlement could not be “unwound”. As a result, the existing mortgage on the Adelaide Terrace Property was not discharged and the new lender could not become the first registered mortgagee on that property (rather it was registered as the second registered mortgagee).
The borrower subsequently defaulted. The securities were sold, including the Adelaide Terrace Property. On the basis the new lender was registered as the second registered mortgagee, it recovered only $2,000. The new lender sued Purcell Partners in negligence for the amount it would have received had it been registered as the first registered mortgagee (less the amount it did receive as second mortgagee) (being approximately $166,000). Purcell Partners settled the claim, and commenced a third party proceeding against Settlement Group, claiming its loss had been negligently caused by, among other things, its representative’s act in returning the discharge of mortgage to the existing mortgagee contrary to its express instructions.
The trial judge found in favour of Purcell Partners, holding that Settlement Group was liable in negligence and ordered it to pay Purcell Partners the full amount of the settlement sum plus costs. Settlement Group appealed.
The appeal was heard by Maxwell P, Redlich JA and Dixon AJA. Maxwell P and Redlich JA upheld the appeal, and determined that Purcell Partners were solely liable in negligence for the loss caused to the new lender. Their Honours held that that Purcell Partners had negligently failed to verify the amount required to discharge the mortgage owing to the outgoing mortgagee. Their Honours held that unless and until the outgoing mortgagee was paid out in full in accordance with the loan agreement, the mutual and concurrent obligation of the mortgagee to discharge the mortgage did not arise. Accordingly, because the borrower through its solicitor failed to pay the outstanding loan amount in full, the outgoing mortgagee was entitled to the return of the discharge of mortgage.
Dixon AJA similarly found the solicitors to be negligent. However, his Honour held that the conduct of the outgoing mortgagee in accepting the cheque at settlement and confirming settlement had been effected gave rise to an estoppel preventing the outgoing mortgagee from demanding the return of the discharge of mortgage. On this point, Dixon AJA on the one hand and Maxwell P and Redlich JA disagreed. Maxwell P and Redlich JA held that there could be no estoppel which could operate between the outgoing mortgage and the new mortgagee because there was no contractual relationship between them. In addition, their Honours considered that the outgoing mortgagee in accepting the cheque was operating under a mistake of fact that the amount of the cheque was sufficient to discharge the mortgage.
While this case is important for those engaged in Victorian conveyancing practice, the decision is also important for solicitors acting for banks and financiers in lending transactions. This case highlights the importance for solicitors engaged in lending and financing transactions to take care to ensure payout figures are correctly calculated and include all relevant secured properties and to ensure settlement agents act in accordance with clear and correct instructions.