January 2012

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Case name	Padden v Bevan Ashford
Neutral citation	[2011] EWCA Civ 1616
Legal points	Solicitors - negligence - mortgage advice - Etridge guidelines - free,short advice to wife
Summary	A judge had been wrong to initiate a plea of ‘no case to answer’ and dismiss a wife’s claim of professional negligence against a firm of solicitors who had given inadequate legal advice in two short, free sessions.
Facts	Mr P, a financial consultant, had taken clients money and was threatened with criminal prosecution. His solicitor told Mrs P that he owed £200,000 and that he would have to sell the jointly owned matrimonial home and various investments. In order to ‘assist’ her husband, she would have to release her interest in the house and investments, and for that purpose she would need to obtain independent advice, but that this was just a formality and she should ‘ignore any advice that she might be given not to sign’. She was provided with a draft letter for the independent solicitor to countersign in which she consented to forego her interest in the house and investments. Two firms of solicitors refused to act. The third firm, BA, agreed to act and on 28th March 2003 Mrs P was seen by a newly qualified solicitor at a short, free, meeting. The solicitor initially advised Mrs P not to proceed with the transaction, but when Mrs P made it clear she was going to proceed, the solicitor responded “I hope your husband is worth it”. Mrs P was apparently more concerned about the welfare of her children if her husband was sent to prison. After the meeting, the solicitor sent Mr P’s solicitor a fax stating that they had been asked by Mrs P to ‘confirm her consent to transfer her interest in [the house and investments] having taken independent legal advice from this firm as to the consequences of doing so’. On 10th April 2003, Mr P attended with Mrs P at a different branch of BA’s offices with four documents being (1) a second mortgage over the house as security for a debt of £740,000.00; (2) a charge over certain shares; (3) a charge over certain endowment policies; and (4) a deed, all in favour of Mr P’s defrauded client. The deed recited that Mr P had agreed to pay the client £860,000.00 plus costs. A solicitor witnessed the signatures of Mr and Mrs P on each of the four documents and certified in the mortgage that Mrs P ‘had the consequences of this deed and the obligations which it imposes on her explained by a solicitor/legal executive’ and that he was ‘satisfied that she understands the nature of this deed and its meaning and effect’ and that ‘to the best of [his] knowledge [she] has freely consented to it without undue influence or…in reliance upon any misrepresentation…’ Mrs P’s case was that she received no advice whatsoever. Mr P was subsequently convicted of obtaining money (about £2 million) by deception and sentenced to six years imprisonment. Mr & Mrs P divorced, and he subsequently died. Mr P’s defrauded client sought to enforce the mortgage which Mrs P sought to defend on the ground of undue influence by her husband. The proceedings were compromised and the house was sold. In early April 2009, Mrs P brought the present proceedings against BA for damages for professional negligence . BA’s defence was (1) they had not acted in breach of any duty owed to Mrs P; (2) any claim based on the first meeting was time barred; (3) the claim failed on causation. The trial judge stopped the case at the end of the claimant’s evidence effectively on the basis that there was no claim to answer. He subsequently gave judgment dismissing the claim. Mrs P appealed.
Held	The appeal would be allowed. Active judicial case management, even during a trial is to be encouraged in general, and an appeal court would be slow to interfere. However, it was an unusual course to take, especially since issues of liability and causation were not easy to resolve. The key issue was whether the judge was right to conclude that the claim should be dismissed. The scope of the responsibilities of a solicitor advising a wife was authoritatively stated by Lord Nicholls in Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773 at paras 64-68. Subject to the facts of each particular case, these observations provide a very good guide to the appropriate approach where an individual (whether or not a wife) seeks advice from a solicitor about an intended provision of significant security in a transaction which, at least on the face of it, would be for the sole benefit of another person who is in a close personal relationship with the individual. The judge had been wrong to distinguish Etridge on the basis that it would be wrong to impose a duty to give full advice to someone who had come off the street without an appointment for a short, free session. The whole point of consulting a solicitor is to ensure that the client understands the effect of the documentation and is free of any undue influence or misrepresentation. Merely advising a client not to enter into a transaction falls well short of the duty imposed on the solicitor. What advice should have been given? Since Mrs P was a ‘highly intelligent and well educated woman’ and understood the effect of the four documents, she had no complaint about the meaning and effect of the documents. However, she was under intense pressure and needed to weigh up the consequences of not signing. Here, she had understood that by signing the documents, she would have a good chance of preventing her husband from going to prison. That assessment was almost certainly wrong. The solicitor should have sought to establish the relevant facts before advising. If that could not have been done in time, the solicitor should have refused to advise in a short, hurried meeting. At the subsequent attendance on 10th April 2003, the solicitor had taken on more than an ‘execution only’ role. He had certified that appropriate advice had been given, when he hadn’t given any advice and hadn’t taken reasonable care to ensure that Mrs P had received such advice. As to the point that Mrs P would have entered into the transaction in any event, she was set on that course of action because of what Mr P’s solicitor had told her about the risk of Mr P being sent to prison unless she signed. But if that had been investigated further, it would have been shown to be unlikely to stand up, and her main or sole purpose for entering into the transaction would very probably not be achieved. The mere fact that BA did not charge for either meeting, or the letter they sent, makes no difference.
Comments	This case emphasizes two important points: First, a substantive point: Providing independent legal advice in a mortgage transaction is an onerous task, and should not to be undertaken lightly. The mere fact that the meeting is short and/or is not billed makes no difference. What are the options? If it is not possible to give proper advice – either because of pressure of time, or because the legal adviser has insufficient information, the adviser should do one of two things (1) decline to act at all, or (2) arrange a longer appointment and/or cause sufficient information to be obtained first. In most cases it is not sufficient simply to advise against entering into the transaction. That involves undertaking a duty of care but then not discharging it properly. For the content of the legal advice, see Lord Nicholls’ guidelines in Etridge at paras 64-68. These apply in cases where a wife is being asked to provide security for her husband’s borrowings. They also apply in other cases, for eg. where a (non-legal owner) wife is being asked to sign a Form of Consent. In this case, the firm was negligent in two main respects (1) the advice given at the initial meeting was inadequate, and (2) no advice was given at the subsequent meeting. Significantly, although Mrs P understood the meaning and effect of the documents she was being asked to sign, the solicitor did not weigh up why she was willing to sign in order to make a fully informed decision on the pros and cons of signing. The Court left open for a re-trial before a different judge the key point on causation – whether in fact, properly advised, Mrs P would have entered into the transaction in any event. She may well be in some difficulty on this point. Second, a point on practice and procedure. Whilst the Court of Appeal endorsed active case management, even during trial, it recognized that initiating a plea of ‘no case to answer’ was a high risk strategy and one which could not really be justified. Quite apart from the fact that the judge had reached the wrong conclusions, the case was listed for two days; it ran into two days; and the judge only had one other witness to hear, whose evidence could have been heard and the case still concluded within two days. Pleas of ‘no case to answer’ are best left to the advocates.

Case name	Barons Finance v Kensington Mortgage Co Ltd
Neutral citation	[2011] EWCA Civ 1952
Legal points	Mortgage – priority between registered charge and equitable charge – payment by mistake – estoppel and change of position – admissibility of fresh evidence on appeal
Summary	The Court of Appeal dismissed an appeal against a summary judgment granted in a case where a registered charge had mistakenly discharged a subordinate equitable charge. The Court refused to permit fresh evidence which could have been adduced at the hearing, and did not consider the appeal had any substantive merit anyway.
Facts	Mr B owned a property which was subject to a registered charge in favour of M5 and an equitable charge (protected by a restriction) in favour of Barons. Mr B agreed to sell the property to Ms H, who was purchasing with the benefit of a mortgage from Kensington. The mortgage advance was used to discharge the M5 mortgage. Ms H’s solicitors subsequently asked for Barons’ consent to the transfer and new mortgage. They agreed, subject to the restriction remaining in place. Ms H subsequently defaulted in repayment of Kensington’s mortgage and the property was repossessed and sold. Kensington’s solicitors wrongly assumed that Barons’ restriction, protecting its equitable charge, enjoyed priority over Kensington’s registered charge and asked for the amount required to remove the restriction. Barons advised £48,000.00 and Kensington paid it. Upon realizing they had made a mistake, Kensington subsequently sued for repayment on the ground of mistake of fact and law and applied for summary judgment. Barons’ defence was that its charge enjoyed priority so there was no mistake. HHJ Langan QC disagreed and gave judgment for Kensington. Barons appealed, but in amended grounds of appeal sought to rely upon two new defences (1) estoppel on the basis that in reliance upon Kensington’s representation that Barons’ restriction ranked in propriety to Kensington’s charge, Barons acted in reliance to its detriment by agreeing to remove its restriction so that Kensington was stopped from denying that Barons had been entitled to the money it was paid; and/or (2) change of position – on the basis that Barons had used the money to clear existing liabilities and to cover expenses.
Held	The appeal would be dismissed for two reasons: (1) On the law, the proposed amended defence had no merit. As to estoppel, Barons had not suffered any detriment because its restriction never took priority. As to change of position, the mere fact that money has been spent in whole or in part does not of itself render it inequitable that the payee should be called upon to repay it (Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 applied). (2) In any event, before Barons could argue these points, they needed permission to amend the defence and rely on fresh evidence. Permission would not be given because Barons could not establish that the evidence could not have been obtained withy reasonable diligence for use at the hearing (Ladd v Marshall [1954] 1 WLR 1489 and Aylwen v Taylor Joynson Garrett [2001] EWCA Civ 1171 applied).

Case name	Re North East Property Buyers Litigation (Cook v The Mortgage Business Plc)
Neutral citation	[2012] EWCA Civ 17)
Legal points	Equity release - sale and leaseback – mortgage - overriding interest - priority
Summary	The Court of Appeal upheld the judge’s determination of preliminary issues that under sale and leaseback arrangements where the purchase price was funded on mortgage, the sellers did not acquire overriding interests and could not assert priority over the mortgages.
Facts	A number of registered proprietors of residential property entered into equity release schemes by way of sale and leaseback. The arrangement was that they would sell their properties to a buyer NEPB on the basis that the purchase price would be sufficient to discharge any existing mortgages or other debts, leaving the seller in occupation under an assured shorthold tenancy agreement, often with an assurance that they could remain in the property as long as they liked. The buyer in turn funded the purchase with a mortgage, but neither the rights of occupation promised by the buyer nor the ASTs were permitted by the mortgage. Following default in repayment of the mortgages, the lenders sued for possession. The sellers defended the claims on the basis that they were entitled to remain in possession and either had overriding interests or that otherwise their interests took priority over the mortgages. In nine test cases, the judge determined a number of preliminary issues [2010] EWHC 1991 (Ch): (1) That none of the interests were capable of amounting to overriding interests under paras 1 and/or 2 of Sched 3, Land Registration Act 2002 (having regard to Abbey National v Cann [1991] AC 56 and City of London Building Society v Flegg [1988] AC 54); (2) That none of the tenancy agreements obtained priority over the mortgages under s 29(4) LRA 2002 (grant of lease for less than seven years treated as registered disposition at time of grant); (3) It is not possible for the lenders’ priority to be affected by notice of the promises made to the sellers. The sellers appealed on the first two preliminary issues.
Held	On the first preliminary issue, the correct approach is first to analyse the true commercial and legal nature of the transactions between the sellers and the buyer. A notable feature of each transaction is that no reference was made in any of the contracts for sale to a leaseback to the sellers. The contracts for sale showed that the properties were being sold with full title guarantee and with vacant possession. They therefore disclosed no basis for a qualified report on title to the lenders by their solicitors which would have alerted the lenders to the possibility that the sellers expected to remain in possession after completion, or that the buyer would obtain anything less than the entire legal and beneficial interest in the properties. The contracts for sale and the transfer and mortgage completed on the same day. Cann and Nationwide v Ahmed (1995) 70 P & CR 381 applied. The consequence is that even if an equity arose in favour of the sellers immediately upon exchange of contracts in consequence of the assurances made by the buyer, there was no moment in time when the freehold acquired by the purchaser was free from the mortgage but subject to the equity. It is too technical and not realistic to separate out the contract on the one hand and the transfer and mortgage on the other hand, as distinct and separate transactions. It is not possible to distinguish Cann on policy grounds. Although the present case involved different social and economic conditions, they were no more necessitous than the conditions prevailing in Cann. It would be inappropriate therefore to shift the risk in commercial lending to the lender and require it to make direct enquiry of the occupying seller. On the second preliminary issue (it being argued that the seller’s rights under a lease for seven years or less has priority over a lender under a subsequently registered charge), the court was not clear on the practical significance of the point because all the tenancies had expired. In any event, prior to registration of the transfer, the grant of any lease by the buyer takes effect only in equity and does not fall within s 29(4) LRA 2002 at all. Even if that was wrong, the court did not accept that a lease of seven years or less granted by a buyer, pending his registration, acquires priority even where the lease is granted and the charge is executed within the priority period conferred by the lender’s official search with priority. Overall, the judge was entitled to make orders for possession. Appeals dismissed.
Comment	The first instance decision [2010] EWHC 2991 (Ch) was reviewed in the November 10 (1) Update. Whilst these are unfortunate cases, the court emphasized that the problem would have been avoided if the sellers had insisted that the contracts for sale had given details of the entire arrangement. The lenders’ solicitors would have reported on title and the lenders could have made a decision whether or not to lend on this basis. Whilst the court speculated why the arrangements were not disclosed, the likelihood is that NEPB knew it wouldn’t be able to raise funds on mortgage!

Case name	AIB Group (UK) Plc v Mark Redler & Co
Neutral citation	[2012] EWHC 35 (Ch)
Legal points	Solicitors – negligence – breach of trust – quantum
Summary	Whilst a firm of solicitors had been negligent in paying out a substantial mortgage advance without securing a first legal charge, the extent of any breach of trust was limited by the terms of its retainer.
Facts	In 2006, S arranged to re-mortgage her property, then valued at £4.25m with AIB for £3.3m. A firm of solicitors, MR acted on behalf of both S and AIB. AIB required that an existing charge to Barclays was discharged on completion. The Barclays charge secured borrowings of about £1.5m on two accounts. On completion MR telephoned Barclays and was given a redemption figure of £1.23m, which they paid to Barclays and paid the balance of AIB’s net advance to S. MR failed to notice that the redemption figure only related to one of the two accounts and so was insufficient to redeem Barclays’ charge. They admitted negligence. AIB’s charge was not registered until almost two years later following agreement with Barclays that it should be registered as a second charge. S defaulted in repayment of AIB’s charge (and was subsequently made bankrupt). AIB repossessed the property and sold it in March 2011 for £1.2m. After redeeming Barclays’ first charge, it left AIB with £867,697.00. AIB sued MR for damages for professional negligence, alleging that MR acted in breach of trust by paying the net advance without obtaining a first charge and that in consequence they were liable to reconstitute the trust fund of £3.3m with interest, credit being given for the £867,697.00 actually recovered (ie. about £2.4m). MR argued that payment was not a breach of trust, or if it was, their liability is limited to the loss in value of AIB’s security caused by their failure to pay off the whole of the Barclays charge being about £300,000.00 paid to Barclays from the sale proceeds. The judge ordered two preliminary issues (1) Did MR act in breach of trust in releasing the advance, if so (2) to what remedy is AIB entitled?
Held	On the first preliminary issue, the terms on which a solicitor is authorized to pay monies held in his client account are to be determined by construction of his contract of retainer, but a payment out in breach of those terms would amount to a breach of trust (Target Holdings Ltd v Redferns [1996] AC 421 applied). In construing the terms of the retainer, it requires the court not only to construe any express terms but also to take account of any implications that may properly be made as to the authority which the solicitor is being given, arising from the circumstances of the instruction, the nature of the transaction involved and the way in which such transactions are ordinarily dealt with. The court would lean against a construction which would mean that the solicitor could not know at the time he is required to pay money out whether he was authorized to do so or not (Bristol & West Building Society v Mothew [1998] Ch 1 per Millett LJ). In the present case, the written terms of the retainer did not deal explicitly with the precise circumstances in which the solicitor could pay out the money. On the facts, MR was plainly authorized to pay monies to Barclays. If it had received a statement from Barclays that the amount required to redeem the charge, which amounted to an undertaking to redeem on receipt of that amount, it was within its authority from AIB to make that payment. The payment would not amount to a breach of trust, even though it did not result in immediately obtaining a first legal charge. The position is not that the solicitor is in breach of trust unless and until the undertaking he has accepted is performed; he is never in breach of trust because it was within his authority to accept the undertaking and make the payment in the first place. However, MR’s instructions were to pay to Barclays the amount required to procure a release of its charge and pay the balance to S. Had they complied with their instructions they would have paid £1.5m to Barclays and £1.8m to S. In the event they paid £1.2m to Barclays and £2.1m to S. In so doing they committed a breach of trust insofar as payment was made contrary to the authority they received. It does not follow that the whole of the payment out of £3.3m was made in breach of trust. The difference between what MR did and what it ought to have done if it had complied with its instructions was the £300,000.00 that should have been paid to Barclays but was instead paid to S. That was the extent of their breach of trust. On the second preliminary issue, AIB is entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away. Where the breach consists of failure to discharge a prior mortgage, with the result that AIB’s interest has been postponed to Barclays to the extent of the capital left outstanding plus interest and charges, AIB is entitled to equitable compensation for the additional amounts accruing due to Barclays which have increased the amount secured in priority to AIB (but subject to giving credit for the amount paid by S to Barclays in reduction of that amount).
Comment	As the judge indicated in his judgment, the issues which surfaced in the Bristol & West series of cases in the 1980’s have re-surfaced following the collapse in the property market. However, as this case demonstrates, lenders may be unable to attribute losses due to falling property prices to negligent professionals by alleging breach of trust and seeking the reconstitution of the total trust fund. Whilst AIB claimed £2.4m, it actually only recovered something like £300,000.00 plus additional interest and charges having regard to the more limited extent of the breach of trust in question. This case contains a useful analysis of the applicable principles and caselaw.

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Update	Secured Lending Reform Bill
	The Bill is due for its second reading in the House of Commons on 30th March 2012. To follow progress of the Bill and to download a copy of the Bill click on the links in the Word or PDF copies. For commentary, see the June 11 Update.