The Court of Appeal has given further clarification on breach of trust claims brought against solicitors by lenders. In AIB v Mark Redler & Co, the solicitors were negligent in acting for AIB on a remortgage advance of £3.3 million. The solicitors had failed to obtain a redemption figure for the borrowers’ second loan account with Barclays who had a first legal charge on the property. Instead of paying some £1.5 million to Barclays to redeem the charge, the solicitors only paid £1.2 million for the redemption of the first loan with the balance of the proceeds going to the borrowers. As a result, AIB only had the benefit of a second charge. The property was subsequently repossessed. The borrowers were made bankrupt resulting in substantial losses for the lender.
AIB argued that the solicitors were also in breach of trust due to the failure to obtain a first legal charge for AIB and that the solicitors were obliged to repay the full amount of the advance. The Court of Appeal rejected this argument on causation grounds. If they had been no breach by the solicitors, AIB would still have gone ahead with the transaction and would have still made the same losses, the only difference is that they would have additional security of around £300,000 being the amount of the second loan and therefore the equitable compensation for breach of trust was limited to this amount.
The Court of Appeal has also stated that on a remortgage, solicitors are in breach of trust unless they obtained a redemption statement from the existing lender and a suitable undertaking. In cases where the existing lender is not legally represented, an unconditional confirmation is required that the advance will be applied by the lender in redemption of its charge.
The AIB decision is significant in that it is a further illustration that lenders may not be in a better financial position in seeking to bring claims for breach of trust as opposed to claims in breach of contract and negligence where contributory negligence defences are available to the solicitors.
