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Firm Counts Cost of £3 Million Mortgage Blunder

Tower BlockA professional firm must pay more than £300,000 in compensation after mistakenly releasing a bank’s funds in respect of a £3.3 million mortgage advance prior to completion and without authority. The firm admitted that it had been negligent and the Court of Appeal has now ruled that it also acted in breach of trust.

The bank had agreed to make the advance on the basis that the property on which it was to be secured was worth £4.5 million. The advance was to be conditional upon the mortgage being a first charge and an existing £1.5 million loan being fully paid off prior to completion. Due to the firm’s oversight, more than £270,000 of the existing loan remained outstanding when it released the bank’s money and the bank only obtained a second charge over the property. The property was subsequently sold for £1.2 million and, after the first charge was satisfied, the bank suffered a loss in excess of £2.5 million.

The firm conceded that it had been negligent and, at first instance, was ordered to pay the bank damages and interest totalling more than £323,000, that being the part of the bank’s loss attributable to the failure to register its security as a first charge. On appeal, the bank argued that the firm had also acted in breach of trust and should be held liable to reconstitute its client account to the position that pertained prior to the unauthorised release of the bank’s money.

The Court of Appeal agreed with the bank that the firm had acted in breach of trust but noted the bank’s concession that, had the transaction been completed in accordance with its instructions, it would have made the loan and incurred financial loss as a result of the mortgagees’ default in any event. Taking a ‘common sense approach’ to the real measure of the bank’s loss arising from the firm’s breach of trust, the court dismissed arguments that it should, in effect, be held liable for the bank’s entire loss. The court ruled that the quantum of damages in respect of the firm’s negligence and its breach of trust should be the same and declined to increase the bank’s award.