Mistake in contract to provide a mortgage

Citation

Waterson, G. and Lee, R. (2000), "Mistake in contract to provide a mortgage", Property Management, Vol. 18 No. 5. https://doi.org/10.1108/pm.2000.11318eab.007

Mistake in contract to provide a mortgage

Mistake in contract to provide a mortgage

In Secured Residential Funding plc v. Douglas Goldberg Hendeles & Co. (a Firm) (2000) The Times, 26 April, two associated mortgage companies, Secured Residential Funding, and Household, shared office premises. In 1989 a borrower applied to Household for a mortgage of £82,000 which was granted. However, the letter sent to the borrower's solicitor on 5 May contained the wrong pack. Thus, when the forms were filled in they were the forms of Secured Residential Funding rather than those of Household. The error was not picked up until 27 June when Household telephoned the solicitor informing them that the wrong documentation had been sent out. On 29 June £82,000 was transferred from Household's bank to the solicitor's client account. On the same day Household sent the correct papers to the solicitor but the letter did not arrive until after completion which took place on 30 June when the solicitor remitted the full purchase price to the vendor's solicitors. On the same day the mortgage deed was executed by the borrower, on the face of the document in favour of Secured Residential Funding and likewise the borrower's life policy was assigned in favour of Secured Residential Funding. The borrower fell into arrears and in January 1990 Secured Residential Funding were registered as proprietors of the charge over the property at the Land Registry. Eventually an order for possession was made and the property was sold for £65,000. Household issued proceedings against the borrower for the shortfall between the sale proceeds and the original advance. Later leave was given to substitute the plaintiffs Secured Residential Funding for Household.

In September 1995 proceedings were brought against the solicitor claiming damages for negligence and naming the plaintiff as lender of the mortgage money. Leave to substitute Household was refused but pleadings were amended to assert that the advance of £82,000 was made by Household on behalf of the plaintiffs.

At first instance it was decided that the solicitor did owe the plaintiffs a duty of care. Second, that the advance was not made by Household acting as principal. Thus the action was dismissed. In the Court of Appeal Laws LJ stated that if the judge was right in deciding that Household was not acting as principal then that was the end of the case and the issue of the solicitor's duty of care would be moot.

Laws LJ stated that it was correct that it was Household who made the mortgage offer to the borrower which was duly accepted. Household also provided the money. Therefore the plaintiff could only succeed in its appeal if it could show retrospectively that Household had in fact provided the money on its behalf, that is if the plaintiff could show that it had ratified Household's actions as their agent.

The difficulty with this line of argument was that there could only be ratification if, when Household made the advance, they purported to do so on the plaintiff's behalf. See: Keighley Maxwell & Co. v. Durant (1901) AC 240. Unfortunately for the plaintiff when Household transferred the money to the solicitor's client account on 29 June it did so as principal. Thus the act of transfer was not subsequently ratifiable.

The plaintiff argued that the loan was actually made not on 29 June but on 30 June, when the solicitor remitted the full purchase price, including the advance of £82,000 to the vendor's solicitor.

The court held that the loan contract and the mortgage were separate and distinct transactions. See: National Home Loans Corporation plc v. Giffen Couch & Archer (a Firm) (1998) 1 WLR 207. Thus on 29 June Household had performed all of its obligations under the contract they had entered with the borrower when the funds were transferred to the client account of the borrower's solicitor, not on the completion date when the solicitor paid the entire purchase price to the vendor's solicitor. There was no question of any agency at all because at no stage had Household purported to act as agent for Residential. The principal of agency, Laws LJ stated, had no part to play in the court's approach to the just correction of mistakes in legal transaction, for which the law possessed a series of effective mechanisms in the shape of such rules and remedies as rectification, recission and estoppel.

In light of the court's conclusions on the issue of agency the question as to whether the solicitors owed the plaintiffs any duty of care was moot. The appeal was dismissed.

Geoffrey WatersonRosalind Lee

The law is stated as it is understood to be up to 1 August 2000.