Redstone Mortgages Ltd v B Legal Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 17 October 2014 |
| Neutral Citation | [2014] EWHC 3398 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: 1MA30551 |
| Date | 17 October 2014 |
[2014] EWHC 3398 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Manchester Civil Justice Centre
Strand, London, WC2A 2LL
Mr Justice Norris
Case No: 1MA30551
Paul Chaisty QC and Mark Harper (instructed by TLT LLP) for the Claimant
Graeme McPherson QC and Michael Bowmer (instructed by Clyde & Co LLP) for the Defendant
Hearing dates: 4, 5, 6, 7, 10, 11, 12, 14 & 15 February 2014
(Further written submissions 17 and 19 February)
This case concerns allegations of professional negligence brought against conveyancing solicitors by a purchaser of residential mortgage backed securities. The trial required the determination of preliminary issues in four selected cases, but with implications for many other cases.
Beacon Homeloans Limited ("Beacon") provided loans secured by mortgages over residential property. It retained B Legal Limited ("B Legal") to act as its conveyancing solicitors in the grant of the mortgages. As soon as the mortgages were completed they were sold to Redstone Mortgages Limited ("Redstone") under a Mortgage Purchase Facility Agreement ("MPFA") under which Redstone took an assignment from Beacon of all the rights and liabilities of Beacon under and in relation to any purchased mortgage. Both Beacon (as originator of the loan) and Redstone (as purchaser of the mortgage) were funded by a German bank, Bayerische Hypo-Und Vereinsbank AG ("HvB"), though Redstone was not a subsidiary of HvB. The object of the exercise was that the mortgages purchased by Redstone would be bundled, securitised and offered to the market ("issued") as residential mortgage backed securities.
The origination and securitisation of the mortgage securities was part of a single commercial venture. Redstone had been incorporated in April 2004 and by early 2005 was already an established purchaser of residential mortgage portfolios. Beacon came into being in December 2004 with the intention that it operate as an authorised lender in the sub-prime market, and with the funding arrangements between itself, Redstone and HvB between then and April 2005, enabling it to operate as Redstone's dedicated residential mortgage lender. B Legal was incorporated in May 2005 with the intention that it operate as the dedicated conveyancing solicitor both for the taking of residential mortgages by Beacon and for the assignment of those mortgages to Redstone. Operations commenced in August 2005.
One might ordinarily expect that the funding for the loan which Beacon was to make to its borrower would be provided out of a short term facility available to Beacon, and that that short term facility would be repaid out of the sale price for the mortgage when it was sold on by Beacon to Redstone. But so integrated was the operation that the funding for Beacon's loan to the borrower was provided directly and immediately by Redstone by an advance payment of part of the purchase price payable for each mortgage. With such an arrangement in place there is obvious commercial pressure to build up a loan book rapidly, for until a portfolio could be assembled ready for backing an issue of securities Redstone would bear all funding costs. So all processes were streamlined and standardised and conducted according to Policy Manuals and Business Process Manuals.
B Legal provided legal services to Beacon both on the taking of the original mortgage and on its assignment under the MPFA for a fixed fee of £200 on each transaction. It did so under the terms of a Legal Services Agreement dated the 29 July 2005 and made between (1) B Legal (as legal servicer) (2) Beacon (as originator) and (3) Redstone (as issuer) ("the Retainer"). Although Redstone was a party to the Retainer it was clear from the first recital that the object of the Retainer was to govern the relationship between B Legal and Beacon and from the third recital that Redstone was a party solely for the purpose of specified clauses relating to its own purchase of mortgages.
Before dealing with the detail of these documents I should make one general point. I received extensive written and oral evidence from Mr Matthew Duncan, a solicitor and former partner of Sidley Austin Wood & Brown. He was then and is now a specialist in structured finance (and in particular residential mortgage backed securities) and in the establishment of residential mortgage lenders. He described himself as "one of the most experienced London-based solicitors practising in this field". He was the architect of the business structure and the draftsman (or at least the leader of the team of draftsmen) of the documents embodying the commercial relationship between Redstone, Beacon and B Legal; and he was fully conversant with the pre-transaction negotiations between the various parties. His evidence consisted of a blow-by-blow account of the circulation of various drafts, of the advice received, of the various amendments made and of what was intended by them, and of a general commentary upon the documents. His evidence included his analysis of the liabilities of B Legal upon entering the Legal Services Agreement and of who was entitled to enforce those liabilities and under what agreement. I do not regard this evidence as of assistance (or indeed as admissible).
My primary task is to ascertain as a matter of fact what were the terms of the Retainer and then to determine as a matter of law what, upon the true construction of the Retainer, were the duties thereby imposed upon B Legal, whether expressly or implicitly. Pre-transaction negotiations are not an aid in this task: nor are the subjective intentions of the draftsman. The interpretive process of course includes a consideration of the objective facts about the circumstances of the transaction: to that extent alone Mr Duncan's evidence assisted.
The following provisions of the Retainer are relevant to the preliminary issues to be decided:-
...a) By clause 2.1 Beacon appointed B Legal to provide "the Legal Services in accordance with the provisions of the Legal Services Documents".
b) The "Legal Services Documents" which set out the services to be provided were the Retainer itself and each document provided by B Legal in relation to the provision of Legal Services including (without limitation) the "Solicitor's Instruction Letter" and each "Certificate of Title".
c) The reference to a "Solicitor's Instruction Letter" was to a document the form of which was set out in clause 28 of the Retainer. This gave B Legal authority and instructions to act on behalf of Beacon in:—
"The completion of its mortgage over the property in accordance with the CML Handbook for Solicitors and Licensed Conveyancers 6 th May 2005 edition ("the Handbook") and with the Supplemental Instructions. For the purposes of the Handbook you have our own Part 2".
It also gave authority and instructions to transfer the mortgage to Redstone.
d) The Council of Mortgage Lenders "Lenders' Handbook for England and Wales" ("CML Part 1") contained the standard instructions from a lender to a solicitor. These instructions could be modified by CML Part 2.
e) Paragraph 2 of CML Part 1 specified that all communication between lender and solicitor should be in writing, with copies to be kept on the solicitor's file as evidence of notification and authorisation (or an electronic copy retained in readable form). Paragraph 2.3 stated:-
"If you need to report a matter to us, you must do so as soon as you become aware of it so as to avoid any delay. If you do not believe that a matter is adequately provided for in the Handbook you should identify the relevant Handbook provision and the extent to which the issue is not covered by it. You should provide a concise summary of the legal risks and your recommendation on how we should protect our …interests. After reporting a matter you should not complete the mortgage until you have received our further instructions".
f) Paragraph 4.1.1.1 of CML Part 1 required the solicitor to take reasonable steps to verify that there were no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain: any such discrepancy had to be reported to the lender immediately.
g) Paragraph 5.4.1 of CML Part 1 said that the title to the property must be
" good and marketable free of any restrictions … or encumbrances which at the time of completion might reasonably be expected to materially adversely affect the value of the property or its future marketability".
h) Paragraph 5.10.3 said that the lender would not accept any restriction upon the mortgage or assignment of the lease unless consent to the transaction could not be unreasonably withheld, and that, if consent to the mortgage was required, then this had to be obtained before completion: this was stated to be "particularly important if the lease [was] a shared ownership lease".
i) From June 2007 an additional obligation was inserted by paragraph 5.15 of the revised CML Part 1 which noted the existence of arrangements with social landlords under which a borrower might not have 100% ownership of the property, saying:-
"In these cases you must check with us to see if we will lend and what our requirements are unless we have already provided these".
j) Paragraph 6.2 of CML Part 1 said that the boundaries must be clearly defined by reference to a suitable plan or description, and that they must accord with the information given in the valuation report, and be confirmed by the borrower, with any discrepancies to be reported.
k) Paragraph 6.11 said that there must be no right of pre-emption, restrictions on resale, options or similar arrangements in existence at completion which would affect the security.
l) Paragraph 7.4 of CML Part 1 dealt with occupiers and said:-
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