In April, my colleague Susannah Marsh wrote an article regarding the Court of Appeal outcome in the cases of Wood v Commercial First Business & Ors [2021] EWCA Civ 471, in which our team at Moore Barlow represented the lender.
In what constituted a radical departure from how the payment of undisclosed commissions by lenders to brokers had been assessed in the lower courts, the Court of Appeal stated that the question to ask when considering the relationship between the broker and the borrower is a simple one: “Was the payee (the broker) under a duty to provide information, advice or recommendation on an impartial or disinterested basis?”
If the answer is yes, then where the payment of a commission has not been disclosed it opens up both the broker and the lender to a claim from a borrower and brings a substantial risk that the Court will rescind the loan subject to the borrower being able to give counter-restitution.
Mrs Wood was successful in her request to rescind the loan, but at that time we awaited the decision from the High Court on how the mechanics of counter-restitution might work.
Liability for lenders when an undisclosed commission has been paid
The judgment on this important area of law was handed down yesterday and will provide much needed guidance for lenders in assessing what their liability may be in cases where an undisclosed commission has been paid.
It must be remembered that the objective of rescission is to restore the parties as near to their original positions as possible. Sometimes this won’t be completely possible, but the Court can make discretionary adjustments to achieve a result which is “practically just”.
Indeed, the object is not to punish the defendant even in the case of fraud. The starting point is to prepare an account where credit is given to the lender for the amount advanced plus interest to the date of rescission, from this any payments made by the borrower together with interest on those payments are deducted.
Where the borrower has had financial difficulties and missed payments, a credit may be due to the lender. However, if the loan is for a relatively short period, or the borrower has consistently made payments or lump sum payments, an amount may be due back to them. The rescission judgment in Wood has helpfully clarified several points regarding this calculation.
Interest – simple or compound?
Firstly, interest – simple or compound? Mrs Wood argued that she should be entitled to compound interest on the payments that she had made while the lender should only be entitled to simple interest on the amount advanced.
This was firmly rejected by the Court on the basis that only where money has been obtained and retained by fraud or withheld or misapplied by someone in a fiduciary position – neither of which applied in this case – could such a determination be made.
The rate of interest
Secondly, the rate of interest. The Court held that the rate of interest allowed on the amount advanced and on the borrower’s payments could be different.
The Court decided that Mrs Wood would be entitled to 4% above the 3-month LIBOR rate (which was determined to be what she could have obtained in the market at that time by expert evidence) in respect of the mortgage payments made while a lower rate of 2% over the 3 month LIBOR was awarded in relation to the amount loaned.
The rationale provided by the Court was that this reflected (as confirmed in expert evidence) the lender’s ability to borrow at a lower cost.
Payment for use and occupation
Thirdly, payment for use and occupation. Where under a contract a party has enjoyed the actual use and occupation of land, then on rescission of that contract the Court can direct that that a reasonable user or occupation rent is paid.
The Judge said that if Mrs Wood had bought the land and then used and occupied that land, on rescission it could be seen how a court may want her to pay for that use and occupation, however as she already owned the land (the case related to a re-mortgage rather than a purchase) it did not apply in the present case. However, the Judge commented that the principle was clearly sensible.
Account of profits
Finally, account of profits. Mrs Wood argued that the lender made a profit from the securitisation of her mortgage and that this profit should also be paid to her. However, as Commercial First Business Limited is a dissolved company the Court could make no finding either way as to Mrs Wood’s entitlement to seek any such account.
Conclusion
This Judgment will be incredibly helpful to any lender who faces a claim by a borrower for undisclosed commission payments. It represents a guide as to how the Courts will determine the accounting process in a claim for rescission of a mortgage and how the mechanics of counter-restitution actually work.
It also makes it clear that compound interest is highly unlikely to be awarded to a borrower and that where the monies advanced have been used to purchase a property, a user or occupation rent may be awarded to the lender.
It should also be noted that Mrs Wood tried to argue that the conduct of the lender was such that it should not be entitled to recover the sums advanced by them. However, the Court made no finding as to Commercial Firsts conduct and they remained entitled to recover the sums advanced which I think is indicative of how a Court would view such cases going forward.
How Moore Barlow can help
If you have any questions around this topic or any other financial litigations matter, find out how our expert team can assist you.
