His Honour Judge Gosnell:
- This claim is brought by the Claimants Mr and Mrs Bateson against the Defendant for professional negligence. The Claimants allege that they were given negligent advice when they used the Defendant as mortgage brokers to arrange remortgages for seven investment properties in June and July 2005. The Claimants claim that as a consequence of the negligent advice they have lost the whole value of the equity they held in the properties of £572,979 and have in addition had to pay a further sum of £170,583.42 to the mortgagees of the properties for the shortfall after the mortgagees had taken possession of the properties and sold them. The Defendant denies negligence and contends that any loss suffered by the Claimants was not caused by its advice or lack of it.
- The facts
There are very few issues about the underlying facts of the case which are mainly agreed. The Claimants started a gym business in 1996 which they initially operated as a partnership. They rented out their home and moved into the fitness centre and in 2001 they bought another property which they rented out. From then on, until July 2005 they bought a number of other properties each with the benefit of an interest only mortgage. As property prices rose, the equity in the properties increased. By June 2005 they had seven properties, one residential home at 7 Heydon Close, Meanwood, Leeds and six buy to let properties. As the properties were bought piecemeal, they were secured with separate mortgages from more than one lender.
- In early 2005 they found another property, Westgrove, 600 Leeds and Bradford Road which they felt could be refurbished for profit. The price of the property was £380,000 and £57,000 was thought to be required as a deposit. Once the house was bought they intended to move into it and rent out their former home at 7 Heydon Close. Mrs Bateson discussed the requirement to raise capital with her bank manager Mr Flynn who recommended that she contact the Defendant as Barclays Bank PLC did not lend on the buy to let market. Mr Flynn sent a fax to Mr Darren Flicker who was employed by the Defendant. It contained information about the Claimants' property portfolio which had been prepared by Mrs Bateson. A meeting took place on 3rd June 2005 between Mr Flicker and Mr and Mrs Bateson. The Claimants case is that this was the only meeting that took place. At that meeting it is agreed that Mr Flicker completed a Mortgage Application Questionnaire to obtain information about his customers' needs and the Claimants were asked to, and did sign, terms of business containing a fee agreement for 0.5% of the mortgage funds offered. Mr Flicker also asked to quote for the mortgage to fund the purchase of Westgrove even though the Claimants had already got a mortgage offer in place from Birmingham and Midshires Building Society. There is a dispute about what information was sought and what advice was actually given which I will deal with in my review of the evidence.
- On 7th June 2005 Mr Flicker sent a report and advice with his recommendations. He provided 8 individual mortgage illustrations with Bank of Ireland recommended for the new purchase and The Mortgage Works for the seven buy to let properties. In the event the mortgage with Bank of Ireland did not proceed but the Claimants did obtain a mortgage offer and proceeded with the mortgage with The Mortgage Works for the seven buy to let properties. On around 11th July 2005 Mrs Bateson advised Mr Flicker that the redemption figures had increased by about £40,000 from the figures that she had given him and he agreed to amend the applications to seek a further £40,000 so she could obtain a capital release as planned. The purchase of Westgrove proceeded independently of the remortgage without recourse to any of these funds on 28th June 2005.
- The remortgage was completed on 29th July 2005 with a total advance of £1,377,058. The Claimants paid the Defendant fees of £6060 in total for arranging the remortgage as agreed. They suffered redemption penalties however from the original mortgages being repaid early in the total sum of £41,034.13 and had to pay an arrangement fee to The Mortgage Works of £20,383. The redemption penalties and Arrangement fee were incorporated into the new borrowing. It is accepted that the remortgage to The Mortgage Works was an "aggregate" or "portfolio" mortgage in the sense that the security was held jointly over all seven properties rather then seven individual and independent mortgages as had existed previously. What is in dispute is whether the Claimants were told about this. It also contained redemption penalties for early repayment.
- This change became significant when the Claimants started to run into financial difficulty. In about January 2007 they were told by their Landlord at the gym that he wished to convert the warehouse they had rented for ten years into offices. They persuaded him to reconsider and he agreed to do some refurbishment and extension of the property so that a smaller area could continue to be rented by them. The work was expected to take 16 weeks but took instead 34 weeks during which time the gym could only partially function. By the time the work was complete many customers had deserted to join other gyms and the Claimants income was significantly affected. In addition a number of tenants either failed to keep up with rental payments or left the property owing rent, one of them even stealing furniture in the process. The combination of these factors led to the Claimants falling into arrears with the mortgage and by about April 2008 they were over £19,000 in arrears being four or five months payments missed randomly. The Claimants tried to negotiate with the Mortgagees but they were unsympathetic and instructed Law of Property Act Receivers in April 2008. Even though the Claimants had substantial equity in the properties and put them all on the market eventually, only one of them sold and eventually the mortgagees took possession and sold all the properties. By January 2009 the amount owing to the mortgagee had risen to just under £60,000 .Once all the arrears, charges and costs were taken into account the Claimants owed the mortgagees £170,583.42 and their property portfolio was lost. Unfortunately, Mr and Mrs Bateson separated in July 2008, they would say due to the strain of this situation and the gym ceased to trade at the end of 1988.
- The Claimants' evidence
Mrs Bateson gave evidence in accordance with her witness statement and confirmed all the background information referred to above. She accepts that her own bank manager referred her to Mr Darren Flicker and faxed over to him a document containing a summary of the Claimant's property portfolio. There was then a telephone call on 2nd June 2005 between Mr Flicker and Mrs Bateson and she emailed him updated details of the values of each of the properties, the outstanding mortgage and the rental being received. A meeting was arranged between Mr Flicker and both Claimants on 3rd June 2005 when they signed the Defendants Terms of Business and Fee Agreement, a Mortgage Application Questionnaire and a pre-printed mortgage application. The purpose of the Mortgage Application Questionnaire was to ascertain the customers' needs and requirements. Page 5 of the form contained a number of questions about the customers' current mortgage details but these are not completed as the words "see attached sheet at back" are written in manuscript. This page included questions relating to any mortgage redemption penalties which were likely to apply to the existing mortgages, their amount and when the penalty period expired. The sheet at the back was likely to have been the original fax from the bank which did not contain this information. The Claimants rely on the absence of any entry in this part of the form to support their contention that no enquiries were made about there being any redemption penalties payable to discharge the existing mortgages early. Mrs Bateson also gave evidence that she was never told that the mortgage with The Mortgage Works which Mr Flicker recommended was an "aggregate" or "portfolio" mortgage under which all the properties were held jointly as security for the loan and could all be subject to possession proceedings if they fell into arrears.
- Mrs Bateson accepted that other parts of the form were completed to reflect their instructions that they were prepared to accept early redemption penalties on the new mortgage to obtain a lower interest rate which should be fixed or capped for a period of three years for the buy to let properties. The residential mortgage should be a discounted rate however. She accepts that mortgages on each of the buy to let properties were recommended with The Mortgage Works with a fixed rate of 4.85% for three years and a variable rate of 1.99% above base thereafter. A detailed letter containing these recommendations was sent to the Claimants on 7th June 2005.
- The application for a mortgage proceeded and an offer was eventually made on 7th July 2005 which was received by her solicitor Mr Dapin on 11th July 2005. He immediately wrote to the Claimants advising them to read through carefully the Terms and Conditions. One of the special conditions attached to the mortgage actually read:
"6. Your attention is drawn to the fact that under the mortgage terms, all properties charged by you to us will form the security for all monies owed to us. This could be particularly significant if we are asked to consider release of property during the term of the mortgage"
In addition to suggesting that the terms and conditions should be carefully read the solicitors also stated in their letter:
"We are obliged to point out that you must make monthly payments on the due date and keep up the payments, otherwise you run the risk of action being taken by your lender for arrears. Your lender could also take action to repossess each property if the arrears do become serious."
Mrs Bateson was asked whether she had read the letter and the conditions as if she had read the two paragraphs shown above she would have realised that this was an aggregate mortgage even if the term was not familiar to her. She replied that the letter was written in standard form and if Mr Dapin had anything important to tell them he would normally call them and ask them to come to his office for a discussion. She therefore did not appreciate that enforcement action could be taken against all the properties if arrears arose.
- At roughly the same time Mr Dapin advised her that the redemption figures had come in for the existing mortgages which were around £42,000 higher than she had expected. She obtained the individual figures over the phone and emailed Mr Flicker to ask him to increase the amount to be borrowed by £40,000. Her solicitor Mr Dapin then sent her a letter on 12th July 2005 which enclosed individual redemption statements for each property which clearly showed a substantial early redemption charge in each case. Even if they were not clear Mr Dapin drew the Claimants' attention to them in his letter by stating:
"I enclose copy redemption statements that I have received from your existing lender and should he oblige if you would confirm that you are agreeable to the figures stated.
I would draw your attention to the redemption penalties and early repayment charges that are included in the statements and if you have not already done so, / would strongly recommend that you take independent advice from a financial advisor as to how your equity in the properties will be affected by these redemption penalties and those that will become payable tinder your new mortgage..."
- Mrs Bateson was asked in cross-examination whether she had taken Mr Dapin's advice after receiving this letter. She replied that she considered his recommendation but did not follow it. There was still over £500,000 equity in the property portfolio and the extra £40,000 had little impact on this she felt. She was happy to reduce the equity figure as it was so substantial. She wanted to release £57,000 of the equity and she indicated they had paid redemption penalties before when it was in their interests to release some cash. She indicated that she did not really look at what the individual redemption penalties were. She was more interested in the bottom line. She accepted however that she was not legally committed to enter into the new mortgage until it was actually completed on 28th July 2005. She also accepted that her solicitors letter of 11th July had also advised her to seek further advice from both her independent financial advisor and accountant but she had done neither as she understood the issues herself.
- She accepted that she and her husband had bought Westgrove without any assistance from Mr Flicker and had also taken out a further advance with The Mortgage Works in August 2006 for £25,000 again without seeking further advice from him. She related how problems with the refurbishment of the gym in 2007 had dragged on for 34 weeks when they were without income. At about the same time problems also started to arise with certain tenants who fell into arrears with their rent and one in particular who took all the furniture and left unexpectedly owing rent. She accepted that the arrears amounted to over 19,000 by early 2008 which amounted to about five months payments. Despite her best efforts to negotiate with the mortgagee , and despite voluntarily putting at least four buy to let properties initially on the market and selling one of them , they could not prevent a Law of Property Act receiver being appointed in April 2008 and eventually all the properties being sold apart from Westgrove. She accepted that by January 2009 the arrears were almost £60,000 but felt that this may have been due to redemption penalties although there was no documentation to support such a calculation. She sought to argue that if there had been seven separate mortgages rather than an aggregate mortgage the arrears problem could have been managed better but it was not immediately clear how this could be done with overall arrears of £19.000 which would be at least £2,800 per property.
- Mr Bateson gave evidence that he had left most of the financial arrangements to his wife although he was able to confirm that her witness statement was true. He had attended a meeting with Mr Flicker where he confirmed he had not been told about redemption penalties or an aggregate mortgage. He said the whole tenour of the meeting had been very positive.
- The Defendant's evidence
Mr Darren Flicker gave factual evidence for the Defendant. He related his prior experience and qualifications in giving mortgage advice and confirmed the basic procedural history which I have already outlined. He set out the general procedure to be followed with a client including a fact finding exercise to get to know the client and their needs and requirements. He would then appropriately research the market and recommend the product which best suited the client's needs. The client would then receive a suitability letter which explained why he was recommending the product. In his witness statement he had outlined how this process had taken place including the fax from Barclays and the email from Mrs Bateson. He then outlined three meetings he had with Mrs Bateson, the last one being jointly with Mr Bateson. He accepted at trial however that he agreed with Mrs Bateson that there had been only one meeting and that he had probably completed the Mortgage Advice Questionnaire over the telephone prior to that meeting. In his witness statement he had said he "believed he would have asked" about the redemption penalties on their existing mortgages and he was "almost sure" he would have advised the Claimants that the new mortgage was an aggregate mortgage as it was "out of the ordinary". In the witness box however he had to concede that he did not recognise the Claimants and had confused them with someone else. He had no actual recollection of what he had said and had to rely on what he would usually have said and done.
- He denied that he directly benefited from the fees charged by the Defendants as he was not on commission at the time and never reached his bonus target. He sought to point out that the product he had recommended had a market leading rate of interest and complied with the client's requirements for capital release of £57,000, lower interest rates and repayments initially and a fixed rate for three years. He accepted that redemption penalties would have been relevant and was unable adequately to explain why they were not recorded anywhere in his fact finding exercise. I gave him the opportunity to consider whether in fact he had known at the relevant time that The Mortgage Works product was an aggregate mortgage but he said that he thought he had done. He accepted that he could have asked a colleague or rung the lender if he was not sure. He was asked about his own history as a buy to let landlord. It transpired that he had part owned 16 properties at one time but all had a Law of Property Act Receiver appointed by a variety of lenders and eventually he managed to recover three of them that he still held a share in. It was clearly not a successful venture.
- The expert evidence
Both parties had permission to call expert witnesses and the Claimants relied on Ms Julia Booth who is an experienced mortgage broker. Having examined all the relevant papers she was critical of the lack of evidence that a proper fact-finding examination had taken place before advice was given. She felt that once the amount of the redemption penalties had been ascertained the Claimants would have been better advised to await the expiry of the penalty period before remortgaging to release equity. She questioned the need to remortgage all the properties when a remortgage of 7 Heydon Close may have produced the required amount of cash. She strongly felt that the Claimants ought to have been advised that the mortgage with The Mortgage Works was an aggregate product.
- The Defendant's expert was Mr Nicholas Baxter who has 36 years of experience in the residential mortgage industry. He approached the problem from a different angle but his conclusions were as follows. He felt this was a commercial business transaction which was unregulated by the FSA but where the Defendant had a duty of care to the Claimants. The Defendant's duty of care extended to a recommendation of a reasonably beneficial product for the Claimants but that the legal consequences of the mortgage or breach of its terms was an area beyond the competence of the mortgage broker and more the province of a solicitor. He felt that Mr Flicker ought to have mentioned that the product was an aggregate mortgage if he had known it was although he doubted that Mr Flicker would have known as it was not obvious from the mortgagee's marketing information. He felt the Claimants were at least experienced landlords who might have been expected to understand issues such as redemption penalties and mortgage terms. His view was that the full £57,000 could not have been released by remortgaging 7 Heydon Close alone. He also found it difficult to understand why the mortgagee had chosen to sell all the houses rather than have the Law of Property Act Receiver collect the rents and sell some properties to clear the arrears then returning the remainder to the Claimants.
- The experts met and prepared a joint statement. They agreed that a buy to let mortgage was unregulated, that the Claimants were experienced landlords and that the paperwork could in theory have been completed in one meeting. They agreed that it was not possible to work out how much the Claimants wished to borrow or why and that costs savings may well have been a secondary objective explaining why perhaps all the properties were remortgaged. They both agreed that the Claimants ought to have been told that the new mortgage was an aggregate mortgage if Mr Flicker knew and Ms Booth felt that he was also obliged to explain as much as he could about what this meant and what the possible consequences might be. Mr Baxter felt this was the solicitor's task. Both of them felt however that a reasonably competent broker would assume that where arrears existed with an aggregate mortgage the whole portfolio would not normally be taken into possession and sold. At trial the experts agreed that there was insufficient information from the Claimants to enable them to do an audit trail to consider whether the product recommended was a reasonable one for the Claimants as they were unable to calculate the Claimants' income or calculate how much was saved in repayments under the new mortgage. They also agreed that whilst both of them could not explain why the Law of Properly Act Receiver and mortgagee took a somewhat aggressive attitude to this account, the fact that the arrears were almost £60,000 might go some way to explain why the decision was taken to sell all of the properties.
- The expert evidence has been helpful but is not likely to be determinative of this case. On balance however, I preferred the evidence of Mr Baxter. He was clearly a more experienced expert witness and I felt his opinion was more balanced and considered than that of Ms Booth. She tended to accept the facts as Ms Bateson stated them to be without question and made assumptions as to what the Claimants would or would not have done if the advice had been different. Whilst she was entitled to be robustly critical of Mr Flicker it was unfair of her to suggest that he was guilty of "churning" with the sole motivation to earn fees for his employer rather than attempting to assist the Claimants. When she was re-examined by Mrs Bateson she meekly accepted all her interpretations of the evidence when some of them were speculative to say the least. Mr Baxter by comparison appeared to adopt a fair minded approach and accepted that Mr Flicker should have both enquired about redemption penalties and mentioned the aggregate nature of the mortgage if he knew about it. His view that the legal consequences of falling into arrears with an aggregate mortgage were a topic best left to the parties' solicitor was, in my view, a reasonable approach. His assessment of whether a remortgage of 7 Heydon Close could release £57,000 was in my view accurate, due both to the redemption penalties and a reduced valuation done by the mortgagee. Where the expert's evidence differs on any topic I prefer the view expressed by Mr Baxter for the reasons I have indicated.
- Breach of Duty
The first issue I need to determine is whether there has been any breach of duty by the Defendant. This was an unregulated transaction and there can be no claim for breach of any regulatory duties. Whilst there was a contract between the Claimants and the Defendant their claim essentially relates to acts and omissions which are alleged to have occurred in the fact finding and advice given between 2nd and 7th June 2005. The proceedings were not issued until 4th July 2011 and so I suspect the Claimants claims in contract are statute barred as in contract time runs from the date of breach. It is clear however that the Defendant owed the Claimants a duty of care in tort and that this claim is not statute barred. The issue is not important as the nature of the duty is likely to be identical. Mr Flicker was clearly under a duty to exercise reasonable care and skill. The standard of care and skill will be that to be expected of a like provider engaged to provide the relevant services. There appeared to be a dispute between the parties whether this is an "advice" or "information" case but I suspect the distinction is not important where the product is unregulated and the issue is breach of duty.
- In this case Mrs Bateson had been to her bank in the hope of raising capital by releasing equity from their buy to let portfolio to provide the deposit for another purchase and to help fund refurbishments. She was referred to the Defendant for advice about remortgages and it seems to me that the Defendant was under a duty to give information about the products available and advice about the product which would best suit the Claimant's needs once they were established. The Claimants make two complaints about the advice and information they were given; firstly they were not advised about the likelihood or amount of any redemption penalties on their existing borrowing and secondly they were not advised that the product they were buying was an aggregate mortgage where all properties were secured on the whole loan.
- In relation to redemption penalties, it would be unusual for the mortgage broker to be aware of these on first meeting the client. II' he discovers that the existing mortgage is only two years old and a discounted rate applies or a rate has been fixed for three years he may well suspect that a redemption penalty may apply. He has no right to contact the lender himself but it would be sensible to advise the client that they should check whether a redemption penalty was likely to apply and if so how much it would be. This information may well be important as it might affect either the broker's view whether a remortgage was financially viable and the client's view whether he or she wished to proceed with that extra expense involved. The fact that questions relating to this issue appeared on the MAQ form shows that the Defendant accepted that this information could well be relevant to the fact-finding enquiry. It follows that the failure to ask the questions or to advise the clients to at least enquire whether there were likely to be redemption penalties and if so the amount (and when they expire) would fall short of the normal standard of care expected from a mortgage broker. The experts both accepted that an enquiry of this nature or a least a warning to enquire should be made. It follows that if Mr Flicker did not make such and enquiry or advise Mr and Mrs Bateson to do so then he was in breach of duty.
- I had the benefit of seeing each of the witnesses give their evidence in the witness box and I formed the view that Mr and Mrs Bateson were truthful witnesses who were attempting to recall what had happened in 2005. It is fair to say they must have viewed this however through the prism of their dreadful experience in seeing all their portfolio of properties repossessed. Mr Flicker was also attempting to assist the court with his honest recollection but he clearly had little actual recollection of what had happened. I have reached the conclusion and I find as a fact that Mr Flicker was in breach of duty in this respect. Whilst I accept that he said it was something he would normally discuss there is no evidence or audit trail that he did so. He has not recorded the Claimants answers to the relevant questions on the MAQ file, he did not refer to it in his report on 7th June 2005 and he did not make any other note or record to that effect. The Claimants both say that he did not warn them of this risk and their conduct subsequently was consistent with that. It is clear he did not have the relevant information about the redemption penalties so he could only have advised the Claimants to make the enquiries themselves. It is clear they did not do so as Mrs Bateson discovered the bad news about the redemption penalties from her solicitor on 11th July 2005 as part of the conveyancing process. She struck me as a lady who would have made the relevant enquires if she was advised to do so and she needed the information. I accept the Claimants' evidence on this issue.
- In relation to the aggregate mortgage issue there was a debate between the experts as to the extent of the Defendant's duty in this respect. Both experts agreed as this was an unusual feature it should have been disclosed to the Claimants if Mr Flicker was aware of it. He gave evidence that he was. I preferred the evidence of Mr Baxter that the extent of the duty was to outline the feature in general terms but to ask the Claimants to seek advice from their solicitor as to the legal meaning and consequences of this term of the mortgage. It cannot be right that a mortgage broker is expected to give legal advice.
- Again I find on the evidence that Mr Flicker was in breach of duty in failing to mention this to the Claimants. I reach this conclusion in the main because he had no actual memory of speaking to the Claimants whereas they could recall the meeting and said it was not mentioned. Again, given the unusual feature of the product I would have expected it to figure in his notes or his written report to his clients if he had specifically drawn it to their attention. He would have suggested that they discuss it specifically with their solicitor and there is no evidence that they in fact did so, although he did in fact include it in his report on the mortgage terms to his client.
- Causation and remoteness of damage
In South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 The House of Lords held that someone under a duty to advise on what is the appropriate course of action will be liable for all the foreseeable consequences of action taken in reliance on that advice, but a person under a duty to take reasonable care to provide information on which someone relies will generally be regarded as responsible for the consequences of the information being wrong , and not all the consequences from the reliance on it. Lord Hoffman in this decision (normally referred to as SAAMCO) used an illustration to show the significance of the scope of a defendant's duty of care for the purpose of questions of causation and remoteness. He spoke of a mountaineer consulting a doctor who told him that his knee was fit for a mountain climb but the doctor was negligent as the knee was not fit. The doctor would be responsible for any injury caused by the mountaineer's knee but not for the weather, the equipment or sheer bad luck.
- This reasoning was further developed by Lord Justice Rix in Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184 at 103 when he said:
"But what does the mountaineer's example teach us in the present case? An investment adviser, with his statutory duties of various kinds, owed to a consumer as a result of the hitter's statutory status as a private person, who as adviser recommends a particular investment, which he must take care to be suitable for his client and, if a packaged investment, to be the "most suitable" on the adviser's menu, may well be responsible if some flaw in the investment turns out materially to contribute to some investment loss. The doctor did not advise, let alone recommend, his patient to go mountaineering: he merely told him that his knee was in good shape. Mr Marsden, however, not only advised Mr Rubenstein on the investment of his capital, he recommended a particular investment. He, so to speak, put him in it. If such an investment goes wrong, there will nearly always be other causes (bad management, bad markets, fraud, political change etc): but it will be an exercise in legal judgment to decide whether some change in markets is so extraneous to the validity of the investment advice as to absolve the adviser for failing to carry out his duty or duties on the basis that the result was not within the scope of those duties."
The facts of this case are of course different, but in my view, Mr Flicker was in a similar position in that he was recommending a product to the Claimants and it is a question whether the type of damage which actually occurred was foreseeable to the parties when the recommendation was made. Whilst the scope of the duty may help decide what type of damage is too remote, the issue of causation as such is governed by the nature of the breach.
- The classic lest of causation of damage is of course the "but for" test. Would the damage have been sustained "but for" the Defendant's breach? In this case there are two separate breaches which will have to be considered individually. Firstly, Mr Flicker failed to warn the Claimants that redemption penalties might be incurred if they remortgaged and discharged their current mortgages. In the event the redemption penalties amounted to about £42,000. The Claimants submit that if they had known about this from the outset they would not have remortgaged and the subsequent losses would not have been incurred. I am not convinced however that the facts support this contention. Whilst it is true that Mr Flicker did not tell them there would be redemption penalties and the application for remortgage was submitted in ignorance of this issue, by 11th July 2005 the Claimants' solicitor had received redemption statements and had advised Mrs Bateson over the phone of a £40,000 shortfall in funds. In his letter of 12th July 2005 he sent copies of the redemption statements to Mrs Bateson and gave her clear advice to speak to her Independent Financial Advisor. She did so, but only to ask him to resubmit the mortgage application seeking a further £40,000 in borrowing. The terms of the letter are set out in paragraph 10 of this judgement and are commendably clear. I have seen the individual redemption statements and again these are very clear documents with the redemption penalties clearly identified.
- Mrs Bateson's evidence was that she did not realise that the £40,000 shortfall was caused by the redemption penalties. She said she thought she had made a mistake in the figures she had supplied to Mr Flicker as to the total amount of the borrowing. I cannot accept this as being accurate. I formed the view during the trial that Mrs Bateson is a very intelligent woman. She has conducted the trial with great skill and dexterity. She clearly understands all the issues. In my view the solicitor's letter of 12th July 2005 and redemption statements are so clear that she must have understood that redemption penalties were being imposed by the existing lenders. She accepted in the hearing that she understood the concept and on one occasion in the past had incurred a redemption penalty in order to release equity. I accept it is difficult to understand why she would proceed once she had this information. She did however explain at trial that the £40,000 was not a significant amount when they had equity of over £500,000 in the portfolio and she wanted to release £57,000 in order to purchase and refurbish Westgrove. Whilst standing back from the transaction now, with the benefit of hindsight, it does not seem like a reasonable bargain, I am left with the conclusion that the Claimants were prepared to suffer the redemption penalties in order to release the equity to fund the refurbishing of Westgrove. There is no evidence that Mr Flicker was asked to advise on the amount of the penalties and whether some alternative scheme involving only some of the properties should be considered. The evidence appears to be that he was asked to increase the borrowing to cover the penalties which had been incurred which he did. This drives me to the conclusion that the Defendant's breach did not cause the Claimants' losses as they were aware of the information that the Defendant should have provided at a time when they still could have withdrawn from or changed the nature of the transaction and they chose not to do so. If Mr Flicker had told them to make the appropriate enquiries as he should have done they would have been in exactly the same position.
- My findings on this issue feed into my consideration of the second issue, the fact that Mr Flicker did not tell the Claimants that they were entering into an aggregate mortgage with The Mortgage Works. The Claimants claim that if they had known this from the outset they would not have entered into this mortgage and their subsequent losses would not have occurred. On balance of probability I am not convinced by this contention. The evidence I have outlined in the previous paragraph shows that the Claimants proceeded with this mortgage when the redemption penalties made the deal seem disadvantageous financially. It was a very high price to pay to secure a fixed rate, a lower rate for three years and a release of £57,000 of equity (albeit borrowed). Despite this the Claimants proceeded which is perhaps a reflection of how much they wanted to buy and develop Westgrove which they planned to be their home. Their solicitor Mr Dapin wrote to them on 11th July 2005 and advised them to seek advice from their Independent Financial Advisor about the lack of a repayment vehicle for the loan and from their accountant about Capital Gains Tax. Mrs Bateson accepted she had read and understood these recommendations but decided not to take advice. If Mr Flicker had told her that the mortgage was an aggregate mortgage and all the properties were together secured on the loan would this have put her off? I can see how today, after suffering the loss of their entire portfolio in the property crash which occurred in 2008, she feels this would have been a very serious consideration. In 2005 however there were no thoughts of the property bubble bursting. This hard working couple had amassed a total of seven properties since 1996 and had over £500,000 in equity and were making a profit of £2000 per month after all the loans were paid. I do not accept that learning that there would be a lack of flexibility if they fell into arrears would have weighed heavily with them , particularly when the rather obvious present disadvantages set out in the preceding paragraph did not cause them to pause and take stock. I am not satisfied that they would have refused to proceed with the remortgage if they had been given the information they were entitled to from the Defendant. The Defendant's breach has not caused their losses on this issue either. I will however deal with the other issues in this case in case I am wrong in that finding.
- If Mr Flicker had advised them of the fact that it was an aggregate mortgage they would have been advised to consult their solicitors about the legal effect and consequences of such a term. I have outlined in paragraph 9 of this judgement that the Solicitors did explain the legal effect of the term in their letter of 11th July 2005 and if the Claimants had read the mortgage conditions it was clearly set out in special condition six. If I were to find as a fact that the Claimants had read and understood these documents then again I would have to find that the breach did not cause the loss. I accept however that Mrs Bateson said she had not studied the letter of 11th July 2005 in detail and was working on the basis that if there was anything important to discuss their solicitor would have invited them to his office for a meeting. This would however mean that the court would have to find the Claimants guilty of contributory negligence in failing to read both the mortgage conditions and their own solicitors' letter. A reduction of 75% in their claim for this reason would not be unreasonable.
- The most difficult hurdle of all for the Claimants to overcome is the Defendant's submission that the Claimants would have been unable to meet repayments on their loans irrespective of the nature of the mortgage or even whether there had been a remortgage at all. The Claimants fell into financial difficulty due to a number of factors: the actions of their landlord in reducing the size of their premises; the delay in refurbishing the premises causing the Claimants to have no income from the business for 34 weeks; the fact that clients had deserted them due to this delay causing further losses thereafter; tenants being late paying rent; and tenants failing to pay rent at all and stealing fixtures and fittings. Having fallen into arrears they were then unable to repay them due to the financial crisis and the difficulty in selling properties in that difficult market. One of the properties at 1 St Benedict's Chase was sold around July 2006 releasing nearly £20,000 in equity but around the same time a further advance of £25,000 was obtained by 15th August 2007 the arrears were £19,699.44 and on 29th October 2007 Mrs Bateson wrote to the mortgagees to explain what had caused their difficulties. By this time four of the buy to let properties were for sale as was Westgrove. Documentation from this time is very sparse but a mortgage statement for early 2008 did show that no payments at all were made between 25th January and 28th April 2008. Interest was being applied to the loan at over £5000 per month at this time. Touchstone was appointed Law of Property Act Receiver over all the properties on 9th April 2008 and all the properties were eventually placed on the market. By 4th August 2008 the outstanding arrears were £26,928.48, by 10th December 2008 they were £54,325.58 and by 13th January 2009 they were £59,798.29. Mrs Bateson alleges that this figure includes an early repayment charge of £63, 675.62 and if this was removed the account would be in credit as a property sale had gone through. Other than the fact that in August 2007 that redemption penalty would have applied to the whole loan, no evidence has actually been produced to support this. Given that the three year fixed interest period would have expired in July 2008 it seems unlikely.
- What emerges from this picture is that the cause of the Claimant's losses was their own financial difficulties compounded by the effects of the property crash in 2008. The remortgage may have provided the opportunity for the losses but the cause of the repossession of the property portfolio was actually the failure to pay the instalment payments by the Claimants and thereafter the failure of the properties to sell or to sell at their original value. This is what wiped out the value of the Claimants' portfolio of properties and caused them to owe the shortfall to the mortgagee.
- The Claimants allege however that the Defendant's breach has caused them to have an aggregate mortgage with the result that their mortgagee took enforcement action against all properties when, if they had seven separate mortgages this may not have happened and the Claimants could have sacrificed some properties to save others. The onus is on the Claimants to prove this and, in my view, the figures do not support them. The arrears in August 2007 if split equally between the properties would produce arrears of around £2,800 which would be enough for most mortgagees to consider enforcement proceedings. There is a paucity of information and evidence about the events between 2005 and the issue of proceedings. This would make it very difficult for the Claimants to satisfy a court that the fact that it was an aggregate mortgage actually made any different when the repayments would still have been beyond their means and the arrears were so substantial and rising. The monthly repayments were about £5000 per month and they had little or no income coming in from their gym business which finally folded at the end of 2008.
- An illustration of this problem occurred by accident when Mrs Bateson was cross- examining Mr Flicker. He gave evidence that he himself had once part-owned 16 properties. Despite him not having an aggregate mortgage and having a number of different lenders all the properties were made subject to Law of Property Act Receivers. Eventually he managed to negotiate the return of three properties once the others were sold. This could only have happened if the sale of the other properties was sufficient to pay off the loans outstanding on them. There is no evidence in the Claimants' case that this could be achieved. The experts both felt that the mortgagees had adopted a rather aggressive line with the Claimants but when told that the arrears were £60,000 by January 2009 they revised that view. The plain fact is that the onus of proving that they could have managed their finances to retain their portfolio if they did not have an aggregate mortgage is on the Claimants and they do not have the evidence to satisfy the court on balance of probabilities.
- Even if the Claimants could have proved that they could have rescued say two or three properties as Mr Flicker did (in my view they cannot), there is no way that the court could possibly value what those two or three properties would now be worth to set that off against the losses. The court has no current valuation evidence to show what the portfolio would now be worth if the Claimants had been able to retain the properties, either cumulatively or individually. The court also does not have figures for how much was actually owed to the mortgagee excluding the costs of sale and possession proceedings. So even if the Claimants had succeeded on all the issues including causation it is difficult to know what award the court could have made. It would have been wrong in principle to award what was sought, namely the value of the portfolio in 2005 together with the shortfall owing to the mortgagee. On any view the Claimants had fallen into arrears for reasons unconnected with the Defendant's breach and some of the properties would have had to be sold in the difficult market conditions that existed at that time. The properties would have suffered in value during die property crash in any event. No evidence or documentation has been produced which would have assisted the court in this exercise. The experts also agreed that it was impossible to get a complete picture of the Claimants financial situation in 2005 and although they were not asked I feel sure they would say that exercise would be even more difficult now.
- There is only one further finding that I wish to record. It was suggested by Ms Booth that Mr Flicker recommended the remortgage with the sole motivation of making commissions for the Defendant. I reject that allegation. I found Mr Flicker to be an honest witness whose evidence I rejected due to failures in the quality of his recollection, not because I found him dishonest or untruthful. It is right, given the seriousness of the allegation that I record this in my judgement.
- It follows from my analysis of the issues that the claim must fail. I say this with some regret as the Claimants are hard working people who have been through a disastrous financial experience and have clearly suffered substantial losses. They are however not alone in that many who entered the buy to let market without conceiving that the market could one day fall were caught out by the devastating global financial crisis which emerged in 2008.
