On 7 October 2022, HHJ Cawson KC, sitting as a judge of the High Court, handed down judgment in Taylor & Anor v Legal and General Partnership Services Ltd [2022] EWHC 2475 (Ch) – the first decision in a contested trial before a High Court Judge in the recent spate of interest-only mortgage mis-selling cases. The claim was defeated at every hurdle. Tom Asquith, instructed by Julian Smart, Elizabeth Rhead and Charlotte Bagley of Clyde & Co, represented the successful defendant.
Introduction
The last few years has seen a wave of mortgage mis-selling claims make their way through the courts. In many cases, the core allegation was that mortgage brokers (or their agents) had negligently recommended an interest-only mortgage when a capital repayment mortgage or in some cases no recommendation at all would have been more suitable. Up until now, many of these cases were resolved before coming to trial, and in a number of cases they were struck out on limitation grounds. However, Taylor v Legal and General progressed to a full trial in the High Court and the judgment is likely to serve as a useful precedent in future cases.
The facts
The Claimants, Mr and Mrs Taylor, were enthusiastic investors in an offshore property development scheme run by Harlequin Hotels and Resorts (“Harlequin”). In total, they and their family invested a total of £172,500 in Harlequin by way of deposits for off plan developments in St Vincent and the Dominican Republic.
In late 2006, Harlequin began to promote a fundraising scheme whereby its investors would obtain loan finance secured on their homes to fund further developments. As part of that scheme, in March 2007, the Taylors obtained a mortgage which was brokered through an appointed representative of the defendant, Legal & General (“the Broker”).
The mortgage was a 20-year interest-only mortgage of £101,000, which the Taylors used to refinance their existing mortgage before ploughing the remaining £74,000 into the Harlequin scheme. The Broker completed, inter alia, a Mortgage Record of Suitability which recorded that it had explained the effect of an interest-only mortgage and had checked how the Taylors intended to repay the capital at the end of the term – which the Taylors explained would be by way of the future sale of the offshore properties which they expected to be built with their investment in the Harlequin scheme. They also had a fallback position which involved them using their surplus income in order to pay off the mortgage. The Broker also confirmed that he was unable to advise on the Taylors’ investment in Harlequin and suggested they take independent financial advice about it.
The mortgage was finalised and the Taylors made their further investment in the Harlequin scheme.
Over time, the Taylors kept up with their repayments. However, the Harlequin developments began to falter. In fact, it was later revealed that Harlequin was effectively a Ponzi scheme run by Essex businessman David Ames – who was sentenced to 12 years in prison on 30 September 2022 for defrauding thousands of investors through the scheme.
The claim
In this claim, the Claimants alleged the Broker had acted negligently and sought to recover the losses they had suffered on entering the mortgage (which they put at c.£115,000 and which included their £74,000 investment in Harlequin). In particular, they alleged the Broker should not have recommended a mortgage before ensuring the Claimants had taken independent financial advice in respect of their further investment in the Harlequin developments – and had it done so, the Claimants would never have proceeded with the mortgage at all, and therefore never have made their further investment with Harlequin.
Findings on duty and breach
With that in mind, and turning to the facts, the Judge’s principal reasons for finding the Broker was not under a duty to decline his recommendation until the Claimants received independent financial advice were that:
- The Broker could not have been expected to advise in relation to the Claimants’ investment, or to identify what was a good or bad investment;
- In any event, the Broker had recorded his advice that he was unable so to advise, which the Judge accepted reflected conversations that actually took place;
- The Claimants were enthusiastic investors in the scheme and had invested considerable sums even before they entered into the mortgage;
- It would be un unreasonable restriction on the Claimants’ autonomy as consumers for the Broker to decline the mortgage until they received independent financial advice – advice which the Claimants deemed unnecessary;
- The Claimants were aware of the risks involved and that it was “plausible” the properties in which they were investing would never be developed with the consequent loss of their investment; and
- Significantly, the Claimants told the Broker that if the investment failed, they would simply fall back on surplus income, which was realistic given the Claimants’ submission at the time of the mortgage that their income significantly exceeded their expenditure.
The Claimants’ alternative argument that the Broker should have recommended a repayment (rather than an interest-only) mortgage also failed. Not only was it not pleaded, but Mr Taylor’s evidence was that he was fully aware of the distinction between the two types of mortgages, and he and his wife intended to keep monthly payments down with the knowledge that in the worst-case scenario, they would rely on their income.
Given the Judge’s findings on duty, it followed that there had been no breach of duty.
Causation
Notwithstanding his findings that there was no relevant duty and no breach, the Judge nevertheless went on to consider the Claimants’ case on causation.
The Judge could see the theoretical merit in the Claimants’ argument that, had they been required to obtain independent financial advice and done so, they would never have proceeded with the mortgage at all.
However, he found the Claimants’ case simply was not supported by the evidence. They were enthusiastic investors who would have proceeded in any event. Moreover, it was hard to see how any breach could be causative of loss when the Claimants had a viable fallback position in the form of their savings which they had in fact relied on.
Loss
Again, consideration of the claim for damages was academic given the Judge’s dismissal of the claim, but he nevertheless went on to observe that it was difficult to see how the sum representing the Claimants’ capital investment in the Harlequin scheme could be said to fall within the scope of duty, following the decision in Manchester Building Society v Grant Thornton [2022] AC 783 .
Limitation
Limitation was also dealt with obiter. The mortgage was taken out in March 2007 and a standstill agreement was entered into on 18 March 2020. Primary limitation had therefore expired. The Claimants relied on the 3-year period afforded by s.14A of the Limitation Act 1980 to argue that they only had the requisite knowledge on or after 18 March 2017.
The key questions were when the Claimants had requisite (a) of the damage and (b) that the damage was attributable to the Broker.
So far as (a) was concerned, the Claimants failed on the basis that Mr Taylor had accepted in cross examination that by late 2016 or early 2017 he knew the investment had become “highly risky” and it had become “probable” that he and his wife would lose a lot of money. This finding was based on the Claimants’ actual knowledge.
So far as (b) was concerned, the Judge noted that the Claimants knew in 2016 that other Harlequin investors were making claims in respect of the mortgage advice they had received and found that it would have been reasonable for the Claimants to have sought legal advice earlier, which would have revealed the relevant acts or omissions of the Broker. This finding was based on the Claimants’ constructive knowledge, though Legal & General had not accepted there was any evidence that the Claimants gained the requisite actual knowledge within 3 years of bringing the claim.
Accordingly, the Judge found that even if the claims had merit, he would have found the Claimants had the requisite knowledge prior to 18 March 2017 with the result that their claim would have been statute barred.
Conclusion
The judgment was a resounding defeat of the claim against the mortgage broker and will be a relief to mortgage brokers facing similar claims.
Of particular note were the Court’s findings on the scope of duty under the relevant MCOB rules and on the facts, which may sound a warning note to other cases where it is contended that mortgage brokers ought to have advised on the suitability of a borrower’s intended investment or at least declined to provide a recommendation until the borrower had taken independent advice about it.
Further, the Judge’s obiter comments on limitation provide further useful guidance as to when knowledge (and especially constructive knowledge) will be established for the purposes of s.14A of the Limitation Act 1980.
With the wholesale failure of the claim in Taylor, it will be interesting to see whether further interest-only mortgage mis-selling cases will be brought to a full trial on similar facts and if not, how claimants will be able to navigate the particular problem that a mortgage broker’s scope of duty may now be found to be narrowly prescribed.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
© Hannah Daly of 4 New Square Chambers
