When a mortgage brokerage agrees to arrange finance for a customer, does that mean that it has provided a guarantee that the required funding will be found? This question was the subject of a recent case in the Court of Appeal concerning a former business owner who was refused summary judgment at Wandsworth County Court against a mortgage broker which had failed to raise £100,000 in business finance.
After the Royal Bank of Scotland had declined Rick Martin’s application for a mortgage of £40,000, Mr Martin’s mortgage broker introduced him to JRC Commercial Mortgages plc (JRC). Mr Martin understood that JRC sometimes used its own funds to lend to clients and this was one of the factors that led him to appoint the firm as his broker. The funds sought (the amount had now been increased to £100,000) were to pay for refurbishment of premises in South West London, which Mr Martin had acquired in 2007 with the intention of establishing a club with restaurant and leisure facilities.
Various email correspondence during that year resulted in a letter from JRC, dated 11 May 2007 and addressed to Mr Martin’s original broker, stating ‘We confirm that we can arrange £100,000 on a ten year term. The rate will be between 2.5 – 3 per cent. The lender’s arrangement fee will be 2 per cent with a further broker fee of 3 per cent and an application fee to JRC of £500.’
Mr Martin duly paid the non-refundable application fee and signed an agreement with JRC on 16 May. JRC approached various institutions but was unable to secure a loan. It claimed that this was on account of both Mr Martin and his business partner having a poor credit rating. Without the necessary finance, the project had to be abandoned and the business did not survive. In October 2009, Mr Martin claimed £200,000 for breach of fiduciary duty and negligence regarding the failure of JRC to deliver regarding its guarantee that finance would be found.
The claim was rejected in a summary judgment at Wandsworth County Court. The judge ruled that there was no duty to deliver a guaranteed result, no negligence and no other liability.
On appeal, it was argued that Mr Martin should not be denied the opportunity of establishing his claim at a full trial. It was claimed that he had spent substantial sums between May and July 2007 in the belief that he would obtain a loan. By the time he discovered the true position, it was too late to go elsewhere, which had resulted in the loss of a viable and potentially valuable business.
The Court of Appeal held that the judge in the lower court had been right to reject the claim. The contract in question stated that JRC would exercise ‘endeavours on the Client’s behalf to procure a written offer of finance’, and that it would approach ‘prospective lenders of finance’ to that end. Nothing in the contract or in the correspondence gave a guarantee that finance would be found or that JRC would lend its own funds if required.
On this basis, the appeal was dismissed.
“It would be very unusual for a mortgage broker to give a warranty that any loan would be forthcoming,” says DFA Law Partner Mark Brown. “In this case, the judge in the County Court was of the clear view that the broker in question had not agreed to take such an unusual step and the Court of Appeal agreed.”