Case Notes
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Lending - responsibilities of mortgagor and mortgagee - bank’s right to pass on legal costs to mortgagor - bank must ensure that costs are reasonably incurred
The bank held a first mortgage over the family home of Mr and Mrs M as security for lending by the bank to allow their brother and sister in law to purchase a property. The property to be purchased did not offer the bank enough security to support the amount of lending required.
The brother and sister-in-law were convicted of drug offences and the Crown applied for and obtained a restraining order over Mr and Mrs M’s property under the Proceeds of Crime Act. The bank was notified of the application because it held a first mortgage over the property. The bank obtained specialist legal advice and was represented at the original hearing and several subsequent hearings over a two year period before the order finally expired.
All the legal fees paid by the bank were charged to the loan account and paid by Mr and Mrs M. They complained to my office that the legal fees were too high and that they had been incurred unnecessarily. They believed if the police had decided to sell the property under the Proceeds of Crime Act, the bank, as first mortgagee, would have received payment of the amount of the loan.
I accepted that the terms and conditions of the mortgage allowed the bank to recover any costs, including legal costs, incurred by the bank in protecting its interests in the property. I asked the bank to justify its decision to seek specialist legal advice, not just for the original hearing, but also when later hearings took place to continue the restraining order.
After investigation I was satisfied with the bank’s explanation that the complexity of the matter needed specialist legal skills. The costs incurred seemed reasonable for the amount of work done. While Mr and Mrs M suggested that the bank would have received payment first in any forced sale, the Proceeds of Crime Act is unclear on whether a bank’s position as mortgagee is fully protected. I noted also that the bank had complied with its obligations to its customers by advising them of the costs to be charged before the costs were added to the loan account. I concluded that this was an unusual case and that the bank had good reason to seek expert legal advice to ensure its interests were fully protected. There was nothing to suggest that the costs incurred were excessive or were incurred unnecessarily.
Mr and Mrs M remained unhappy about the costs incurred, but accepted that the bank was entitled to pass on the costs under the terms and conditions of the loan agreement.