Secret commission meant a mortgage could be rescinded

In the appeal of Pengelly v Business Mortgage Finance 4 plc [2020] EWHC 2002, Mr Justice Marcus Smith has provided a useful overview of mortgage brokers’ duties and commission. He held that a broker who arranged a mortgage was acting as the mortgagor’s agent. There was a fiduciary relationship, and as the broker had received secret commission from a third party (the mortgagee) the mortgage arranged could be rescinded. Mr Pengelly (the mortgagor) was a farmer operating a working farm at The Barn at Middle Amble, Wadebridge, Cornwall (the farm). In 2005, he approached UK Mortgages and Finance Services Ltd (UKMFS) to obtain a mortgage for him. UKMFS provided its standard terms and conditions (the terms). The terms included a clause that they would act on the mortgagor’s behalf and also that, in relation to fees they might receive from the lenders with whom they placed the mortgages, if the amount they received was less than £250 the mortgagor would be notified and if it exceeded £250 he would be told the exact amount. A mortgage (the mortgage) was obtained with Commercial First Business Ltd (CFBL). CFBL paid commission to UKMFS, taking “the hazardous course” of relying on UKMFS to communicate this fact to the mortgagor. UKMFS did not advise the mortgagor of the payment or of the amount. The mortgage was subsequently assigned to Business Mortgage Finance 4 plc (Finance 4). There were arrears and Finance 4 brought possession proceedings against the mortgagor. The mortgagor defended, counterclaiming that UKMFS was his agent and that the commission paid to it by CFBL meant that the mortgage should be rescinded. No point was taken by either party about the assignment. The mortgagor was unsuccessful in the county court and appealed. The appeal judge accepted that UKMFS could properly be described as the mortgagor’s agent. Further, the terms were such that the relationship was a fiduciary one. Fiduciary duties had come into being. These duties have at their core the concept of loyalty. Unless informed consent is given, a principal is entitled to undivided loyalty. This loyalty will be undermined if the fiduciary is subject to other incentives or calls on their loyalty. Without informed consent a fiduciary must not profit from their position and must account for it to their principal. Although the terms had attenuated UKMFS’s fiduciary obligations, UKMFS had failed to strictly comply with the terms. Of course, the counterclaim was not against UKMFS. Could accessory liability attach to CFBL/Finance 4? Yes. The judge adopted the three-stage test that Slade J set out in Industries & General Mortgage Co Ltd v Lewis  [1949] 2AER 573 – answering all questions affirmatively. Firstly, was the bribe or secret commission paid to the fiduciary? Secondly, did the third party know the capacity in which the recipient of the bribe or secret commission was acting? Thirdly, had the third party failed to disclose the bribe or secret commission to the principal? Having considered Hurstanger Ltd v Wilson [2007] EWCA Civ 299, the county court judge had concluded that this would be a case of “half-secret” commission – a case falling short of informed consent but where some disclosure was given. Such cases limit the remedies available as of right, with it being in the discretion of the court whether to rescind. The appeal judge did not agree. The failure to advise the mortgagor of the commission paid would have resulted in the (perfectly reasonable) conclusion that no commission at all was received in this case. It was not a case of “half-secret” commission, the commission was secret. Accordingly, rescission was a remedy to which the mortgagor was entitled, subject to him making satisfactory proposals for counter-restitution and in this regard the appeal was allowed. Elizabeth Haggerty is a barrister at Lamb Chambers