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Fees and indemnity

Fees and indemnity

By Ben Wyatt


Has your bank charged you too much to discharge the mortgage?

Property lawyers will be able to identify with the question posed here as it is an issue that a borrower/mortgagor often asks. How is it that I have to pay these additional fees just because I am in default?

The contract that a client enters into with a financier is supported by security over land in the form of a mortgage. Both the general conditions of mortgages and most loan agreements contain clauses that entitle the lender/mortgagee to recover from the borrower/mortgagor costs associated with any default.

These costs can relate to letters of demand, default notices and recovery proceedings, and often are comprised of solicitor's bills which are then added to the client's loan statements and put through as part of a debt outstanding to be paid at settlement.

The particular clauses in loan agreements and the standard conditions of mortgage are worded in such a way that most clients accept the charges as being an impost that they have to pay, but in fact are often over inflated because most clauses would be considered by the courts to be no more than an entitlement on the part of the lender to seek costs on a standard basis pursuant to the Supreme Court scale.

The most common wording for these clauses reads something along the lines of, "in the event of default the bank is entitled to claim from the borrower all sums incurred in remedying the default including costs and expenses and legal costs on an indemnity basis".

The reference to "indemnity basis" has had judicial consideration over many years. The oft quoted case is Re Adelphi Hotel (Brighton) Ltd [1953] All ER 498, but perhaps more recently by reference to Gomba Holding UK Ltd v Minories Finance Ltd [1993] Ch 171. The meaning of "indemnity" seems to have been interpreted by the courts to mean no more than costs pursuant to whichever scale is applicable at the time on an indemnity basis (although Re Adelphi led to a determination that the costs would be determined on a party/party basis).

What it does not mean is that the fees claimed should be pursuant to a fee agreement between the solicitor and the lender/mortgagee as that would otherwise allow a potential range of different charges to be claimed depending on the firm of solicitors retained by the lender.

The client's rights in these circumstances are set out under the Legal Profession Uniform Law, previously under the Legal Profession Act, and entitle a third party payer (the mortgagor here or lessee say) to seek to have those costs assessed in the Costs Court pursuant to the Uniform Law.

Ben Wyatt, principal, Sladen Legal

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