Tainted transaction did not save solicitors from negligence finding

• United Kingdom

• Financial services disputes and investigations

11-10-2018

The Court of Appeal in Stoffel & Co –v- Ms Maria Grondona [2018] EWCA Civ 2031 has upheld a decision that a firm of solicitors were negligent in their failure to register their purchaser client’s title to the property and the lender’s corresponding charge at HM Land Registry despite the transaction being tainted because the illegality was not central or relevant to the solicitors’ obligations under their retainer.

Background:

The Claimant, G, entered into an agreement with M to acquire a property from M. The terms of the agreement were such that M would effectively retain ‘ownership’ of the property even after legal title had passed to G. G was simply required to obtain mortgage finance in connection with her “purchase” of the property with the sums raised from a lender being paid to M. M agreed to make G’s mortgage payments on her behalf on the basis that he remained the person entitled to the equity in the property and any income that the property might generate by way of rental. In consideration of her agreement in this respect G would receive 50% of any profit on any subsequent sale of the property.

G completed her purchase of the property in 2002 with an advance from Birmingham Midshires (“BM”) of £76,500. G, along with BM, instructed Stoffel & Co to act on their behalf and the transaction completed.  However, Stoffel & Co failed to register the transaction at HM Land Registry and as a consequence M remained proprietor of the property and BM’s charge was never registered.

G defaulted on the mortgage payments due to BM. BM was unable to rely on its security as the charge had not been registered. BM pursued G for the monetary debt under the mortgage agreement. G defended the claim and brought Part 20 proceedings against Stoffel & Co for negligence and/or breach of contract. Stoffel & Co defended the claim brought by G  on the basis that the purpose of the original transaction was illegal and the principle of ex turpi causa non oritut action applied.

The First Instance Decision:

At first instance the court held that G had been a participant in mortgage fraud to deceive BM into making the advance to purchase the Property. The court found that the legal charge between BM and G was a sham and that there was no intention for title of the Property to pass to G. However the court, applying Tinsley –v- Milligan [1993] UKHL 3 rejected the illegality defence on the basis that G had not relied upon that illegality to found her claim against Stoffel & Co.  

Court of Appeal Decision:

The court overturned the first instance findings of fact and found the mortgage agreement was genuine as it involved a personal obligation by G to BM and that there had been a genuine intention to transfer the legal ownership of the Property to G, with the agreement between G and M being only that the equitable interest in the property be retained by M.

The court applied the correct test as set out in Patel -v- Mirza [2016] UKSC 42 to determine if there was any reason why G should not be entitled to recover damages from Stoffel & Co for their registration failures because of the illegal purpose of the transaction, particularly:-

• The underlying purpose of the prohibition transgressed:

Despite mortgage fraud being a ‘canker on society’ the court held that there was no public interest in allowing negligent solicitors to avoid their profession’s obligations as a result of their clients making misrepresentations to lenders.

• Any other relevant public policies:

The court found that that there was a genuine public interest in ensuring clients who use the services of solicitors are entitled to seek civil remedies for negligence and breach of contract.

• Proportionality:

The court held it would be disproportionate to reject G’s claim as:

• BM raised no complaint of fraud;
• Stoffel & Co did not allege fraud against G in their witness statements;
• G’s illegal conduct was not central to the proper and legitimate contract of retainer with Stoffel & Co;
• G was not seeking to evade her obligations under the mortgage contract and her intention in pursuing the claim was not to profit from the fraud – instead it was to obtain funds to reduce or discharge her liability to BM; and
• there was no risk that engrossment of G’s claim would undermine the integrity of the justice system.

On that basis the court upheld the decision that a Stoffel & Co were negligent and G was entitled to recover damages.

On quantum,  G had brought her claim on the basis that she should be indemnified in respect of her contractual liability to BM. This was rejected. The court found that but for the negligence the position would have been that G would have been the registered proprietor of a property on which she could rely to repay the mortgage and therefore the damage that she had suffered was accordingly limited to the value of that property

Comment:

This case illustrates  that a  negligent  solicitor will not necessarily be relieved of liability simply because the parties to the transaction in which the negligence occurred were involved in a sham or illegal transaction. Each case will rest on its facts and will depend on the intentions of the parties. In this case, whilst it was accepted that there were misrepresentations to the lender, the court found as a matter of fact, that the mortgage agreement was genuine as between G and BM and that there was a genuine intention for G to become legal owner of the property.   The illegal features of the underlying transaction between G and M were irrelevant to  solicitors’ obligations under the retainer to register the purchase and charge.  The correct approach is to look at the obligations under the retainer rather than to focus on any underlying illegality of which solicitors have no knowledge and which therefore should not affect their obligations.  The decision on quantum reiterates that a negligent solicitor will not be liable for all of the consequences of a claimant’s decision to enter into a transaction, which falls squarely in line with the decision in BPE v Hughes Holland [2017] UKSC 21.