Mortgagee seeking to hold solicitor responsible for alleged mortgage fraud – Extracts from draft lease indicating possibility that vendor had purchased at an inflated price from an intermediate buyer – Solicitor receiving plausible explanation – Whether solicitor in breach of contractual duty to report “subsales” – Whether solicitor guilty of misrepresentation – Whether solicitor should have reported last-minute price reduction and direct payment of deposit to vendor
In December 1989 the plaintiff made a £169,400 mortgage loan offer to an applicant (the borrower) proposing to buy a recently built penthouse flat in London Docklands for £200,000, which accorded with the plaintiff’s own valuation. The applicant named F, of the defendant firm, as the borrower’s solicitor. On 2 January 1991 F received the plaintiff’s instructions to act, together with a copy of its standard conditions, which required the defendant, inter alia, to report to the plaintiff on becoming aware of a reduction in the purchase price for whatever reason, or of “the existence of a sub-sale”. By letter dated 18 January 1991 the solicitors acting for the vendor, DJ, informed F, who had hitherto assumed that the borrower would be the first lessee of the flat, that the transaction would be effected by way of assignment. Enclosed with that letter were extracts from a draft lease that recited that the freeholder, London Docklands Development Corporation, had agreed with one DB to grant a 125-year lease to DJ, who would pay £132,800 to DB and a premium of £120,000 to LDDC. F was also informed that the price payable by the borrower had been lowered to £195,000 and that a deposit of £25,600 would be remitted by the borrower directly to DJ. The reason given for the heavy loss apparently to be sustained by DJ was that the lease was part of a wider transaction relating to a number of properties. None of these matters was included in F’s report on title, which was submitted to the plaintiff on 23 January 1991. Following receipt of the mortgage advance, both exchange of contracts and completion took place on 29 January 1991. The borrower paid only one mortgage instalment before abandoning the flat, which was eventually repossessed and sold by the plaintiff for £75,000. The plaintiff, seeking to recover losses down to June 1998 in excess of £230,000, proceeded against the defendant alleging fraud, breach of fiduciary duty, breach of contract and negligent misrepresentation. The judge dismissed the first two allegations, on finding that F had not behaved dishonestly and had at no time intended to subordinate the interests of the plaintiffs to those of the borrower. The outstanding issues related to the contents of the report on title.
Held: The claim failed in all but one minor respect.
1. In deciding whether the borrower was a party to a “subsale” for the purpose of implementing the plaintiff’s instructions, it was immaterial whether the property was transferred by a single document executed by the original owner in favour of a named subpurchaser, or by two or more separate conveyances executed pursuant to a so-called “back to back” sale: see Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 per Chadwick J at p609. However, having regard to the purpose for which the lender required the information, namely whether doubt should be cast on the correctness of the valuation or the bona fides of the borrower (the lending criteria), there was no such (reportable) subsale unless the borrower or an intermediate buyer had apparently agreed to pay a price that was manifestly inflated by comparison with the price paid to the original owner.
2. In the present case no such price had been agreed by the borrower. Nor had it been shown that such a price had been paid by DJ, there being no satisfactory evidence as to full consideration payable under the lease or the precise terms agreed between DJ and DB. Accordingly, the non-reporting of the matters disclosed in the extracts from the draft lease did not amount to a breach of contract. Moreover, it was doubtful, as a matter of causation, whether the borrower’s application would have been rejected if F had reported the figures given in the draft lease. The evidence was that the plaintiff had allowed archetypal subsales to proceed when they had been brought to its attention.
3. As regards the direct payment of the deposit to DJ, the defendant accepted that it was under an implied duty to communicate information that might cause the lender to doubt the lending criteria: see Mortgage Express Ltd v Bowerman & Partners [1996] 1 EGLR 96. However, at the material time such payment, while unusual, was not recognised by the profession generally to be reportable as a possible badge of fraud. Moreover a plausible explanation had been given to F who had received DJ’s solicitor’s confirmation that the money had been so paid. Different considerations would have arisen if the relevant events had taken place after the issue by the Law Society of its Green Card warning in March 1991.
4. An action for misrepresentation could not be founded on F’s declarations at the conclusion of her report that she had complied with her instructions and that there were no other matters which should be brought to the plaintiff’s attention, since both expressed a value-judgment. Nor had F misled the plaintiff in so far as she had represented that she had reasonable grounds for believing that there was no subsale.
5. The failure to report the reduction in the selling price was a breach of an express term of the retainer. However, the breach sounded in nominal damages only as on the evidence the plaintiff would have gone ahead even if notified. Causation presented a similar obstacle in so far as the same facts gave rise to a claim for negligent misrepresentation: see Bristol & West Building Society v Mothew [1988] Ch 1 per Millett LJ at p12.
Christopher Parker (instructed by Hamlin Slowe) appeared for the plaintiff; Grant Crawford (instructed by Wansbroughs Willey Hargrave) appeared for the defendant.
Alan Cooklin, barrister