Mortgagee defrauded by persons buying under equity participation scheme – Mortgagee proceeding against solicitor both for negligence and complicity in fraud – Whether solicitor should have been alert to buyers’ intentions – Action dismissed – Warning against bringing fraud actions on slender evidence
The three defendants were partners in a firm of solicitors. In or about September 1990 the second defendant, L, was instructed by S and B in respect of their intended purchases of flats 10 and 19 in a block in London W2. Each flat had been marketed under an “equity participation scheme”, whereby the buyer was only required to pay half the purchase price while the balance was left outstanding as a debt secured by a second charge in favour of the vendor. The scheme further provided for the entirety of the buyer’s expenses, including stamp duty, legal fees and one year’s service charges, to be borne by the vendor. Subject to contract, S had agreed to buy no 10 in the name of his girlfriend, A, for £330,000, and B had agreed to buy no 19 for £340,000. At that time no 10 was occupied by a tenant, F Ltd. Having applied to the plaintiff mortgage providers, then trading as National Home Loans Corporation plc (NHL), both A and B received mortgage loan offers for up to half of the purchase price of their respective flats on terms that they would go into occupation within 30 days of completion.
On 11 October 1990 NHL wrote instructing the defendant firm to act on its behalf and enclosed its standard instructions to solicitors. These required the firm, inter alia, to advise NHL of any facts suggesting that the property was not to be purchased as the applicant’s principal residence or that it would not be possible to obtain full vacant possession. On 26 October 1990 L, having previously so requested, received NHL’s confirmation that it was aware that the properties were to be bought under an equity participation scheme and that the registration of a second charge would be acceptable. Over the same period, in correspondence with the vendor’s solicitors, L successfully resisted a proposal designed to allow F Ltd to remain in possession after the transfer of no 10 to A. Contracts in respect of both flats were exchanged on 7 November 1990 on terms permitting the purchasers to take out an insurance policy instead of paying a deposit. On 21 November L submitted to NHL a report on title certifying, inter alia, that there were no matters that needed to be brought NHL’s attention.
Completion took place on 7 November, when the amounts advanced by NHL were remitted to the vendor after a trainee, employed by the defendant firm, had verified that both flats were empty. Neither A nor B paid any instalments under their mortgages, and, save for a short period of occupation by A, neither took up residence in their respective flats, which were eventually repossessed by NHL and sold at a substantial loss. In April 1997 the plaintiff issued proceedings alleging, among other matters, that L had acted negligently and/or fraudulently in making the statements contained in the report on title. At the trial (where the motives of S and B remained unexplained) the only witnesses to material fact were L and the former trainee.
Held The action was dismissed.
1. There was no evidence that L understood that the purchasers had no intention of occupying the flats or of paying the instalments.
2. Given the plaintiff’s knowledge of the participation scheme, there was nothing intrinsically sinister about an arrangement that dispensed with the need for a deposit. Accordingly, the firm was not in breach of duty in failing to disclose that no significant cash payment would be made.
3. In the absence of any material witnesses apart from L, and in the absence of documentary evidence capable of upsetting his testimony, the allegation of fraud should never have been made. Moreover, if a case based on allegations of fraudulent conduct were to be brought, it had to be brought promptly. The defendants were accordingly entitled to their costs on an indemnity basis.
Christopher Parker (instructed by Hamlin Slowe) appeared for the plaintiff; Michael Mark (instructed by Wansbroughs Willey Hargrave) appeared for the defendants.
Alan Cooklin, barrister
