Professional negligence – Registration of title – Illegality – Appellant solicitors appealing against judgment in favour of respondent in claim for damages alleging negligence and/or breach of retainer in failing to register title to property in her favour – Respondent cross-appealing against decision on quantum – Whether appellant negligent in failing to register title where underlying transaction tainted with illegality – Appeal and cross-appeal dismissed
The appellant firm of solicitors appealed against a decision of the county court on a part 20 claim by the respondent, in which the judge found in favour of the respondent in her claim for damages against the appellant for negligence and/or breach of retainer in failing to register in her favour a Land Registry transfer document form (TR1), a legal charge and a Land Registry cancellation of entries for lenders form (DS1) in relation to a leasehold property at 73b Beulah Road, Thornton Heath, Surrey, which the claimant was purporting to purchase from a third party (M).
The respondent cross-appealed against the same order, in which the judge determined that she was entitled to damages of £78,000, plus interest from 30 November 2009 at 3% over the Bank of England base rate in a total sum of £17,591.76 as at 11 May 2016. She contended that the judge should have awarded her damages calculated by reference to the amount of her continuing indebtedness to the chargee of the property, rather than, as the judge decided, by reference to the loss in value of the property at the time the negligence/breach of duty was apprehended.
The issue on the appeal was whether the fact that the respondent was a participant in an illegal mortgage fraud designed to obtain monies for M, precluded the respondent from recovering against the appellant on the basis of the illegality principle. The issue on the cross-appeal was the method of the calculation of the quantum of damage.
Held: The appeal and cross-appeal were dismissed.
(1) Following the Supreme Court’s decision in Patel v Mirza [2016] UKSC 42, the basis upon which the judge had based her decision (namely reliance in accordance with the decision) was no longer the applicable law and the judgment could not stand. The court was required to apply the correct test as articulated in Patel v Mirza to the facts as found by the judge. One could not decide whether allowing a claim tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without: (i) considering the underlying purpose of the prohibition which had been transgressed; (ii) considering any other relevant public policies which might be rendered ineffective or less effective by denial of the claim, and (iii) keeping in mind the possibility of overkill unless the law was applied with a due sense of proportionality.
(2) The fact that, so far as the respondent and M were concerned, the mortgage application was fraudulent in that it contained misrepresentations, did not as a matter of law result in it being a sham transaction. The respondent intended to borrow the money secured by way of a legal charge on her registered legal title to the property and the chargee intended to lend the money secured in such a way. The chargee had no knowledge of the misrepresentations or the intentions of the respondent and M. As between the chargee and the respondent, the transaction of legal charge was not a sham and was clearly intended to take effect. If and to the extent that the judge decided otherwise on the facts found, she was wrong in her analysis as a matter of law. The transfer of legal title from M to the respondent was the very essence of the transaction, whatever their intentions might have been in relation to retention of beneficial ownership by M. Legal title might pass under such a contract to a transferee so long as the title was intended under the contract to pass to that person. In general, once property, or an interest in property, had passed to the illegal transferee, he had all the remedies available to him as the valid holder of that property or interest, both in relation to the illegal transferor and to third parties. Had the appellant registered the TR1 at the Land Registry following its execution and delivery, the legal title in the property would have passed to the claimant under section 27(1) of the Land Registration Act 2002, despite the illegal agreement. The absence of registration meant that all the respondent was entitled to was an equitable interest in the property. What the appellant firm was obliged to do, and failed to do, so far as the respondent was concerned, was to protect her equitable interest in the property. The illegal features of the agreement between the respondent and M were irrelevant to that obligation: Snook v London and West Riding Investments Ltd [1967] 2 QB 786 followed.
(3) There was no public interest in allowing negligent conveyancing solicitors who were not party to, and knew nothing about, the illegality, to avoid their professional obligations simply because two of their clients were involved in making misrepresentations to the mortgagee financier. There was more likelihood that mortgage fraud would be avoided if solicitors appreciated that they should be alive to, and question, potential irregularities in any particular transaction. There was a genuine public interest in ensuring that clients who used the services of solicitors were entitled to seek civil remedies for negligence/breach of contract against a defendant arising from a legitimate and lawful retainer which was entered into between them, in circumstances where the client was not seeking to profit or gain from her mortgage fraud, but merely to ensure that the chargee’s security was adequately protected by registration. Similarly, it would be entirely disproportionate to deny her claim if one took into account the non-exhaustive list of potentially relevant factors, including the fact that, although the misrepresentations were reprehensible, in reality there was no risk that the enforcement of her claim would undermine the integrity of the justice system.
(4) The judge correctly concluded that the quantum of the respondent’s loss was limited to the value of the property as at November 2009 together with interest thereon until the date of payment, rather than a sum calculated by reference to the claimant’s ongoing debt obligation to the chargee under its charge. The unredeemable and inescapable liability of indebtedness to the chargee was merely the consequence of her decision to take out a loan and not of any negligence or breach of contract on the appellant’s part.
Dan Stacey (instructed by Levi Solicitors LLP) appeared for the appellant; Maurice Rifat (instructed by Direct Access) appeared for the respondent.
Eileen O’Grady, barrister
