Estate agents — Duty to purchaser — Subsale at inflated price to defraud mortgagee — Failure of estate agents to inform vendor — Whether vendor entitled to damages for loss of right to renegotiate sale price
In September
1989 the plaintiff, who had earlier purchased a flat on a long lease and
refurbished it, instructed the first defendant estate agents to find a
purchaser. A Mrs B made an offer to purchase in November 1989, which was
accepted. On January 4 1990 purported references were given by solicitors for
the purchaser to the third defendant, a sales executive employed by the first
defendants, for the purpose of obtaining the landlords’ consent to the
assignment. Those references were in fact on behalf of a Miss De B. On January
9 the landlord’s solicitors by fax sought clarification from the first
defendant as to the identity of the proposed assignee. On January 19 1990
contracts were exchanged for the sale of the flat to Mrs B for a consideration
of £210,000. By letter dated January 25 1990 solicitors for Mrs B submitted a
transfer to the plaintiff’s solicitors for subsale to Miss De B in
consideration of £395,000 to be paid as to £210,000 to the plaintiff and
£185,000 to Mrs B; the sale was completed on February 6 1990. The subsale was a
bogus transaction to defraud Eagle Star, who loaned £296,000 on security of the
flat.
The market
value of the flat at the time of the sale was about £210,000. Mr D W Steel QC,
sitting as a deputy judge of the Queen’s Bench Division ([1993] 2 EGLR 39), gave
judgment to the plaintiff for nominal damages of £5 holding that the first
defendant fell short of the ordinary standard of care in losing or ignoring the
fax of January 1990, but that the plaintiff suffered no loss. The plaintiff
appealed and the first defendant cross-appealed.
appeal was allowed. Negotiations for the sale of the plaintiff’s flat came to a
temporary stop after the fax of January 9 1990 was received and this was a reasonable
justification for the first defendant not pursuing the matter of who would be
the assignee if negotiations recommenced. Accordingly, the failure to act on
the fax was not a breach of duty. In any event, even if the plaintiff had known
about the pretended subsale there was no evidence that in fact he could have
renegotiated the sale price to obtain a higher price at the expense of the
fraudsters. As a matter of public policy the court could not award damages to
the plaintiff for failing to obtain a share in the proceeds of a fraud, even
though had the plaintiff in good faith negotiated a higher price, he would have
been able to retain any money paid to him as a bona fide vendor.
No cases are
referred to in this report.
This was an
appeal by the plaintiff, Israel Berkowitz, and a cross-appeal by the first
defendant, M W (St John’s Wood) Ltd, from the decision of Mr D W Steel QC,
sitting as a deputy judge of the Queen’s Bench Division, who had given judgment
to the plaintiff in a claim against the first defendant and the third
defendant, Mr De Brito, for damages in relation to the defendants’ duties as
estate agents.
Philip Kremen
(instructed by H M Rose & Co) appeared for the appellant; Christopher
Russell (instructed by Berrymans) represented the respondents.
Giving the
first judgment at the invitation of Butler-Sloss LJ, HOFFMANN LJ said:
In 1989 Mr Berkowitz, the plaintiff, bought a leasehold flat in a block in
Maida Vale for £135,000. His intention was to renovate the premises and to
resell at a profit. In September, when the work had been done, he engaged the
first defendant, a firm of estate agents trading as Winkworths, to market the
flat at £250,000. At this time, however, the property boom was coming to an end
and the market was noticeably weakening.
By late
November Mr Berkowitz had received only one offer, £230,000, which he had
accepted, but nothing had been heard from the purchaser thereafter. On November
27, a Mr Sabargi, who had been introduced by a subagent of Winkworths called
Vickers, viewed the flat and made an offer of £212,000 on behalf of a Mrs
Bhoutross. Even this offer seemed at one stage likely to disappear. On January
10 1990 Mrs Bhoutross’ solicitors tried to have the price reduced to £200,000.
Winkworths, anxious not to loose the deal, advised Mr Berkowitz to accept the
lower offer. He was at the time under some pressure from his bank. He
nevertheless rejected the proposal and on January 19 contracts were exchanged
at the slightly reduced price of £210,000. Completion was fixed for February 2.
On January 25
Mrs Bhoutross’ solicitor wrote saying that he had subsold the flat to a Miss De
Brovolska for £395,000. They sent a draft transfer to Miss De Brovolska in
consideration of the payment of £210,000 to Mr Berkowitz and the remaining £185,000
to Mrs Bhoutross.
Mr Berkowitz
was astonished by this development. He concluded that he must have been cheated
by Winkworths. His solicitors swore an affidavit, saying that Winkworths must
have known of the proposed subsale and in those circumstances the only
reasonable inference was that they were colluding with Mrs Bhoutross in breach
of their duties to their client. The affidavit was sworn for the purposes of a Mareva
injunction to freeze the alleged profits on the resale, but that was
subsequently discharged and played no part in the proceedings.
It turned out
that Mr Berkowitz was right to be astonished that this flat, for which he had
hoped at the most to obtain £250,000 and for whom no one else could be found to
pay more than £210,000, had been subsold for £395,000. The subsale was, in
fact, completely bogus. It was part of a mortgage fraud which, in the heady
days of the property boom, was unfortunately not uncommon. Miss De Brovolska
turned out to be a woman without assets or income, living in a council flat in
Wandsworth. Application had been made in her name to Eagle Star Insurance Co
for a mortgage for £296,000, saying that she was buying the flat for £395,000,
and that she had an income of £150,000 a year from the export business. It was supported
by false references and
advance and the £210,000 paid to Mr Berkowitz.
In these
proceedings Mr Berkowitz sues Winkworths and the employee who dealt with the
transaction, Mr De Brito, for damages for breach of duty. He abandoned the
allegation that Winkworths were actually acting in fraudulent collusion with
the purchasers, but said that they should have known that a subsale was being
negotiated and should have informed him of that fact. If he had been told of
the subsale he says he would have been able to negotiate some increase in the
price. It may not be easy to say what he would have been able to negotiate, but
the loss of the chance to renegotiate should entitle him to substantial
damages.
The
plaintiff’s case for saying that Winkworths should have known and informed him
of the subsale is as follows. The flat was leasehold. By the terms of the lease
the purchaser required the written consent of the landlord for an assignment,
not to be unreasonably withheld. The landlord wanted references to show that
the purchaser would be able to pay the ground rent and service charges. On
January 4 the subagent who had found the purchaser, Vickers, passed on to Mr De
Brito of Winkworths two references, which had been faxed to them. Mr De Brito
saw what they were, but did not read them. He sent them straight on to the
landlord’s solicitors, Carter Faber, which was a firm he knew well because
Winkworths also acted as managing agents for the landlord of the flat. Mr De
Brito therefore did not notice that the references were, in fact, not for Mrs
Bhoutross, but for Miss De Brovolska, who at that stage would have meant
nothing to him.
The judge
found that there was no breach of duty in passing on the references without
reading them. Once he had discovered what they were, it was simply sufficient
for him to get them into the hands of Carter Faber and let them read them. The
judge also found that he accepted Mr De Brito’s evidence that even if he had
seen the name De Brovolska, he would not have concluded from that that a
subsale at a profit was being negotiated. Mr De Brito said, and the judge
accepted, that a purchase negotiated with the agent in one name is quite often
followed by a contract with a person in a different name; after all, the person
who had come to see the flat was neither Mrs Bhoutross or Miss De Brovolska,
but a Mr Sabargi.
On February 9
Carter Faber sent a fax to Mr John Hall of Winkworths, pointing out that they
had heard from Mr Berkowitz’s solicitor, Mr Rose, asking for a licence to
assign to a Mrs Bhoutross, but the references which they had received were in
the name of Miss De Brovolska. They asked Mr Hall to find out exactly who was
going to be the assignee and if, as Mr Rose had said, it was to be Mrs
Bhoutross, to obtain references for her. The judge found that Mr Hall took no
action on this fax and it was a breach of duty on his part not to do so. It is,
however, fair to observe that on the day after the fax arrived, the question of
who was to be the assignee was overtaken by a crisis in the negotiations. This
was the attempt by Mrs Bhoutross’s solicitors to get the price down to £200,000
to which Mr Rice, on the instructions of Mr Berkowitz, responded curtly on the
same day with a letter saying that the offer was refused, and asking for the
return of his papers. At the same time he wrote to Carter Faber saying that the
sale was not proceeding and asking them not to do anything more. In those
circumstances it is perhaps not surprising that as between Mr Hall and Carter
Faber, who, for the reasons I have given, are extremely close to each other,
the matter was not immediately progressed. Carter Faber appeared to have
received the letter on January 12 and acknowledged it, and it was not until
January 15 or 16 that the deal got back on the rails again with an agreement at
£210,000. Exchange of contracts followed on January 19. On January 12 Carter
Faber sent a fax to Mr Hall saying:
Please find
attached a letter received today from Mr Berkowitz’s solicitors which does not
seem to tie up with our telephone conversation of yesterday. I look forward to
hearing from you.
In the notice
of appeal and skeleton argument some importance is attached to that fax and the
court was invited to infer, first, that there was a conversation between Mr
Shaw and Mr Hall the day before; second, that the material for the conversation
at that stage is likely to have been the fax of January 9; and, third, that in
the course of the conversation Mr Shaw and Mr Hall must have come to the
conclusion that there was a subsale. That contention has been withdrawn today
by Mr Kremen and, in my judgment, rightly so, because it is contradicted by a
letter which Carter Faber wrote after exchange of contracts on January 22 to Mr
Berkowitz’s solicitor, Mr Rose, saying that they were still waiting for a bank
reference for Mrs Bhoutross. They clearly would not have written such a letter
if they were of the opinion that the true assignee by subsale was to be Miss De
Brovolska and it follows from that that there is no material for supposing that
Mr Hall held that opinion either.
The question,
therefore, is, notwithstanding the fax of the 9th did not alert Mr Hall to the
possibility that there was a subsale, it ought to have done so and created a
duty on his part to take steps which would have resulted in the information
coming to the attention of Mr Berkowitz with the consequence that he was able
to negotiate an increase in the price.
The judge
found that if Mr De Brito had noticed that the references were in Miss De
Brovolska’s name when they passed through his hands on January 4, he would not
have concluded that there was a subsale and it would not have been reasonable
to expect him to have done so. It seems to me that the same reasoning applies
equally to Mr Hall on the 9th and 10th. In my view, therefore, there is no
basis for saying that Mr Hall ought to have notified Mr Berkowitz that there
was a subsale on the basis of the fax. What is said, however, by Mr Kremen is
that he ought at any rate to have progressed the matter simply as a matter of
conveyancing by getting Vickers, who had introduced the purchase in the first
place, to find out who exactly was to be the assignee. Mr Kremen says that if
they had done that, Vickers would have asked the question, and as a result of
that it is possible, or at least likely, that the existence of a subsale would
have been revealed, even though it is not suggested that Vickers would have
been told it was at £395,000.
In my
judgment, the fact that the negotiations came to a temporary stop immediately
after that fax was received was, in the circumstances, a reasonable justification
for Mr Hall in not immediately pursuing the matter of who would be the assignee
if the negotiations got back on track again.
When the
crisis was eventually resolved, exchange of contracts took place very shortly
thereafter. One asks what ought to have been foreseen by Mr Hall as a
consequence of his not taking immediate action to follow the matters raised
with him by Carter Faber on the 9th and, as it seems to me, the only answer can
be that there might possibly have been some delay in obtaining the landlord’s
consent for an assignment. If, in fact, that was the result of the wrong
references being supplied, that would be not a matter which could be layed at
the door of Mr Berkowitz, and would not involve him in any breach of contract
or loss of any kind.
In those
circumstances, I respectfully disagree with the judge’s finding that the
failure to act upon the fax constituted a breach of duty by Winkworths’ agents
to their principal and I would on that ground allow the cross-appeal in the
respondents’ notice and discharge the judge’s finding of breach of duty.
In the end,
however, it does not particularly matter because of the judge’s separate
finding that the breach of duty that he had found had no practical consequence.
This was because, in his judgment, Mr Berkowitz had failed to prove that the
breach of duty had caused him any loss. He therefore ordered him only nominal
damages of £5, without any costs. On this point too I think that the judge was
right. It appears to me that Winkworths cannot be liable on the basis that the
plaintiff suffered loss because he was not informed of a subsale, which did not
in fact exist. There was only a pretended subsale in documents brought into
existence for the purposes of defrauding Eagle Star Insurance Co. The only real
transaction was the purchase of Mr Berkowitz’s flat for £210,000, paid for out
of money obtained from Eagle Star. What Mr Berkowitz is saying is that if he
had known of the pretended subsale he might have been able to obtain a bit more
of
wrong both in fact and in law. There does not seem to me to be any reason to
suppose that if Mr Berkowitz had been armed with knowledge that there was
possibly a subsale, which is all that he could have concluded if he had been
told of the references in the name of Mrs De Brovolska, he would have been able
to squeeze more out of the fraudsters. He had been lucky to get them back to
£210,000, and it seems to me just as likely that they would have stood their
ground, or even that the deal would have collapsed.
I also think
that it would be wrong for the court to award damages to the plaintiff as
compensation for being deprived of the right to share in what turns out to have
been stolen money. It is perfectly true that if Mr Berkowitz had in good faith
negotiated with the fraudsters and obtained an increase in the price and that
money had been paid to him, he would, as a bona fide vendor, taking the
money in good faith, have been entitled to retain it. It does not follow it
would be in accordance with public policy in the light of the facts that we
know today to award Mr Berkowitz damages for failing to obtain his share of the
spoils.
For those
reasons, too, I think that the judge came to the right conclusion in not
awarding damages to the plaintiff and I would dismiss the appeal.
Agreeing, SIR
FRANCIS PURCHAS said: The judge was wrong to find the defendants were in
breach of their duties and for this reason the appeal should be dismissed and
the cross-appeal allowed.
Also agreeing,
BUTLER-SLOSS LJ said: I agree with the judgments just delivered by
Hoffmann LJ and Sir Francis Purchas. Consequently, I the appeal will be
dismissed, the cross-appeal will be allowed. The judgment for the plaintiff
will be set aside. The judgment for the respondents’ counterclaim stands.
