Lender’s casebook: Fraudulent mortgage, negligent solicitor
The increase in professional negligence claims continues. Fiona Hayles, senior associate, dispute resolution group at SGH Martineau LLP, discusses a recent mortgage case
In Godiva Mortgages Ltd v Sophie Khan and Keepers Legal LLP, Ms Khan had purported to purchase a property from her brother in law with the aid of a mortgage from Godiva, using Keepers Legal (KL) as her solicitors.
The price stated in the contract was £495,000, of which £173,250 had allegedly already been paid by way of direct deposit to the seller. The balance of £321,750 was to be funded by the mortgage advance. At completion, KL retained £16,375 for their costs and disbursements and paid the reduced amount to the seller’s solicitors, having been told that this lesser sum would be accepted to complete.
In fact, the transaction was thoroughly fraudulent: the direct deposit had never been paid; Ms Khan’s brother-in-law (the supposed seller) had died; the existing mortgage on the property was not discharged; Godiva did not obtain any title to the property; and the money paid by Godiva simply disappeared. Godiva therefore brought a claim against Ms Khan and KL for fraudulent misrepresentation and breach of contract and/or negligence.
The High Court in Birmingham reviewed the circumstances of the mortgage application. It was clear that Ms Khan had made a whole series of fraudulent misrepresentations ranging from evidence of her income and address to the monies she had actually paid. Ms Khan had told KL (who were instructed by both Ms Khan and Godiva) that she had paid £173,250 direct to the seller when in fact no monies had changed hands.
Ms Khan’s brother-in-law, who she alleged she was purchasing the property from, had died a year previously, and his signature on the contract documentation had been forged. In those circumstances, the court found that Ms Khan was liable to Godiva for the losses flowing from their advance.
The claim against KL was more problematic. Godiva did not claim that KL had been a party to the fraud, but only that it was guilty of negligence and breach of contract without which Godiva would not have made the loan.
The allegations centred on three main issues: first, that KL had not informed Godiva of Ms Khan’s instruction that she had paid £173,250 to the seller as a direct deposit; second, that the receipts provided by Ms Khan in support of this did not add up to the figure claimed; and third, that the price of the property was effectively reduced by £16,375 at completion.
As a result of this, Godiva claimed that it would not have made the advance had it been aware of the full circumstances of the application and relied upon in part, the terms of the CML Handbook which requires disclosure of anything which might reasonably be considered important to a lender.
However, the evidence provided by Godiva could not show that had it been made aware by KL that £173,250 would be paid on completion, rather than already being paid, that the mortgage would not have been granted. The transaction involved a family sale with an apparently substantial security margin (supported by a valuation figure of £525,000 obtained by Godiva).
Further, it could also not be proved with certainty that the inconsistent deposit receipts and reduced selling price at completion meant that Godiva would have refused to lend.
On that basis, whilst the court found that there had been a breach of contract and a breach of duty in negligence by KL, it did not cause Godiva any loss. In terms of recovery, Godiva was therefore left to pursue Ms Khan rather than the potentially easier pockets of KL’s insurer.
Whilst in hindsight it may be obvious that a fraud has been committed, it must be remembered that when a court is asked to decide on a claim, the evidence to be scrutinised must be that contemporaneous with the matters in dispute. One wonders why Godiva did not run a potentially more successful breach of trust claim.