Mortgage

Professional negligence - mortgage identity fraud - enforcement of contractual undertakings - breach of trust - application for summary judgment

Summary

Facts

SM, a mortgage lender, received a broker application for a mortgage for an intended borrower, LG, for whom A, Solicitors, purported to act (SM had its own solicitors, JMW). There were several communications passing between the parties about the borrower’s identity, with A providing certified copies of identity documents for JMW’s approval, culminating in A giving SM a number of (fairly standard) undertakings, including (1) to use the loan advance to complete the transaction, and (4) within 5 working days of completion to register the charge as a first legal charge etc.

Following completion of the mortgage advance, with part of the net advance being used to redeem an existing mortgage, it became clear that A’s client was an imposter, with the real LG querying why his mortgage had been redeemed, and providing his identity documents.

SM sued A for (amongst other things) specific performance of its undertakings; or damages for breach of undertaking, breach of trust or breach of warranty, with A issuing a Part 20 claim against JMW (on the basis that if the transaction was a fraud, JMW acted in breach of trust by releasing the loan monies to A.

SM subsequently issued the present application against A for summary judgment under CPR 24, principally in relation to (1) breach of contractual undertaking, and (2) breach of trust.

Issues

Whether the High Court would grant summary judgment on a lender’s application to enforce contractual undertakings given by a firm of solicitors in a case involving mortgage identity fraud.

Decision

(Master Pester) (After reciting the test for summary judgment in CPR 24):

Breach of undertaking

(1) Simply because it was contended the case merited further investigation and the fact pattern was unusual was not a compelling reason why the matter should not be decided now. A had provided SM with contractual undertakings which it was entitled to rely on.

(2) This was not an attempt to enforce the undertakings under the court’s inherent supervisory jurisdiction or s 50(2) Solicitors Act 1974 (jurisdiction of senior courts over solicitors) – the undertakings were given by the LLP not by individuals and the court had no jurisdiction to enforce undertakings by an incorporated body (Harcus Sinclair LLP v Your Lawyers Ltd [2022] AC 1271). If the undertakings were to be enforced, they could only be enforced as a matter of contract.

(3) A’s submissions on the construction of the undertakings had a real as opposed to fanciful prospect of success. As to undertaking (1) (to use the loan advance to complete the transaction) whilst it was within the parties contemplation that a first legal charge would be provided, it did not necessarily follow that SM would be provided with a legally enforceable charge as part of the ‘transaction’. That was a different question. The wording of the undertaking could have made express reference to the ‘transaction’ involving the provision of a legally enforceable charge, but it did not. The undertaking was therefore ambiguous. As to undertaking (4) (within 5 working days to register the charge) there was some ambiguity about that this required. A made the application in time but did not obtain a valid registered charge. The court would not require a party to perform the impossible. In any event, other undertakings suggested the duty was only to use ‘reasonable endeavours’.

Breach of trust

(4) The court accepted that the advance paid to A was held on trust.

(5) Before it could be determined whether there was a breach of trust, it was necessary to determine the terms of the trust.

(6) If A was holding the advance on trust, the terms of the trust were to be found in the undertakings. It was unlikely that A would be prepared to assume a more onerous obligation as trustee than those found in the undertakings.

(7) If the terms of the trust were only to use the advance for the ’transaction’ and that this did not require the entering into of a valid charge, this was a matter for trial.

(8) In any event, even if there was a breach of trust, a defaulting trustee could rely on s 61 Trustee Act 1925 (trustee acting honestly and reasonably and ought fairly to be excused). In the context of mortgage fraud this has been interpreted as requiring the trustee to prove he acted reasonably only in relation to those aspects of his conduct which are connected to the beneficiary’s loss. In many cases, a defence based on s 61 is a matter which cannot be decided on a summary judgment application because it requires a close examination of all the facts. The court is entitled to have regard to all the facts and matter before deciding whether to grant the defaulting trustee relief.

(9) The particular facts and matters upon which the trustee relies needs to be pleaded. Where (as in the present case) a statement of case is found to be defective, the court should first consider whether that defect might be cured by amendment, and if it might be, the court should refrain from striking it out without first giving the party concerned an opportunity to amend (the court expressed the view that A should amend its Defence).

SM’s application dismissed.

Comments

Mortgage litigators may be familiar with the sequence of professional negligence cases involving mortgage identity fraud: Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65; Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626; Santander UK v RA Legal Solicitors [2013] EWHC 1380 (QB); Ikbal v Sterling Law [2013] EWHC 3291 (Ch); AIB Group (UK) Plc v Mark Redler & Co [2014] 3 WLR 1367 (UKSC) and specifically on solicitors’ duties in connection with identity checks, see P&P Property Ltd v Owen White & Catlin LLP [2019] Ch 273 (CA) (which included the appeal in Dreamvar (UK) Ltd v Mischon de Reya [2016] EWHC 3316 (Ch); Lennon v Englefield [2021] EWHC 1473 (QB). For general commentary on evidence of identity, see Emmet & Farrand on Title, Volume 1, para 1.005.

The UK Finance requirements in respect of identity checking are in The Lenders Handbook, Part 1, para 3.1.5. See also generally, the Law Society’s Practice Note on Mortgage Fraud (13 Jan 2020).

It is worth remembering that this case involved an application for summary judgment to enforce fairly standard contractual undertakings, which turned out to be ambiguous and were in any event fact sensitive and were suitable only for determination at trial (not least because of the availability of the s 61 defence for breach of trust). The case also addressed other issues including about solicitors’ disclosure obligations (para 39 etc); the correct measure of damages (para 45 etc); and, as noted, about the requirement to plead and particularise the facts and matter relied upon in support of a section 61 defence (with the court indicating it would give permission to amend to cure the defect, rather than striking out).