Did participation in a mortgage fraud bar a negligence claim?
What rights will a claimant have if a property has been transferred to him or her to further a mortgage fraud? Should the court give effect to the transfer as against the transferor or a third party? Or should the claim be barred because it is tainted with illegality?
The judiciary has long struggled with the enforceability of contracts involving illegality. The court used to ask itself whether the claimant was relying on an action that was illegal to support his or her claim: Tinsley v Mulligan [1994] AC 240. But, following the Supreme Court decision in Patel v Mirza [2016] UKSC 42, the court must instead consider whether it would be harmful to the integrity of the legal system (or possibly to certain aspects of public morality) to allow the claimant to bring his or her claim.
In Stoffel & Co v Grondona [2018] EWCA Civ 2031 the Court of Appeal had to decide whether a claimant was precluded from claiming damages from solicitors engaged to register the transfer of a property into her name. Ordinarily, there would have been no dispute about liability; the solicitors admitted that they had failed to register the transfer to, and a new legal charge created by, the claimant. But the claimant had entered into the transaction to enable the existing owner of the property, who had a poor credit history, to secure finance that would not otherwise have been available to him. The parties to the transaction had agreed that the transferor would continue to deal with the property as if it were his own after the transfer – but the claimant stood to gain 50% of any profit made when the property was sold.
What rights will a claimant have if a property has been transferred to him or her to further a mortgage fraud? Should the court give effect to the transfer as against the transferor or a third party? Or should the claim be barred because it is tainted with illegality?
The judiciary has long struggled with the enforceability of contracts involving illegality. The court used to ask itself whether the claimant was relying on an action that was illegal to support his or her claim: Tinsley v Mulligan [1994] AC 240. But, following the Supreme Court decision in Patel v Mirza [2016] UKSC 42, the court must instead consider whether it would be harmful to the integrity of the legal system (or possibly to certain aspects of public morality) to allow the claimant to bring his or her claim.
In Stoffel & Co v Grondona [2018] EWCA Civ 2031 the Court of Appeal had to decide whether a claimant was precluded from claiming damages from solicitors engaged to register the transfer of a property into her name. Ordinarily, there would have been no dispute about liability; the solicitors admitted that they had failed to register the transfer to, and a new legal charge created by, the claimant. But the claimant had entered into the transaction to enable the existing owner of the property, who had a poor credit history, to secure finance that would not otherwise have been available to him. The parties to the transaction had agreed that the transferor would continue to deal with the property as if it were his own after the transfer – but the claimant stood to gain 50% of any profit made when the property was sold.
Instead, the transferor had died, leaving the claimant liable on her mortgage and without any legal title to the property that she had charged as security for the loan. So the question was: was the claimant entitled to damages because her solicitors had failed to register the transfer into her name? She argued that punishment was a matter for the criminal courts and that it would be disproportionate to deny her claim. The illegality was not central to her contract with her solicitors. And she was not seeking to profit or gain from the mortgage fraud. She was, in fact, seeking damages to help redeem, or partially redeem, the mortgage that she had signed.
The Court of Appeal decided that the illegal features of the agreement between the parties to the mortgage fraud did not prevent the transferee from suing her solicitors for their failure to register her title. Lady Justice Gloster acknowledged the importance of preventing dishonest applicants for mortgages from abusing the system. But the mortgagee had not complained about the fraud in this case and Her Ladyship could see no public interest in allowing negligent conveyancers, who are not party to, and know nothing about, a mortgage fraud, to avoid their professional obligations.
Her Ladyship doubted that it would assist the fight against fraud if mortgagors involved in making false representations to mortgagees were unable to pursue their solicitors for negligently having failed to register the mortgagee’s security. The mortgage fraud was simply part of the background story and there was no risk that enforcement of the negligence claim would undermine the integrity of the justice system.
Allyson Colby, property law consultant
