Mortgage Express v Iqbal Hafeez Solicitors [Lawtel 10.10.2011]
Lender entitled to return of entire mortgage advance where solicitors unknowingly released monies to fraudsters. The Defendant firm was instructed by three clients in relation to the purported purchases of three properties. The clients instructed the Defendant that they had already exchanged contracts with the vendors and paid substantial deposits directly to them. The Defendant was also instructed by the clients’ mortgage company, the Claimant, in accordance with the usual terms set out in the Council of Mortgage Lenders’ Handbook.
The Claimant transferred the mortgage advance to the Defendant, which in turn transferred the advance to the solicitors acting for the vendors. It subsequently transpired that the transaction was fraudulent and the vendors’ solicitors did not exist. The mortgage advance paid to them disappeared.
The Claimant alleged that the Defendant had acted in breach of trust by releasing the advance to the fraudsters. The Defendant argued that it was entitled to relief under s.61 of the Trustee Act 1925 because the Claimant’s allegedly negligent underwriting process had contributed to its own loss.
The High Court gave judgment for the Claimant and ordered the Defendant to pay back the entire advance. The court held that:
- The Defendant’s failure to identify the obvious signs of a mortgage fraud was negligent, but not deliberate or dishonest.
- The Defendant’s release of the advance to the fraudsters was in breach of trust, not least as it failed to check it was familiar with the vendors’ solicitors or undertake the appropriate checks if it was not and failed to check the source of its clients’ funds/deposits. The Handbook also required an undertaking from genuine solicitors on completion.
- The Defendant was not entitled to relief under s.61 of the Trustee Act 1925. Since s.61 requires the trustee to show that he acted honestly and reasonably, this suggests that the court considered the Defendant’s actions to be unreasonable.
- It was not appropriate to make any deduction for contributory negligence.
Whilst the court’s written judgment is still awaited, and we are unable to comment on the precise basis of its decision, this case highlights the principle that an absence of dishonesty will not entitle solicitors to relief from liability in circumstances where they have disposed of a mortgage advance in breach of trust.
This case will be welcome news to lenders, as they seek to recover significant losses - estimated at £1 billion by the National Fraud Authority - arising out of increasingly sophisticated mortgage frauds, which in many cases went unnoticed until property prices fell in 2007. Recent statistics released by the Solicitors Regulation Authority show that mortgage fraud related lender claims against solicitors are at their highest since 2007, and this rise is expected to continue in the short term.
It is widely acknowledged that solicitors have faced an increase in claims arising out of the recession, as they continue to be perceived as easy targets with deep pockets. It remains to be seen whether this case will trigger a further surge in lender claims but it does underline the need for better risk identification and management by law firms, particularly given the unusual nature of the property transactions in this case, that should have set alarm bells ringing.