“City Advice” was negligent BUT more importantly advice from solicitors without qualification was negligent

On 30 May 2012 Mr Justice Newey handed down his Judgment in the matter of J Hermann and M G Hermann v Withers LLP [2012] EWHC 1492 (Ch). The decision considered whether advice immediately prior to the purchase of a property (in Knightsbridge) was negligent.

Mr and Mrs Hermann were American nationals who had instructed Withers LLP to act for them in March 2008 on the purchase of 37 Ovington Square in Knightsbridge for £6.8m. The sales particulars made reference to a communal garden. Enquiries were made by Withers of the vendor’s solicitors, Turner Debenhams, about the nature of the right to use the communal gardens. Withers were not satisfied with the information they were provided with and they carried out research as to whether there was a statutory right under the Kensington Improvement Act 1951. They concluded that a statutory right did arise and advised the Hermanns to this effect on 18 April 2008 and later that same afternoon contracts were exchanged. The sale contract did not refer to the garden.

After purchasing the property and not having received assurances from the “Garden Committee” which looked after the garden, the Hermanns instructed Thring Townsend Lee & Pembertons. They obtained Counsel’s advice which supported Withers’ view that a statutory right arose and in November 2008 they disclosed this opinion to the Committee. It appears that the Committee subsequently intimated that may consider an application for a licence and had done so on other occasions for a fee of £25,000. However the Hermanns did not accept this suggestion and proceedings were issued. By May 2009 a formal offer was made to the Hermanns that they agree to a licence for 50 years at a costs of £25,000. The Hermanns did not accept this and made a reduced counteroffer which was not accepted.

In June 2010 the litigation came before Sir William Blackburne who handed down his Judgment in July. The Judge decided that the 1851 Act did not apply and that there was therefore no statutory right to use the communal garden.

In November 2010 proceedings were issued against Withers. Both parties agreed that Withers were to be judged by the standards of a City firm not a “country firm”. The Judge concluded that whilst the 1851 Act was complex that by providing absolute advice without qualification the Defendants were negligent. The Judge accepted that the Hermanns would not have proceeded to buy the Property had they been properly advised. The Judge concluded that there had been a failure to mitigate and that the Hermanns should have sought a licence for £25,000. Damages were assessed as follows: £25,000 representing what they should have paid for a licence; the legal costs which would have been required if a licence had been agreed in sum of £10,000; £65,000 reduction in value of Property; interest on the £65,000; £2000 loss of amenity and enjoyment; their new solicitors’ costs in investigating the issue up to the conclusion of the negotiations regarding the proposed licence on an indemnity basis up to May 2009; interest.

Dishonest assistance and Knowing Receipt: still need to prove on balance of probabilities

On 1 June 2012 Mr Justice Arnold handed down his Judgment in the matter of Goldspan Limited v AJ Patel [2012] EWHC 1447 (Ch), an interesting decision concerning claims by the liquidator of Goldspan for dishonest assistance and knowing receipt. Goldspan claimed the sum of £710,000 (£610,000 plus £100,000) from the Defendant on the basis of alleging he dishonestly assisted in the fraud that and he knowingly received £100,000 of it. Goldspan had already obtained summary judgment against Arvind Patel for £1.3 million, which Arvind Patel had obtained following the sale of 2 nursing homes by Goldspan.

The claims against the Defendant (being Arvind Patel’s cousin) concerned the two payments made by Goldspan to the Defendant. The £610,000 was then intended to go to Arvind Patel’s daughters. 

Mr Justice Arnold provided some useful commentary on the requirements to prove liability for dishonest assistance and knowing receipt which are of particular interest in the context of lender claims arising out of mortgage fraud.

It was held that the Defendant had not dishonestly assisted in the fraud. It was decided that the £100,000 had been loaned previously by the Defendant and that he had subsequently received it honestly.

It was Judge’s view that the defendant ought to have realised that Arvind Patel appeared to be involved in some inappropriate exercise of some kind but that was not relevant. Goldspan had not proved that the Defendant had acted dishonestly or known that the £610,000 did not belong to Arvind Patel.  Goldspan therefore failed in its claims for both dishonest assistance and knowing receipt.

Bogus Firms - on the Solicitor’s head be it!

In May 2012 the SRA provided guidance to solicitors to limit the risk of ID theft. As well as providing guidance to assist in establishing that the solicitor you are dealing with is genuine, the SRA Executive Director David Middleton provided some interesting comments as to the risks to solicitors of not establishing that their opposite numbers were genuine solicitors: “Firms are at risk because even if they are said to be the victim of fraud, they could be held liable for breach of trust in paying away mortgage monies”. This reflects the development of the law on breach of trust in such cases as Lloyds Bank v Markandan and Nationwide Building Society v Davisons covered in previous briefings.

New Standard Instructions where lender and borrower separately represented:

On 2 July 2012 the CML will publish new standard instructions to solicitors acting in these circumstances, interestingly there is a standard letter to be sent by the lender’s solicitor to the borrower’s solicitor including setting out the ID documentation required. This highlights the requirement that the borrower’s solicitors need to certify that they have seen the borrower’s original ID. This will assist lenders in that if the borrower’s solicitor fail to take appropriate steps to identify their client they may well have no Defence to a breach of warranty claim by the lender.