Mortgage Fraud, Negligence and Misrepresentation

13th April 2016

In the case of a discharge, a lender will often have no conveyancer instructed. Even where a discharge is effected as part of a sale transaction, neither the seller nor the buyer’s conveyancer act for the lender in that regard. Instead, the relevant internal department will process redemption of the mortgage and issue discharge documentation (namely, Form DS1). Although HM Land Registry requirements as to verification of identity needed on submission of an application for discharge have been tightened in recent years, the discharge process is still vulnerable to fraud. The case of Chief Land Registrar v Caffrey & Co [1], heard in February 2016, is a valuable reminder of the care, when making a discharge application to the Land Registry, solicitors should take to ascertain that a DS1 has been genuinely executed by the lender.

Dishonest discharge

Mr and Mrs Turner had a loan with DB Bank (the bank) which was secured by a registered charge over their farm. In 2009 the Turners provided their solicitors with a fraudulent DS1. They falsely claimed that the DS1 had been signed by or on behalf of the bank and that the bank was legally represented. The Turners’ solicitors submitted the DS1 to the Land Registry as part of an application to remove the charge. The Land Registry raised a requisition requesting evidence that the person signing the DS1 had authority to do so for the bank. The Turners supplied their solicitors with a fake power of attorney and the solicitors sent a certified copy of it to the Land Registry. The charge was removed. Subsequently, the Turners took out another loan, this time from Santander, which was secured by a registered charge over the farm.

In 2011 the bank discovered that its charge had been removed and applied to reinstate it. A Land Registry adjudicator decided that the charge should be reinstated, but that it should rank after Santander’s charge. The bank then obtained an indemnity from the Land Registry, and the Land Registry became entitled to pursue any cause of action which the bank may have had.

Negligence and misrepresentation

The Land Registry sued the solicitors, claiming firstly that the solicitors had assumed a duty of care to verify the DS1 and, in failing to do so, had been negligent; and, alternatively, that the solicitors had made negligent representations in submitting the false DS1 and power of attorney.

The negligence claim failed. The court held that the solicitors owed no duty of care to the bank: the solicitors were not acting for the bank and the solicitors believed that the bank was being separately advised. Furthermore, considering the question of causation, which is always crucial in any negligence claim, the court held that the loss suffered was not directly caused by the solicitors submitting information, but rather it was caused by the Land Registry actually removing the charge.

The negligent misrepresentation claim, however, succeeded. A misrepresentation is an untrue statement of fact or law; upon which a party relies; and which thereby causes the relying party to suffer loss. Liability for negligent misstatement arises where the representor owes a duty in making the representation to the representee. In the case of White v Jones [2] it was decided that such a duty will arise if there is a “special relationship” between the parties. In Caffrey, the court found that the solicitors had provided information upon which they knew the Land Registry would rely. As such, there was the requisite special relationship and the solicitors had assumed a duty in respect of those representations.

WM Comment

This case is a useful reminder of some of the key principles of negligence and negligent misstatement. In addition, whilst the court was reluctant here to find negligence liability by imposing a duty of care on the solicitors in the context of a land registration system which is still vulnerable to fraud upon discharge, the success of the misrepresentation alternative emphasises the care that solicitors must nevertheless take when making any representations which they know will be relied upon.

So far as lenders are concerned, the case also highlights the value of the Land Registry’s statutory indemnity scheme, which is often a good option to consider upon discovery of an erroneous discharge.

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[1] [2016] EWHC 161 (Ch)
[2] [1995] 2 AC 207