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LSC is a commercial lender who provided short term finance in 2013 to a mortgage borrower. The sum advanced was £169,000, the borrower was a Gail Boddice. The advance was to be secured by a legal charge over a residential buy-to-let property in Chester and the loan facility was to be guaranteed by her husband. Abenson’s acted for the borrower. The property had been in joint names historically but was to be transferred into Mrs Boddice’s sole name. There was an ID fraud “most probably” accordingly to the Court perpetrated by the husband. LSC pursued the “borrowers” solicitors when its application for registration of charge at Land Registry had been rejected, and the fraudster had absconded with the mortgage monies. The claim was on three grounds;
1. Breach of undertaking by Abensons.
2. Breach of a duty of care to the lender (to take reasonable care to establish that the charge had been validly executed).
3. Breach of warranty of authority (solicitors warranting that they acted on behalf of the real borrowers when they palpably had not).
The case of LSC Finance Ltd v Abensons Law Ltd did not go well for the borrower’s solicitor. In fact Mr Abenson, solicitor for the purported borrower was described by the Judge as “by far the worse solicitor witness I have ever seen giving evidence in the witness box”. His answers were “extremely” vague. His evidence was inconsistent on the facts surrounding the execution of the charge, and the transfer of the property into single name, and his testimony on the circumstances surrounding the execution of the charge and how it came into his possession, was wholly unsatisfactory. Mr Abenson gave three differing and separate accounts in relation to this crucial issue.
From a lenders point of view the case is most notable for the precise terms of the undertaking which the lender’s solicitors insisted upon, and which Abensons gave (notwithstanding their deficiencies in other areas). Post completion, time passed, and Abensons failed to obtain registration of the transfer, and the charge in favour of LSC. Land Registry refused to register the transfer and mortgage documentation suspecting, quite rightly, the existence of mortgage fraud.
The Judgement
HHJ Hodges judgement does not make for pleasant reading for Abensons, or the reputation of high street solicitors. It was clear that with the benefit of hindsight from an independent view point, that Abensons failed to take their binding obligation to the lender seriously, or give appropriate significance to the requirements which were made of them in relation to the execution formalities.
On the duty of care issue, the Judge came down clearly on the side of the lender, indicating that any solicitor who fails to verify the signatures on documents presented to him when executed elsewhere, and not by a lawyer, would be in breach of his duty of care. Relying on a telephone conversation with the borrower to confirm her execution, was unacceptable and failed to meet the standard required.
The letter of undertaking which Abensons gave, is quoted in the judgement and is of interest to all mortgage lenders. It read;
“ 1. We confirm the execution of:
(a) the first legal charge by the Borrower in favour of LSC over the Property (“”the Charge””).
…
(b) the Personal Guarantee by the Guarantor.
…
3. Within 7 working days of completion, we will complete the registration of the Charge against the Borrower as a first legal charge on the Property. We will send to the Land Registry the Charge and requisite registration fee with form(s) AP1, RX1 and all relevant documents (including certified copies of the Charges [sic] to register the Charge at the Land Registry. ”
The Court recognised that the precise terms of the undertaking were all important and this was the crux of the case. The acceptance of an instruction letter from solicitors that they were required to hold an original “validly – executed security” prior to completion, and to provide an undertaking for the same, formed the basis of their instructions, was highly significant. In “Ronseal” terms “validly executed security” is precisely that. It is a legal charge which is validly executed and capable of registration. Failure to so provide, even if solicitors are not at fault, will still leave solicitors in breach of an undertaking prescribed in such terms.
And once the undertaking had been construed in that way, literally, it followed that the same solicitors were in breach of the warranty of representation to the lender, i.e. that they acted for the true borrowers.
The claims for breach of undertaking and breach of warranty of authority had therefore been made out.
Lessons to Learn
1. Solicitor to solicitor undertakings are of huge importance, and provide a vital safeguard against loss to lenders through identity fraud.
2. When the Court deems that a solicitor should pay special attention to verification of signatures on documentation when executed not in his presence, and not before a professional, a prudent lender should be doing exactly the same.
3. Where a legal charge is taking place contemporaneously (as in this case) the transfer of title from single to joint names (for no apparent good reason) additional caution should be attached, and if the borrowers solicitors are unable to provide a reasonable explanation for the arrangement, enhanced due diligence should be applied.