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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Redstone Mortgages Ltd v B Legal Ltd [2014] EWHC 3398 (Ch) (17 October 2014)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2014/3398.html
Cite as: [2014] EWHC 3398 (Ch)
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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| Redstone Mortgages Limited |
Claimant |
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| - and - |
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| B Legal Limited |
Defendant |
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Graeme McPherson QC and Michael Bowmer (instructed by Clyde & Co LLP) for the Defendant
Hearing dates: 4, 5, 6, 7, 10, 11, 12, 14 & 15 February 2014
(Further written submissions 17 and 19 February)
____________________
Crown Copyright ©
- This case concerns allegations of professional negligence brought against conveyancing solicitors by a purchaser of residential mortgage backed securities. The trial required the determination of preliminary issues in four selected cases, but with implications for many other cases.
- Beacon Homeloans Limited ("Beacon") provided loans secured by mortgages over residential property. It retained B Legal Limited ("B Legal") to act as its conveyancing solicitors in the grant of the mortgages. As soon as the mortgages were completed they were sold to Redstone Mortgages Limited ("Redstone") under a Mortgage Purchase Facility Agreement ("MPFA") under which Redstone took an assignment from Beacon of all the rights and liabilities of Beacon under and in relation to any purchased mortgage. Both Beacon (as originator of the loan) and Redstone (as purchaser of the mortgage) were funded by a German bank, Bayerische Hypo-Und Vereinsbank AG ("HvB"), though Redstone was not a subsidiary of HvB. The object of the exercise was that the mortgages purchased by Redstone would be bundled, securitised and offered to the market ("issued") as residential mortgage backed securities.
- The origination and securitisation of the mortgage securities was part of a single commercial venture. Redstone had been incorporated in April 2004 and by early 2005 was already an established purchaser of residential mortgage portfolios. Beacon came into being in December 2004 with the intention that it operate as an authorised lender in the sub-prime market, and with the funding arrangements between itself, Redstone and HvB between then and April 2005, enabling it to operate as Redstone's dedicated residential mortgage lender. B Legal was incorporated in May 2005 with the intention that it operate as the dedicated conveyancing solicitor both for the taking of residential mortgages by Beacon and for the assignment of those mortgages to Redstone. Operations commenced in August 2005.
- One might ordinarily expect that the funding for the loan which Beacon was to make to its borrower would be provided out of a short term facility available to Beacon, and that that short term facility would be repaid out of the sale price for the mortgage when it was sold on by Beacon to Redstone. But so integrated was the operation that the funding for Beacon's loan to the borrower was provided directly and immediately by Redstone by an advance payment of part of the purchase price payable for each mortgage. With such an arrangement in place there is obvious commercial pressure to build up a loan book rapidly, for until a portfolio could be assembled ready for backing an issue of securities Redstone would bear all funding costs. So all processes were streamlined and standardised and conducted according to Policy Manuals and Business Process Manuals.
- B Legal provided legal services to Beacon both on the taking of the original mortgage and on its assignment under the MPFA for a fixed fee of £200 on each transaction. It did so under the terms of a Legal Services Agreement dated the 29 July 2005 and made between (1) B Legal (as legal servicer) (2) Beacon (as originator) and (3) Redstone (as issuer) ("the Retainer"). Although Redstone was a party to the Retainer it was clear from the first recital that the object of the Retainer was to govern the relationship between B Legal and Beacon and from the third recital that Redstone was a party solely for the purpose of specified clauses relating to its own purchase of mortgages.
- Before dealing with the detail of these documents I should make one general point. I received extensive written and oral evidence from Mr Matthew Duncan, a solicitor and former partner of Sidley Austin Wood & Brown. He was then and is now a specialist in structured finance (and in particular residential mortgage backed securities) and in the establishment of residential mortgage lenders. He described himself as "one of the most experienced London-based solicitors practising in this field". He was the architect of the business structure and the draftsman (or at least the leader of the team of draftsmen) of the documents embodying the commercial relationship between Redstone, Beacon and B Legal; and he was fully conversant with the pre-transaction negotiations between the various parties. His evidence consisted of a blow-by-blow account of the circulation of various drafts, of the advice received, of the various amendments made and of what was intended by them, and of a general commentary upon the documents. His evidence included his analysis of the liabilities of B Legal upon entering the Legal Services Agreement and of who was entitled to enforce those liabilities and under what agreement. I do not regard this evidence as of assistance (or indeed as admissible).
- My primary task is to ascertain as a matter of fact what were the terms of the Retainer and then to determine as a matter of law what, upon the true construction of the Retainer, were the duties thereby imposed upon B Legal, whether expressly or implicitly. Pre-transaction negotiations are not an aid in this task: nor are the subjective intentions of the draftsman. The interpretive process of course includes a consideration of the objective facts about the circumstances of the transaction: to that extent alone Mr Duncan's evidence assisted.
- The following provisions of the Retainer are relevant to the preliminary issues to be decided:-
- The Retainer had indicated that the document known as "the CML Handbook Part 2" was something that had yet to be agreed, and the effect of the Solicitor's Instruction Letter was that in the meantime the Supplementary Instructions governed the position. It was common ground that the CML Part 2 (which modifies the standard provisions of the CML Part 1) had been agreed by 10 December 2005. The issue was whether there was any earlier variation.
- According to the evidence of Nicola Chard (the effective principal of B Legal), when B Legal commenced acting it operated on the basis of CML Part 1 as varied by the Supplemental Instructions, there being no CML Part 2 agreed. This meant a laborious and uncompetitive title checking process which caused delay that was unacceptable to intermediaries. This led to a meeting in October 2005 between Beacon representatives and herself to consider in what way processes could be refined and streamlined. What then occurred was that by a course of dealing from October 2005 the specific requirements of the eventual CML Part 2 were gradually agreed and adopted as part of that streamlining of the operational process and were then formally documented: and that from the start of that period the critical parts (relating to local authority searches, requiring production of leases, obtaining ground rent receipts, and the role of Beacon as the point of contact) were operative. By "a course of dealing" she meant the cumulative effect of instructions to B Legal received from Brian Pitt (Operations Director of Beacon) following meetings by him with Simon Potter (Director of Asset Securitisation at HvB and a director of Redstone) and others, those instructions being both in relation to particular processes and in relation to specific cases. Redstone did not adduce evidence from Mr Pitt or Mr Potter to challenge this: and when I read and heard the evidence I thought it credible and that it accorded with the probabilities inherent in the business model operated by Redstone and Beacon.
- Redstone submitted that the fact that the first draft of the CML Part 2 that was circulated did not reflect the working practices to which Nicola Chard referred demonstrates that her evidence ought not to be accepted. But this does not take into account the fact that the final version of CML Part 2 so rapidly emerged when the draft was challenged. Nor does it take into account the date borne by CML Part 2. The fact that CML Part 2 was effective before December 2005 probably explains why it says on its face that it shows "last amendments" dated 3 August 2005. (Indeed, putting on one side the subjective intentions of the parties, in my judgment a reasonable observer reading the Retainer in the light of the CML Part 2 would reasonably understand the parties to have meant that these provisions were to have retrospective effect as from 3 August 2005).
- I find and hold that from at least 25 October 2005 the following parts of CML Part 2 were operative:-
- Mr Duncan argued in his evidence that in so far as Beacon and B Legal purported to agree upon the modifications set out in the CML Part 2 as ultimately agreed in December 2005, and in so far as they may have implemented those variations from October 2005 prior to formal documentation, such alterations in the Retainer were ineffective. Mr Chaisty QC accepted that the CML Part 2 relaxations must apply to the Retainer even if not consented to by Redstone in writing (though he did not articulate the basis for this concession): but he pursued the argument in relation to relaxations prior to formal adoption of the CML Part 2 and in relation to any other "relaxations" on which B Legal relied. Whilst acknowledging that clause 6.1(a) of the Retainer required B Legal to act in accordance with the Solicitor's Instruction Letter as varied by the CML Part 2 "except to the extent that [B Legal] was given any express specific written or oral instructions or [had] agreed a specific process with [Beacon] or the Originator's Representative in relation to a particular matter or matters", Redstone's representatives argued that this power could not be exercised so as to disadvantage Redstone by depriving it of protection which it had under the unmodified Retainer unless Redstone agreed. So, for example, Beacon could never have said in a particular case "We know there is a defect in title but go ahead anyway even though there is no security" and B Legal could never have accepted such instructions because both knew that the mortgage was to be immediately assigned to Redstone.
- I do not accept this argument. Redstone was only a party to the Retainer for specific purposes. These related to B Legal's obligations in relation to the transfer of a mortgage from Beacon to Redstone and the perfection of Redstone's title, to audit and data protection requirements, and a promise by B Legal not to act for any borrower in any transaction or legal proceedings to which Beacon or Redstone was a party. They did not include the right for Redstone to agree in writing any proposed variation of the Retainer under clause 24 or to concur in the giving of specific instructions or agreeing a specific process in relation to a particular matter. The definitions section of the Retainer had provided for the appointment of "an Issuer Representative" whose recited function was to manage Redstone's relationship with B Legal and have authority to provide instructions, requests for variations, consents and approvals in accordance with the Retainer. On the evidence, no such individual was appointed: B Legal dealt exclusively with Beacon personnel, and Redstone conducted its oversight of the operation through its representation (by Mr Simon Potter and Mr Mark Lewis) on the board of Beacon, its presence at monthly review meetings with Beacon and the exercise of its audit rights under clause 13 of the Retainer. Redstone therefore had no contractual rights under the Retainer in relation to either Beacon or B Legal and could not as a matter of contract prevent them from (a) varying the terms of the Retainer applicable as between them in writing or (b) giving and acting upon any express specific written or oral instructions or agreeing a specific process in relation to a particular matter or matters which conflicted with the terms of the Solicitor's Instruction Letter or CML Part 2 instructions.
- Mr Duncan argued that all of Beacon's rights under the Retainer (including the right to vary the obligations under CML Part 1 and the right to give express specific written or oral instructions or to agree a specific process) had been assigned to Redstone under a Security Deed. But this document was not in the trial bundle (and I think was not disclosed) and until a fairly elliptical reference to it in Mr Duncan's witness statement had not featured in the action. I therefore do not take account of any rights as between Redstone and Beacon arising under the Security Deed.
- Although Redstone was only a party to the Retainer for those purposes:
- I therefore hold that if Beacon and B Legal did agree in writing a variation in the Retainer (as for example by agreeing the terms of CML Part 2 or agreeing to dispense with a Solicitor's Instruction Letter in individual cases) or if Beacon did give B Legal any express specific written or oral instructions or if it did agree a specific process with B Legal in relation to a particular matter or matters which conflicted with the terms of the Solicitor's Instruction Letter or CML Part 2 instructions (as happened when the acceptable remaining leasehold term was raised from 35 to 50 years or when Beacon altered the mechanics of dealing with completion monies) then Redstone would have no right of action against B Legal in respect of that departure.
- But I would make four points. First, express specific instructions or agreement upon a specific process in relation to a particular matter or particular matters is something quite different from generalised laxity of practice or the adoption of some unspoken convention. (Subject to Redstone bearing the ultimate burden of proof in the action) specific instruction or agreement is a matter for B Legal to establish. That may be done by direct evidence of a specific instruction or agreement: or it might be done by evidence of a specific change of practice obviously embarked upon and obviously accepted and which passed muster at any audit, which properly founds the inference that it had its origins in some instruction or agreement (even if direct evidence cannot now be given as to the date on which and the manner and terms in which it was given). Second, the variation in the Retainer or the specific instruction or agreement must relate to something in the Solicitor's Instruction Letter or the CML Part 2 instructions: the Retainer is careful in its use of the words "specific" and "particular", and it should be possible to identify the particular obligation from which the specific instruction or agreed process departs. Third, at the end of the day it is still B Legal's responsibility to decide whether it can properly issue a Certificate of Title. If Beacon had said "We know there is a defect in title but go ahead anyway even though there is no security" that instruction would still not enable B Legal to issue a certificate of title addressed to Beacon and Redstone. It would simply authorise B Legal to complete a transaction even though it could not provide a Certificate of Title. The absence of the Certificate of Title would then enable Redstone to exercise the rejection power reserved to it in the MPFA and Beacon would find it had made a loan that Redstone was not obliged to purchase. Fourth, whatever variations to the Retainer were agreed between Beacon and B Legal and whatever specific instructions were given in relation to particular matters, the resulting mortgage security (if purchased by Redstone) would still be subject to the warranties as to its nature and quality which Beacon had given to Redstone in the MFPA ( including warranties as to title). There would therefore be no commercial point in Beacon instructing B Legal to overlook known defects in title since that simply exposed it to liability under its warranties.
- I turn from a consideration of the documentary framework to a description of the operation. The commercial object of all parties to the Retainer was to provide a streamlined and cost effective service focused on speed and volume. The way in which this was achieved was described by Caroline Venn who was (between May 2005 and May 2010) the Senior Underwriting Manager at Beacon (responsible for day-to-day management and control of the underwriting department and working under the Head of Underwriting). She had been involved in setting up process manuals for
- A borrower's application would be submitted by one of the authorised panel of mortgage intermediaries (or packagers). The application with all its relevant supporting documents would then be manually assessed by an underwriter (rather than submitted to some automatic evaluative process). Most of the small underwriting team was based at Beacon's office at Marlow: but there were some Roving Underwriters who were located at the offices of regional packagers. The underwriters and the completion specialists worked alongside each other in the same office: and B Legal staff sat on the same floor in close proximity, but separately. The collated information and all underwriting decisions and comments were always recorded electronically and keyed into a processing system called "Blue". There were also individual paper files relating to each application, including an underwriting worksheet or check list: but the paper file would not necessarily contain all of the material recorded on Blue. Once a loan offer had been issued then the team of completion specialists would match the offer with the individual underwriting file and manage the administration of the case through to completion or other closure: but the completion specialist had no decision-making powers so that if any query arose or any additional information was received then that had to be referred back to an underwriter for resolution or decision. Under the business process manual it was mandatory for any response by an underwriter to be noted on Blue (and it might also be noted on the underwriting file). Under the Blue system funds could not be released for completion until signed off by an underwriter. Blue identified the level of authority of a user from their log-in details: it would therefore not be possible for a completions specialist to sign off satisfaction of underwriting conditions, nor for a completion specialist to release mortgage funds (but only a mandated employee).
- B Legal shared the same offices as Beacon, operating from a bank of desks next to Beacon's underwriting and completion teams. Its effective principal was Nicola Chard. From 1988 she had been in-house legal director of Household Mortgage Corporation plc and Secured Residential Funding plc, and continued as such when HMC was acquired by Abbey National plc in 1993. In 1998 Abbey National plc acquired First National Bank plc, and she became FNB's legal director and sole principal of its in-house firm of solicitors. When FNB's business became incorporated into GE Consumer Finance (UK) plc she became legal director of that company until March 2004 when she left to establish her own consultancy business. It was in that capacity that she was approached by the proprietors of Beacon Capital Holdings Ltd to provide consultancy services to and to project manage certain aspects of the proposed Beacon business with Redstone: and it was from that relationship that B Legal eventually emerged.
- Although the Retainer contemplated that a Solicitor's Instruction Letter would be issued in each case, on 1 August 2005 (2 days after the Retainer was entered into) Beacon wrote to B Legal to confirm that it was not their intention to provide or issue a copy of the Solicitors Instruction Letter on each instruction: it was agreed that B Legal would act in accordance with the authority and instruction set out in the Solicitors Instruction Letter as if a letter had been produced for each matter on which they were instructed. The letter of 1 August 2005 went on to state that on each such instruction B Legal would only receive from Beacon the mortgage offer, the valuation report, a standard form mortgage deed, Beacon's Mortgage Conditions and certain standard form deeds. The letter concluded:-
- When documentation was received from Beacon in hard copy form the relevant data would be keyed by administrative assistants onto B Legal's processing system (which had prompts and dialogue boxes - "pop-ups and alerts" as Karen Shelton called them - to guide the conveyancer through the process). At the same time a paper file would be created and assigned to conveyancers working in teams of two. Standard form Requisitions and Undertakings would then be sent to the borrower's solicitors by the administrative assistant, and the responses checked by a conveyancer, along with the results of the Land Registry searches, bankruptcy searches, and usual title matters. If there were any discrepancies the issue would be referred to the relevant Beacon completion specialist for them to refer the matter to the relevant Beacon underwriter. The reference would generally be in writing, but the response might be oral or in writing (but would in any event have been recorded by the underwriter on the Blue system). The response would generally be given by the completion specialist (though there may have been occasions when the response came from the underwriter directly). This is the clear evidence of Caroline Venn (Senior Underwriting Manager at Beacon from May 2005 until May 2010) confirmed as to the period from November 2007 by Shaun I'Anson (Head of Underwriting at Beacon). If everything was in order that conveyancer would print out a Certificate of Title. As printed, the Certificate of Title form required it to be signed by a solicitor. But in practice certificates were signed by unqualified conveyancers "pp Nicola Chard", a practice which seems to have been accepted, to have gone unremarked in the audits to which my attention was drawn, and is not advanced as a ground of complaint in this action.
- Initially, when volumes were low, this system was operated by Nicola Chard, her legal secretary (who was used to handling conveyancing matters) and a part time assistant. But in early January 2006 she engaged Sarah Lloyd (a qualified solicitor) to act as a conveyancer, the terms of engagement requiring her to serve a probationary period that was still running in February 2006, during which time Nicola Chard directly supervised all her work. In June 2006 she appointed Manisha Bhula (a qualified solicitor with nine years' experience of conveyancing work) to supervise the running of the property department. In June 2007 she engaged Karen Shelton, who was an experienced conveyancing clerk. By then there were eight conveyancers, of whom four were formally qualified as solicitors or ILEX conveyancers, and four who were not qualified other than by experience.
- It was within this frame work that the four cases with which I am concerned arose.
- On 21 May 2013 District Judge Obodai ordered the trial of the following preliminary issues:-
- It is not possible conveniently to answer Question 1 in a concise declaratory form: but the answers will emerge in the analysis in the judgment. I shall focus on answering Question 2.
- I deal first with the case of Welch. In September 2005 Ms Welch was purchasing 23 Ferndale Road, Shrewsbury from the Jacksons. She applied to Beacon for a loan of £84,597. Beacon had only just started in business and applications were still few in number: so there was no pressure on the mortgage processing system (save the commercial pressure to establish a reputation in the market for quick service).
- Beacon's underwriting team approved the loan and B Legal was instructed. B Legal received the valuation, the mortgage offer, a set of the standard mortgage origination documents, and details of the borrower's solicitors.
- The valuation described "an end terraced two storey house which [was] in need of a general programme of refurbishment and decoration". The market value of the property in its then condition was estimated to be £100,000, which valuation reflected "the present poor condition of the property". The comparables ranged from £120,000.00 to £127,000.00. The valuer identified as "essential repairs" the replacement of the guttering which had caused damp penetration and damage to the internal plaster finishes and decorations.
- The mortgage offer was made subject to special conditions. First, it was stated that notwithstanding anything in the mortgage conditions, 23 Ferndale Road could be let to and occupied by persons other than Ms Welch, provided that the letting was an assured short hold tenancy. This would have indicated (and did in fact indicate) to B Legal that this was a "buy-to-let" mortgage. As soon as B Legal entered this mortgage offer on their processing system it was apparent that Ms Welch was or had been an applicant for loans on other properties as well: and that confirmed her as a "buy-to-let" investor. Second, the mortgage required Ms Welch to undertake to carry out works to the gutters, re-pointing and re-lining and general refurbishment and decoration of 23 Ferndale Road within 6 months of completion.
- B Legal sent to the borrower's solicitors their standard form Requisitions and Undertakings Form. On the 18 October 2005 this was returned by Ms Welch's solicitors. So far as material:-
- On the 26 October 2005 Nicola Chard of B Legal provided a Certificate of Title to Beacon and to Redstone and their assigns, giving the Certificate of Title in standard form. In reliance on that Redstone transferred the mortgage advance to Beacon (in part payment of the purchase price of the mortgage) and Beacon transferred that money to Ms Welch's solicitors. On 31 October 2005 Mr Jackson transferred 23 Ferndale Road to Ms Welch and Ms Welch charged the property to Beacon. The benefit of the charge was immediately assigned to Redstone, and Redstone was registered as proprietor of it.
- When Ms Welch defaulted on the mortgage Redstone obtained a possession order against her in May 2007. In the course of enforcing that order it became apparent that the sale and purchase of 23 Ferndale Road was not in truth what appeared in the conveyancing documents. The sale was not at £99,950.00 (which the transfer said) but at £63,000.00. The sale was not with vacant possession. The Jacksons were to remain in occupation throughout under what was described as a "permanent rental" with an understanding that the Jacksons could buy the property back at 10% below market price. These arrangements were considered by HHJ Worster in Redstone Mortgages v Welch & Jackson [2009] 3 EGLR 71. The judge held that Ms Welch had acquired 23 Ferndale Road subject to the equitable rights of the Jacksons which took priority over Beacon's rights under the mortgage. He set aside the sale, but on terms that Beacon be subrogated to the previous lenders whose advances had been paid off with Beacon's money.
- The equitable claims of the Jacksons against Ms Welch were enforceable against Beacon and its successor Redstone because the Jacksons were in actual occupation at completion. CML Part 1 does not require the conveyancing solicitor to undertake or procure the physical inspection of the property at the moment of completion. Having regard to the terms of paragraph 7.4 of CML Part 1 Redstone cannot say that B Legal ought to have discovered that the Jacksons were in occupation at completion. Redstone is bound to accept that a lender runs the risk that the information given by a borrower may be incorrect. To succeed in its claim Redstone has to say that any reasonably competent conveyancing solicitor would have had reason to doubt the accuracy of the information provided about occupation, and would have taken appropriate steps that would have lead to the loan not being made.
- Redstone contends that there was a discrepancy between the terms of the mortgage offer (which permitted letting) and the answer given in the requisitions that at completion Ms Welch would be the only person in occupation. Redstone submits that B Legal ought to have appreciated that this (together with the absence of an answer to Requisition 3.4) indicated that the purchase of 23 Ferndale Road might be a "sale-and-lease back" transaction and not a "buy-to-let" transaction and:-
- In my judgment this argument is wrong. Clause 5.2 of the Retainer required B Legal to exercise due skill, care and diligence when performing its obligations. In the context of providing a Certificate of Title this meant certifying to Beacon and to Redstone that the title was such as a reasonably competent solicitor acting with proper skill and care would accept as a good marketable title: see Barclays Bank v Weeks, Legg & Dean [1999] QB 309 at 327. Clause 6.1(b) of the Retainer required B Legal to execute and issue a duly completed Certificate of Title unless it advised Beacon in writing that such a Certificate of Title could not properly be issued. Under clause 6.3(b) of the Retainer, if in the course of its consideration of whether to issue a Certificate of Title B Legal identified an issue of which a reasonable and prudent solicitor acting for a mortgagee would inform his client then B Legal had to inform the relevant underwriter at Beacon and then not complete the transaction until specific instructions had been received. Under CML Part 1 paragraph 7.4 B Legal was entitled to rely upon information provided by the borrower about occupation at completion unless there was reason to doubt the accuracy of the information disclosed about who would be in occupation.
- In my judgment a reasonable and prudent solicitor acting for a mortgagee would not have identified "sale-and-leaseback" as an issue and could properly issue a Certificate of Title. The contract signed by the Jacksons said that the sale was with vacant possession: the contract of course was their opportunity to say that the sale was not with vacant possession but was subject to them remaining in occupation under a perpetual rental containing an option to repurchase. The Property Information form indicated that the Jacksons would be moving out: the Property Information form was their opportunity to say that they would not be moving out. The Requisitions addressed what is the legally relevant time, namely the moment of completion. It is not in the least surprising that at the moment of completion the only person in occupation would be the purchaser (the vendor having given vacant possession to enable completion to take place): indeed it would be surprising if at completion there was already a tenant in actual occupation under a tenancy agreement granted prior to completion. Moreover, although the purchase was a "buy-to-let" purchase, the property itself needed significant works to be undertaken, including relining and general refurbishment, (the condition of the property reducing its value to 20% less than comparable properties). In such circumstances it was again not at all surprising that at completion there would be no one other than the legal owner in occupation. In my judgment there was in the information provided (or omitted) nothing at all to indicate that the Jacksons would remain in occupation under a "permanent rental" arrangement.
- Beacon was told untruths by its borrower and its solicitors are not to blame. I answer question 2(a) of the Preliminary Issue in the sense that B Legal did discharge its contractual duties to Beacon (and its common law duty to Redstone) in the case of Welch. I dismiss the claim.
- On 13 December 2005 Beacon approved the mortgage application of Mushtaq Sher. The application was initially underwritten by Duncan Murray: but since he lacked a full underwriting mandate his work was audited and signed off by Caroline Venn. Beacon agreed to lend Mushtaq Sher £126,679 to enable him to buy a property from his father, Mohammed Sher. Mohammed Sher had written to Beacon explaining that he would be "transferring over all of the mortgage, the equity and the property completely to [his] son Mr Mushtaq Sher for the mortgage amount of £126,000" because he was "moving away and [would] not have any responsibilities of the house… and [would] not be expecting any financial return from [his] son for the transfer of the property over to him in any shape or form and (sic) any time whatsoever, financial or otherwise". This letter must have been on the underwriting file. The property to be mortgaged was described in the application and in the mortgage offer as "38 North Road, Ravensthorpe, Dewsbury".
- Beacon provided B Legal with the mortgage offer, the valuation, the standard mortgage forms and details of the borrower's solicitors. The valuation (based upon an inspection which the valuer had undertaken for another lender) identified the property to be mortgaged as "38 North Road", describing it as a house with one kitchen, one living room, four bedrooms and one bathroom. B Legal raised requisitions with the borrower's solicitor, heading the enquiry form "38 North Road".
- The Requisitions were returned in February 2006. Requisition number 2.1 was:-
- Requisition 3.1 required the borrower to confirm that the borrower would on completion be the only person aged 17 or over in occupation of the property: and that was also confirmed.
- The Replies to Requisitions enclosed official copies of the entries on the register of the title to the property, together with a title plan. The verbal description of the registered property in the Property Register described it as "being 36 and 38 North Road": and the title plan showed adjoining buildings numbered 36 and 38 included within the title. No. 38 fronted onto North Road and No. 36 lay behind it, without any direct access onto North Road itself. The registered proprietor was shown as Mohammed Sher "of 36 and 38 North Road".
- The Replies to Requisitions also enclosed a copy of the Property Information Form completed by Mohammed Sher. This confirmed that "the property" had not been subdivided, and neither required access over neighbouring land nor was subject to any such access rights, formal or informal.
- In my judgment it would have been apparent to a reasonably competent conveyancing solicitor that an element of doubt existed over what property was to be mortgaged: was it the entirety of the land comprised in the title, or part only? B Legal spotted the point. On 22 February 2006, having tried to telephone the borrower's solicitors that evening, they wrote at 18:19 to those solicitors in these terms:-
- The response of the borrower's solicitors is dated 22 February 2006 and refers to B Legal's fax "of even date". But the copy of the response on B Legal's file has a fax header showing receipt at 13:02 on 23 February 2006. That is explained by an attendance note made at 11:55 am on 23 February 2006 which records the making of a telephone enquiry of the borrower's solicitors as to why there had been no response to B Legal's fax of 22 February, the receipt of an explanation that the response had been sent to an 0870 number, and a request from B Legal that the fax be resent to an 01628 number. I find that the copy of the response on B Legal's file is the fax sent in response to that request.
- There is in the B Legal file a typed Memorandum dated 22 February 2006 apparently written by Sarah Lloyd and addressed to Phil Bertaut who was the Beacon Completions Specialist responsible for this transaction ("the Sher Memorandum"). The key part is in these terms:-
- The Certificate of Title (on which the printed date is 22 February 2006) was signed by Nicola Chard. Mr Bertaut completed his "Completion Checklist" (which in fact referred to "28 North Road" and recorded the title number for the original title containing both No.36 and No.38) on 23 February 2006 and the matter proceeded to completion on 24 February 2006. Caroline Venn has no independent recollection of the transaction and cannot recall personal involvement in the matters leading up to completion: though she believes that if she had seen the Sher Memorandum she would have referred the matter to the valuer before releasing funds.
- At completion Beacon obtained a charge over No.38 (but not No.36) which was given a new title number (WYK817097("097")). In order to complete B Legal had to ensure that the existing charge was redeemed. The existing charge was in favour of Kensington Mortgage Company Ltd and of course was over the entirety of the land comprised in the title. Beacon's loan was therefore used to pay off this mortgage over the whole, and Beacon's loan was secured by a charge over only part of the land over which Kensington had security.
- When Beacon came to enforce its charge it discovered that No.38 was part only of an entire dwelling, No.38 and No.36 having been knocked together. No.38 could not be occupied separately from No.36. Rectification proceedings were then commenced in Redstone's name in April 2009, and an order for rectification to include 36 North Road within the scope of the Redstone charge was obtained by default.
- At trial it was put in cross-examination (though no Redstone witness gave direct evidence to this effect) that the rectification proceedings were taken by B Legal in Redstone's name but without its approval and as some form of cover-up: but I accept the evidence of Nicola Chard that the rectification proceedings were commenced on the instructions of Beacon (it being a matter for Beacon and Redstone at their monthly meetings considering the Problem Title Report to sort out the level of Redstone involvement). The rectification proceedings are properly noted in the Problem Title Reports.
- The claim in the rectification proceedings was
- In August 2010 HvB made an informal claim that B Legal had failed to perfect Redstone's charge over the security property as represented in the offer of advance and the transactional documents. Nicola Chard was aware of the response. The response did not mention the Sher Memorandum. It simply asserted that "title to the property identified as the security property had been perfected as required" and that B Legal had acted properly in verifying title based on the documents provided at the time the transaction completed and that it was
- On 20 April 2011 Redstone made a claim in respect of this transaction. On 22 July 2011 solicitors for B Legal gave a full Pre-action Protocol response. They said that from a review of B Legal's papers they considered that what had happened was a fraud perpetrated upon Beacon by the Shers, and that it was clear that B Legal had "acted appropriately in verifying title to the secured property in accordance with the checks contained within the Beacon Handbook and also the Title Verification Standards". They argued that if there was an obligation on any party to confirm the physical state of the property and its suitability as a sufficient security for the loan then it was the surveyors who failed to discharge that role. No mention was made of the Sher Memorandum.
- Proceedings commenced. In paragraph 20 of its Defence served in April 2012 B Legal relied on the Sher Memorandum. In its Reply dated 18 July 2012 Redstone simply did not admit whether or not any report had been made to Beacon in the form of the Sher Memorandum. By the time of trial Redstone did not admit the authenticity of the Sher Memorandum. On the last day for so doing (22 November 2013) it served a Notice pursuant to CPR 32.19 requiring the document to be proved at trial. It does not plead any positive case that the document is forged or lead any evidence seeking to establish falsity.
- Requiring a party to "prove" a document means that the party relying upon the document must lead apparently credible evidence of sufficient weight that the document is what it purports to be. The question then is whether (in the light of that evidence and in the absence of any evidence to the contrary effect being adduced by the party challenging the document) the party bearing the burden of proof in the action has established its case on the balance of probabilities. Redstone cannot (by a refusal to admit the authenticity of a document) transfer the overall burden of proof onto B Legal, any more than it could do so simply by refusing to admit a fact.
- The question is therefore whether any evidence as to the provenance of the document has been produced, and if it has then whether (although not countered by any evidence to the contrary) such evidence is on its face so unsatisfactory as to be incapable of belief. It is vital that the process of challenge is fair. Criticism of the evidence about the authenticity of the document cannot amount to a covert and unpleaded case of forgery. If a case of forgery is to be put then the challenge should be set out fairly and squarely on the pleadings (and appropriate directions can be given). If the charge is that a witness has forged a document (or has been party to the forgery of a document) and the grounds of challenge have not been set out in advance, then if the questions are not objected to the response of the witness to the charge must be assessed taking into account the element of ambush and surprise.
- At trial B Legal called Mr Bertaut who gave evidence of the Sher transaction based on his recollection (made when he was contacted in connection with this case in November 2012) enhanced by a refamiliarisation with the Beacon underwriting file and documents from B Legal's file. This enabled him to say that he had received the Sher Memorandum and had referred the file straight to Caroline Venn, a matter he remembered because it concerned "a query I had never come across before" and because "the combination of circumstances" meant that the case had stuck in his mind. He recalls writing the "Post-it" tab when he walked over to Sarah Lloyd's desk with the file and Sarah Lloyd was unable to speak to him. He recalls that afterwards they went outside for a cigarette.
- I was unimpressed by this inauthentic detail. Whilst I do not accuse Mr Bertaut of conscious fabrication (he has no apparent incentive to perjure himself) the breezy confidence with which he gave and elaborated his evidence of what was at the time a routine transaction (part only of the land in a registered title was being mortgaged) occurring 6 ½ years earlier left me with the distinct impression that this was not recollection but reconstruction of what must have happened, undertaken out of a desire to be helpful. (The "curious combination of circumstances", which I take to refer to the knocking together of No 36 and No 38 but the retention of both addresses on the register, in fact only came to light in August 2008, long after Mr Bertaut had left Beacon). So I do not rely upon his evidence as taking me beyond the documents themselves.
- The author of the Sher Memorandum was Sarah Lloyd. She was not called as a witness although her whereabouts were known. Mr Chaisty QC invited me to draw an adverse inference from this namely that if called she would not have said that the Sher Memorandum was authentic. This submission in my judgment misapplies the decision of the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] PIQR 324. In certain circumstances the Court is entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give. There must however be a case to answer raised by the party asking for the adverse inference to be drawn, some evidence (however weak) adduced by that party on the matter in question, before the court is entitled to draw the desired inference. Here Redstone runs no positive case and has adduced no evidence to raise the case that the Sher Memorandum is inauthentic: it has simply put B Legal to proof of authenticity. So the only question is whether the evidence which B Legal chooses to call is sufficient to throw upon Redstone the burden of adducing evidence (either direct evidence or evidence by inference from other established facts) to prove on the balance of probabilities that advice was not given about the identity of No.38 which would have been given by a reasonably competent solicitor.
- I take the same view of Mr Chaisty QC's submission that an adverse inference is to be drawn from the failure of B Legal to call the directors of Beacon.
- B Legal relied on the evidence of Nicola Chard. She said she was directly supervising the work of Sarah Lloyd during February 2006 (and this is confirmed by the fact that correspondence went out under Nicola Chard's reference). Her first witness statement and her second witness statement contained markedly different accounts of her recollection (the second being occasioned by a need to respond to the CPR 32.19 notice and prepared after a detailed review of the documents). Although she swore to the truth of both statements I think this was a slip and that the second was intended to replace the relevant parts of the first where they differ: but a difference there was. She states that between the 18 February 2006 and 22 February 2006 she was on holiday, and that in her absence Sarah Lloyd was supervised by a property barrister who attended the offices. Accordingly, when she returned on 23 February 2006 (the date requested for the completion of the Sher transaction) the file had been left for her review and approval, containing (i) a blank Certificate of Title ready for signature if she approved, and (ii) the unanswered fax of 22 February 2006. She recalls a telephone call being made (though there is no attendance note of it) in which the borrower's solicitor confirmed that the transfer (and the related charge) would be over part only of the land comprised in the registered title. She confirms that Sarah Lloyd drafted the Sher Memorandum either after that telephone call or after receipt of the fax enclosing the draft TP1: and that she (Nicola Chard) saw it before it was dispatched and directed that a copy of the title plan be attached to the Memorandum. She confirms that the writing on the "Post-it" note is that of Mr Bertaut and writing on the other copy of the memorandum is that of Sarah Lloyd. This is direct evidence as to the provenance of the Sher Memorandum, and that it is what it purports to be.
- Mr Chaisty QC submitted that Nicola Chard was simply not a credible witness because her evidence was demonstrably inconsistent, incorrect and on numerous occasions false, being also contradicted by other of B Legal's witnesses. I do not accept the submission that Nicola Chard's entire evidence cannot be believed (though whether her evidence is reliable on this subject is a separate question).
- Nicola Chard was subjected to a sustained and robust cross-examination, including an exploration of many peripheral issues. I find that in general she was a careful witness giving considered answers on which I can rely. It is right that on the peripheral issues her evidence differed from that of other B Legal witnesses: she had a more benign view of the quality of B Legal's internal training, the clarity of its policies and the comprehensiveness of its protocols than those who were trained and who operated the relevant processes. On the other hand, she had a more rigorous view of B Legal's responsibilities (disagreeing with the suggestion that its role was simply "the provision of information" to Beacon). But this did not demonstrate that she was a dishonest or wholly unreliable witness: and a degree of difference about peripheral detail, which is being thought about for the first time in the witness box seven or eight years after the relevant events, is to be expected.
- What was in effect suggested was that the Sher Memorandum was forged: and since Sarah Lloyd left B Legal in 2007 and the problem over 38 North Road only emerged in August 2008, the suggestion (it was never openly put this way) had to be that the forger was Nicola Chard or someone else on her behalf (and that she was either lying when she said she recognised Sarah Lloyd's handwriting on one copy of the Sher Memorandum or alternatively she or someone else on her behalf had suborned Sarah Lloyd four years after she had left B Legal and procured her to write upon a recently produced document). What was put to Nicola Chard was that the Sher Memorandum "had been created subsequently" and had been inserted into the firm's file after a copy of that file had been sent to its insurers: to which she responded "Certainly not".
- Redstone adduced no direct evidence to counter this. But there are other indicators of which to take account.
- For B Legal Mr McPherson QC asked me to take into account the improbability of forgery. This case is about a relatively small insured loss (the successful rectification of the title meaning that Redstone seeks only compensation for delay). The claim is against a company (not Nicola Chard personally). The consequences of a finding of fabrication of evidence against a solicitor are momentous and ruinous, and the risks involved in suborning Sarah Lloyd and Mr Bertaut enormous. What is the likelihood of Nicola Chard running the risk in the context of such a claim? She has nothing to gain but everything to lose.
- For Redstone Mr Chaisty QC asked me to bear in mind the following points:-
- The failure to remember or discover the Sher Memorandum (and so mention it before the Defence) and the coincidence between the dealings with the Sher Memorandum and with the Howard Memorandum are points of real weight. But in my judgment (and bearing particularly in mind the observations in paragraphs [57] and [58] above) they do not destroy the apparent credibility of Nicola Chard's evidence as read and seen by me so as to relieve Redstone of the burden of proving on the balance of probabilities that it was not properly advised as to the extent of the security. Redstone must prove on the balance of probabilities that Beacon was not advised by B Legal: and it has not done so. The question now is: did the Sher Memorandum discharge B Legal's duty of care?
- I have set out the general duties of a solicitor certifying title above. In relation to the Sher application CML Part 1 para 4.1.1 required the solicitor to verify that there were no discrepancies between the property as valued and the title (and other) documents and to report the same so as to enable Beacon to check with the valuer whether the valuation needed to be revised. CML Part 1 paragraph 6.2 tells the solicitor that the boundaries must be clearly defined by reference to a suitable plan or description (as well as according with the information given in the valuation report). The conveyancing solicitor was bound to check with the borrower that the plan or description accorded with the borrower's own understanding of the extent of the property to be mortgaged: and in that connection CML Part 2 paragraph 6.2 said that reliance could be placed on the answer to a requisition. By clause 5.2 of the Retainer these duties had to be discharged with due skill and care.
- Redstone pleaded (but did not at trial argue) that there was a breach of undertaking by B Legal and also that there was a breach of trust. The case was argued as one concerning a breach of a contractual or other duty of care. The breaches alleged were that B Legal only obtained a first legal charge over 097 (not over 101); that it failed to notice that 097 was part only of 101; that it failed to inform Beacon of this fact; and that it failed to take any steps to investigate what was actually being transferred to Mr Sher. (There were also complaints about post-completion conduct in relation to the registration of the Beacon charge).
- Most of these complaints simply cannot be sustained on the facts. So the case argued at trial and addressed by both sides in closing had a slightly different emphasis.
- First, it was said that B Legal had not taken steps to ensure that the property to be charged was properly "defined" for the purposes of CML Part 1 paragraph 6.2, because the only plan which it had was the HMLR filed plan, which was not (bearing in mind its scale) a suitable plan for those purposes. This is not seriously arguable. CML Part 1 applies to every transfer and every mortgage of registered land. The suggestion that registered conveyancing cannot be conducted by reference to the plans filed at HMLR and that there must be some measured survey plan to a larger scale before a solicitor certifying title for a lender has discharged his duty cannot be maintained. In the instant case the fact is that the TP1 in the precise terms in which it was sent to B Legal was (when executed) sent to HMLR and accepted as the foundation of the title 097. No 38 was marked on the filed plan of title 101, as was No.36. HMLR was able to match the verbal description in the parcels clause to the markings on the filed plan.
- Second, it was said that B Legal failed in its duty to inform Beacon that it could not state with certainty what the boundaries were. This seems to me simply a variation of the first argument. Every conveyancer dealing with registered land knows (and those who drafted and those who adopted CML Part 1 as standard instructions knew) that the combination of the scale of the filed plan and "the general boundaries rule" means that the filed plan is not definitive of the boundaries to within inches but is perfectly adequate for the purpose of identifying what land is the subject of the transaction. It cannot be said that every reasonably competent conveyancing practitioner would have informed a sub-prime lender like Beacon of that notorious fact.
- Sher is not a case about boundaries. It is a case about whether B Legal sufficiently drew to the attention of Beacon the fact that only part of the land in title 101 was being offered as security for Beacon's loan, so as to enable Beacon to check with the valuer whether the valuation (which related to a four-bedroom house which the borrower had confirmed to B Legal was intended to be offered as security) needed to be revised. Once Redstone has failed to establish that the Sher Memorandum was forged (and so failed to establish on the balance of probabilities that it was not advised in the terms of the Sher Memorandum) the only question is whether the Sher Memorandum and its attachment was sufficient for that purpose. In my judgment it was.
- Redstone also ran a case at trial (pleaded in relation to the case of Howard but argued by reference also to Sher) that B Legal was wrong to act on the instructions of a completion specialist and not upon the written instructions of an underwriter. I reject that argument. First, the evidence is that only an underwriter was mandated to release funds under the Blue system: it must follow that the actual decision to act on the Sher Memorandum was taken by a person with appropriate authority at Beacon. Redstone cannot say "The right person took the decision but the wrong person conveyed the message so we get our money back". Second, the clear evidence from B Legal and from the Beacon employees (both completion specialist and underwriter) is that the completion specialist was the established means of communication. If the management of Beacon (including board representatives from Redstone) were not content with this then they should have stopped it. It was not wrong of B Legal to act on communications from someone with apparent authority to convey messages from underwriters.
- I answer question 2(a) of the Preliminary Issue in the sense that B Legal did discharge its contractual duties to Beacon (and its common law duty to Redstone) in the case of Sher. I dismiss the claim.
- On 10 April 2006 Philip Howard received from Beacon the offer of a remortgage loan of £108,975 to be secured on a property at 65 Flower Street, Northwich. The application had been underwritten by Alison Woodstock at Beacon. The valuation report described the tenure of the property as "Freehold", and valued it in the sum of £135,000. When Office Copy Entries dated 26 April 2006 were provided to B Legal they disclosed that 65 Flower Street was in fact leasehold at a variable rent and that the lessor was the Vale Royal Borough Council. There were no restrictions on the title other than in favour of the existing sub-prime lenders.
- CML Part 2 as effective at this date stated generally (in response to a request to identify a contact point for enquiries about a lease) that B Legal was not required to obtain a copy of the lease where title insurance was available. B Legal had not been told the scope of cover under Beacon's title insurance policy and was not provided with a copy policy as part of its instructions.
- In the instant case, on 18 July 2006 B Legal requested the borrower's solicitors to provide a copy of the lease. On 27 July 2006 under cover of a letter which said "copy lease enclosed herewith" (and nothing more) the first four pages of an undated and unstamped lease were faxed to B Legal. This confirmed that the lessor was the local authority. Clause 1 of the lease contained material definitions: and these included definitions of 'Market Value', 'Gross rent' (which was the yearly rent appropriate to the demised premises let by the Council in accordance with its management powers under the Housing Act 1985) and 'specified ground rent' (which was to be calculated annually in accordance with the provisions set out in a schedule to the lease, a copy of which was not provided). Although the lease was granted for a 99 year term, the document that was faxed appeared to show that no premium had been paid, the consideration for the grant being only a covenant to pay monthly the specified ground rent, although this was variable annually by reference to a rack rent reduced by some formula set out in an undisclosed schedule. In my judgment this would have alerted a reasonably competent conveyancer of the need for further enquiry and to the possibility that the lease was a "shared ownership" lease i.e. one under which the registered proprietor was treated as the owner of only part of the leasehold interest, renting the remainder from the lessor (with a right to purchase additional percentages thereby requiring an adjustment in the rent), and being subject to restrictions on the power of disposal. Restrictions upon a power of disposal are matters to which CML Part 1 paragraph 5.10.3 refers (though no specific reliance was placed upon this provision at trial).
- There is in the B Legal file a Memorandum apparently written by Manisha Bhula and addressed to Mr Bertaut, who was again the Beacon Completion Specialist ("the Howard Memorandum"). Dated the 27 July 2006, the Howard Memorandum notes that B Legal had only that day received the outstanding papers from the borrower's solicitors. The Howard Memorandum addresses first the fact that the property was leasehold and not freehold and notes that "the Certificate of Title will need to be revised" and that
- The Certificate of Title was printed on 28 July 2006: its description of the tenure as "Freehold" was amended in manuscript to "Leasehold 83 years left". Mr Bertaut had a Completion Checklist. One of the details to be checked was
- The evidence of B Legal is that it received oral instructions that it was "okay to fund": and the transaction duly completed on 28 July 2006 (earlier than the requested date of 31 July 2006 mentioned in the Memorandum).
- When the original lease was produced to B Legal in February 2007 it showed that Mr Howard had bought only a 50% share in the property, that his power to charge the property to Beacon was restricted and that there were restrictions upon the price that could be charged on disposal. But the lease was evidently not considered at that point and was simply sent to Redstone to complete its file. Only after the property had been repossessed and sold in September 2008 did anyone (it was the potential purchaser's solicitors) notice that Mr Howard had only bought a 50% interest in 65 Flower Street.
- On March 2011 Redstone made a claim in respect of this transaction. In their Pre-action Protocol Response B Legal's solicitors said:-
- In November 2013 Redstone gave notice saying that they did not accept the authenticity of the Howard Memorandum.
- Whilst I have some doubts about the authenticity of the Howard Memorandum I propose to proceed on the footing that it is authentic.
- The standard form Certificate of Title required B Legal to certify that they had investigated title to the property and that the title to 65 Flower Street was good and marketable and free of any encumbrances which at the time of completion might reasonably be expected to materially adversely affect the value of the property or its future marketability: see paragraph 5.4.1 of CML Part 1. Clause 5.2 of the Retainer provided that B Legal would exercise due skill, care and diligence when undertaking the investigation of title.
- The existence of title insurance (the terms of which were not communicated to B Legal as part of its instructions) did not (save in two respects) affect what was required of B Legal in the performance of that duty. The two respects were (i) in CML Part 2 B Legal were instructed that no lease was required to be obtained "where title insurance is available"; and (ii) in CML Part 2 B Legal were directed to the Title Verification Standards which required them in relation to titles to be insured to look for particular entries in the register which might indicate shared ownership but did not require them to examine the registered lease. B Legal did not know whether title insurance would be available in relation to 65 Flower Street because its conveyancers did not know the terms of cover. (In fact, if they had investigated the matter it would have been clear that title insurance was not available in relation to shared ownership properties, so that title would have to be fully investigated). Because B Legal could not be sure that the exception applied they had to obtain the copy lease: and they asked for it.
- What they obtained was the first four pages of a draft from which it would have been manifest to any reasonably competent practitioner that the lease of 65 Flower Street (if in the terms of the draft) was not a usual 99 year term such as is customarily offered as security, and that there was a real risk that (notwithstanding the absence of entry on the register of any restrictions) this was a shared ownership lease. Nicola Chard had given instructions that shared ownership leases be reported to Beacon. CML Part 1 para. 2 required such a report to be in writing. Mr Chaisty QC submitted that such a report should include a concise summary of the legal risks and a recommendation on how Beacon could protect its interests. These words were drawn from paragraph 2.3 of CML Part 1: in that context they relate to a communication by the solicitor to the lender of a matter which is not adequately provided for in the Handbook. They are not of general application. They do not apply here.
- What was required was a report that the lease of 65 Flower Street was probably a shared ownership lease, that a copy of the lease had not been provided (although requested), that it was not possible (from the four pages of the draft that had been provided) to determine the true extent of Mr Howard's ownership of the lease or the restrictions on his or a mortgagee's power of disposal or the effect of the rent variation provision, and that from the title documents obtained it would not be possible to give an unqualified certificate that the property would be free from any restrictions or encumbrances which at the time of completion might reasonably be expected to materially adversely affect the value of the property or its future marketability (but only one qualified by the written disclosure). This seems to me to follow from the terms of clause 6.1(b) of the Retainer and the terms of paragraph 5.10.3 of CML Part 1, and to be what any reasonably competent conveyancing practitioner would have done.
- The report could have been given to the completion specialist, since I find that that was the normal channel of communication and B Legal was entitled to assume that Beacon staff would comply with its own internal procedures to ensure that the report reached the person with the relevant mandate to take a decision. I reject the argument that the Howard Memorandum may be dismissed simply because it was not a written communication to the underwriter.
- The report did not have to be directed to the completion specialist or expressed in language suitable to be understood by the particular administrator (rather than an underwriter). Mr Chaisty QC placed reliance upon a passage in County Personnel v Pulver [1987] 1 WLR 916 at 922 in these terms:-
- In my judgment the Howard Memorandum fell short of what was required. First, it did not use the trigger words "shared ownership". Second, and more importantly, a decision about the adequacy of the title to the security and its conformity to the valuation simply could not be taken in the absence of knowledge about the terms of what was potentially a "shared ownership" lease. This was the fundamental point that had to be got across. Instead the impression was given was that there was a bit of paper missing ("the original lease is not available") but the answer might lie with the valuer ("I assume you will need to refer this to UW and/or the valuer and a new offer may be issued"): but neither valuer nor underwriter could do anything without the lease. This report was inadequate. A client being asked for instructions whether or not to proceed was entitled to adequate information as to the circumstances in which the choice to proceed or withdraw was being made (though not under the Retainer to advice as to what choice should be made).
- Redstone complains that B Legal was in breach of duty because it did not obtain a first legal charge, because it failed to appreciate or ascertain the fact that Mr Howard had only a 50% share, that it failed to advise Beacon that Mr Howard had a 50% share, that it failed to appreciate and/or advise Beacon as to the terms of the lease (and in particular that the title of Mr Howard was unacceptable pursuant to Beacon's Underwriting Loan Manual), that it failed to appreciate and advise Beacon that the assumptions in the valuation were not correct, and that despite all of those matters certified to Beacon that it had investigated title and that Beacon would have a good and marketable title to the property. I do not accept any of those charges, save for the last.
- B Legal did obtain a first legal charge over the property: the difficulty is that the charged interest was so restricted as not to be "good and marketable". B Legal was not under a duty to ascertain that Mr Howard had only a 50% interest. It was under a duty (when the time for completion came and the Certificate of Title was called for) to explain what the position was: in summary, that it was necessary to see the lease in order to investigate title and express an opinion upon it, that a complete executed lease had not been seen, that what had been seen was part of an unexecuted draft which indicated that this was a shared ownership lease, but no opinion could be given upon the restrictions on disposal. It was under a duty to set out the difficulties standing in the way of giving a Certificate of Title. It was not under a particular duty to explain that a shared ownership lease fell outside Beacon's internal underwriting criteria: it is not the task of the conveyancing solicitor to know the detailed lending policy of a client lender. It is the task of the conveyancing solicitor to certify title if that can properly be done, and if not either to state the qualifications on the certificate or to seek instructions having reported accurately the position. It was not under a duty to explain that the assumptions in the valuation were wrong: B Legal's only duty was to report that as matters stood they could not be confirmed. But I consider that B Legal failed in its duty to report ( though not in the exact manner pleaded) and its provision of an unqualified Certificate of Title.
- I answer question 2(a) of the Preliminary Issue in the sense that B Legal did not discharge its contractual duties to Beacon (or its common law duty to Redstone) in the case of Howard.
- On 5 November 2008 Beacon offered Mr McOwen and Ms Parsons a loan of £75,000 to be secured by a charge on 33 Trevarner Way, Wadebridge. The application had been considered by one of the Roving Underwriters who, according to the Underwriting Checklist, had authorised an offer of "Product NP65" (that is, a Near Prime Product having a maximum LTV of 65%). The Underwriting Checklist was available to the Beacon underwriting team, but not to B Legal.
- B Legal was instructed. The valuation report it received proceeded on the footing that the tenure of the property was Freehold and on that basis it was valued in the sum of £150,000. The Office Copy Entries received by B Legal showed that the property was leasehold for the term of 99 years from 1 April 1999, and that the lessor was Devon and Cornwall Housing Association Ltd. The Property Register noted that the lessee was under an obligation to surrender the lease in certain circumstances. B Legal obtained a copy of the lease. It showed that Mr McOwen and Ms Parsons had purchased a 50% share in the property (then valued at £44,500) for £22,250 and were due to pay a Specified Rent in respect of the remaining 50%, with the right to acquire further percentage shares, and an obligation to offer to surrender the lease and otherwise only to dispose of it for a percentage of the market value of the premises equal to that which they owned.
- The conveyancer at B Legal who was handling the transaction was Karen Shelton. Although she had no formal legal qualifications she had been working as a legal secretary in a solicitor's conveyancing department ever since she had left college, and had in fact followed her last principal to B Legal. She was experienced and competent, and in the witness box gave a good account of the nature of a "shared ownership" lease.
- On 18 November 2008 she e-mailed Hayley Seymour at the completions department at Beacon (in accordance with the standard practice of dealing with the assigned completions specialist in relation to all questions). Karen Shelton informed Hayley Seymour that the tenure of the proposed security was leasehold, and added
- She received no response; and was obliged to send a chasing e-mail on the 26 November 2008 at 12:14. This produced an enquiry from Hayley Seymour at 16:29 asking
- On the printout of that e-mail is endorsed the following note:-
- Redstone challenged the authenticity of this e-mail traffic and the note endorsed upon it. This challenge was rightly not pressed in cross-examination. The evidence of Mr Ireson (the current Head of Information Technology at B Legal) proved beyond argument from the retrieved metadata that the e-mails were genuine. As to the note endorsed upon them, Karen Shelton was a very good witness, who frankly admitted that she had no recollection of this particular transaction, but gave entirely frank, honest and reliable evidence as to her practice (and that of B Legal) over the two years she worked there. I have no doubt that the e-mail traffic and notes accurately record what occurred.
- On 27 November 2008 Karen Shelton signed the Certificate of Title certifying that the tenure of the property was leasehold with an unexpired term of 90 years: and the transaction completed that day with Beacon advancing £74,960.
- In July 2010 Redstone took possession of 33 Trevarner Way and, upon contacting The Devon and Cornwall Housing Association, discovered that the borrowers owned only 50% of the property so that the loan of £75,000 represented 100% of the value of their interest (not 65% or less).
- I have dealt above with general obligations relating to the giving of a Certificate of Title. In this case (i) paragraph 15.5 of CML Part 1 required Karen Shelton to check with Beacon to see if Beacon would lend on a "shared ownership" lease and (ii) paragraph 5.4 of CML Part 1 and clause 6.1(b) of the Retainer required Karen Shelton to draw to the attention of Beacon the impact of the shared ownership lease on B Legal's ability to certify that the title was free of any restrictions or incumbrances that might be reasonably expected to materially adversely affect the value of the property or its future marketability. (Mr Chaisty QC submitted that Karen Shelton should have warned Beacon that the borrowers had a beneficial interest in the property of less than 100%. But to speak of "beneficial ownership" is not strictly accurate, though it is a convenient colloquialism. The borrowers were the registered proprietors of the entire leasehold interest and did not hold it on trust. But the nature of the leasehold interest was such that by covenant they could reduce their liability to pay rent by paying additional premiums, and until they had paid the whole market value of the property they had to offer to surrender the lease. These (and some mortgagee protection provisions) were what affected the ability to give an unqualified Certificate of Title).
- In my judgment simply to report that "this is a shared ownership lease with the Council" was not adequate. It did not enable Beacon to do anything. B Legal had a copy of the lease. A consideration of its terms would have made clear that an unqualified Certificate of Title could not be given because the property could not be disposed of for full market value and was in any event subject to a restriction on disposal of the very type referred to in the Title Verification Standards referred to in CML Part 2. Beacon was entitled to be told this and would have been so told by a reasonably competent conveyancer. The fault lies not with Karen Shelton but with those who trained and supervised her.
- Redstone complains that B Legal did not obtain the first legal charge over the property, that it failed to appreciate that the borrowers held only a 50% share in the property, that it failed to advise Beacon as to the terms of the lease (and that it fell outside the criteria in Beacon's Underwriting Loans Manual), that it failed to advise Beacon that the loan would be outside the relevant "loan to value" ratio, and that it certified title. I have dealt with many of these allegations in the context of the Howard case. In the present case only the complaint that B Legal failed to advise Beacon as to the terms of the lease (in the limited way I have indicated) and the complaint that it provided an unqualified Certificate of Title are sound.
- I would specifically dismiss the complaint that B Legal failed to advise Beacon that the loan would be outside the relevant LTV. This is yet another attempt by a sub-prime lender to involve the conveyancing solicitor in the underwriting decision. It depends upon the assertion that it is the duty of a conveyancing solicitor (i) to understand the individual lender's LTV criteria for a particular mortgage product and (ii) to reassess the value of the property in the light of the title disclosed. It is not maintainable.
- I answer question 2(a) of the Preliminary Issue in the sense that B Legal did not discharge its contractual duties to Beacon (or its common law duty to Redstone) in the case of McOwen and Parsons.
- I will hand down this judgment in Leeds and do not expect the attendance of the parties or their legal representatives. There will be a further short hearing to address the terms of the order and consequential issues arising out of this judgment (the arrangements for that hearing to be made through the usual channels within the next 14 days). I will extend the time for appealing until 21 days after the date of that further hearing.
Mr Justice Norris :
a) By clause 2.1 Beacon appointed B Legal to provide "the Legal Services in accordance with the provisions of the Legal Services Documents".
b) The "Legal Services Documents" which set out the services to be provided were the Retainer itself and each document provided by B Legal in relation to the provision of Legal Services including (without limitation) the "Solicitor's Instruction Letter" and each "Certificate of Title".
c) The reference to a "Solicitor's Instruction Letter" was to a document the form of which was set out in clause 28 of the Retainer. This gave B Legal authority and instructions to act on behalf of Beacon in:-
"The completion of its mortgage over the property in accordance with the CML Handbook for Solicitors and Licensed Conveyancers 6th May 2005 edition ("the Handbook") and with the Supplemental Instructions. For the purposes of the Handbook you have our own Part 2".
It also gave authority and instructions to transfer the mortgage to Redstone.
d) The Council of Mortgage Lenders "Lenders' Handbook for England and Wales" ("CML Part 1") contained the standard instructions from a lender to a solicitor. These instructions could be modified by CML Part 2.
e) Paragraph 2 of CML Part 1 specified that all communication between lender and solicitor should be in writing, with copies to be kept on the solicitor's file as evidence of notification and authorisation (or an electronic copy retained in readable form). Paragraph 2.3 stated:-
"If you need to report a matter to us, you must do so as soon as you become aware of it so as to avoid any delay. If you do not believe that a matter is adequately provided for in the Handbook you should identify the relevant Handbook provision and the extent to which the issue is not covered by it. You should provide a concise summary of the legal risks and your recommendation on how we should protect our …interests. After reporting a matter you should not complete the mortgage until you have received our further instructions".
f) Paragraph 4.1.1.1 of CML Part 1 required the solicitor to take reasonable steps to verify that there were no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain: any such discrepancy had to be reported to the lender immediately.
g) Paragraph 5.4.1 of CML Part 1 said that the title to the property must be
" good and marketable free of any restrictions … or encumbrances which at the time of completion might reasonably be expected to materially adversely affect the value of the property or its future marketability".
h) Paragraph 5.10.3 said that the lender would not accept any restriction upon the mortgage or assignment of the lease unless consent to the transaction could not be unreasonably withheld, and that, if consent to the mortgage was required, then this had to be obtained before completion: this was stated to be "particularly important if the lease [was] a shared ownership lease".
i) From June 2007 an additional obligation was inserted by paragraph 5.15 of the revised CML Part 1 which noted the existence of arrangements with social landlords under which a borrower might not have 100% ownership of the property, saying:-
"In these cases you must check with us to see if we will lend and what our requirements are unless we have already provided these".
j) Paragraph 6.2 of CML Part 1 said that the boundaries must be clearly defined by reference to a suitable plan or description, and that they must accord with the information given in the valuation report, and be confirmed by the borrower, with any discrepancies to be reported.
k) Paragraph 6.11 said that there must be no right of pre-emption, restrictions on resale, options or similar arrangements in existence at completion which would affect the security.
l) Paragraph 7.4 of CML Part 1 dealt with occupiers and said:-
"We recognise that in some cases the information given to us or you by a borrower may be incorrect or misleading. If you have any reason to doubt the accuracy of any information disclosed, you should report it to us provided the borrower agrees"
m) Paragraph 10.1 of CML Part 1 said that a Certificate of Title should not be submitted unless it was unqualified or the lender had authorised the solicitor in writing to proceed notwithstanding any issues that had been raised with the lender.
n) As well as giving instructions to act on behalf of Beacon in completion of the mortgage, the Solicitor's Instruction Letter listed the documents that would be provided (including the mortgage offer, the valuation, a transfer, a draft Certificate of Title and some Supplemental Instructions), and confirmed that "your duties to us are limited to the matters contained in the approved certificate".
o) The Solicitor's Instruction Letter gave authority to complete the transaction in these terms :
"If the title is satisfactory and the terms of these instructions, the Mortgage Offer and the Mortgage Conditions have been, or will, on or before completion be complied with and only if the matters referred to in the Certificate of Title are and at completion, remain true, and subject to written confirmation from us that we are satisfied that our underwriting requirements have been met you are instructed to arrange for the execution of the mortgage and for the transaction to be completed".
p) The reference to Supplemental Instructions was a reference to further instructions attached to the Solicitor's Instruction Letter. These notified B Legal of the intention to transfer the Mortgage to Redstone and required B Legal to acknowledge a duty of care to Beacon and its successors and assigns in relation to compliance with the instructions and completion of the Certificate of Title. They also referred to Title Insurance in these terms:-
"Although we accept title insurance… this does not absolve you from your responsibility to undertake a local search where there is anything to alert you to a real possibility that there might be unacceptable restrictions affecting the Property or its use"
q) The Solicitor's Instruction Letter also referred to the "CML Handbook Part 2" (" CML Part 2") which, in the Retainer itself, was said to be a matter to be agreed between B Legal and Beacon.
r) The reference to the "Certificate of Title" was a reference to Beacon's standard form Certificate of Title.
s) This standard form Certificate of Title required B Legal to give "the Certificate of Title set out in the appendix to rule 6(3) of the Legal Servicer Practice Rules 1990" (sic) in respect of the property to be charged and was addressed to both Beacon and Redstone. Amongst the matters certified by the conveyancer in such a certificate were the following:-
" Except as otherwise disclosed to you in writing (i) we have investigated the title to the Property…and, upon completion of the mortgage, you … will have a good and marketable title to the Property … free from prior mortgages or charges and from onerous encumbrances …(ii) we have compared the extent of the Property shown on any plan provided by you against relevant plans in the title deeds and/or the description of the Property in any valuation which you have supplied to us, and in our opinion there are no material discrepancies…(iii) the assumption stated by the valuer about the title … in any valuation which you have supplied to us are correct…(iv) if the Property is leasehold the terms of the lease accord with your instructions".
(I was provided with a 2007 version of these provisions: nobody suggested that the version current at the date of the Retainer was materially different).
t) Clause 5.2 of the Retainer provided that B Legal would exercise due skill care and diligence when performing its obligations.
u) Clause 6.1 of the Retainer contained the engagement by B Legal to act as solicitors to Beacon in relation to each matter referred to it by Beacon and said:-
"[Beacon] shall be deemed to have issued and [B Legal] shall be deemed to have accepted the Solicitors Instruction Letter (including the CML Handbook Part 2 Instructions) in relation to each such matter as if duly completed with the relevant information and details of such matter except to the extent that [B Legal] is given any express specific written or oral instructions or has agreed a specific process with [Beacon] or [the person from time to time nominated by Beacon as the manager responsible for monitoring and managing its relationship with B Legal and authorised by Beacon to provide instructions, requests for variations and approvals in accordance with the Retainer] in relation to a particular matter or matters which conflict with the terms of such Solicitors Instruction Letter or CML Handbook Part 2 instructions, in which case those express specific instructions shall prevail".
v) Clause 6.1(b) of the Retainer required B Legal to execute and issue a duly completed Certificate of Title in respect of each mortgage (except to the extent that it advised Beacon in writing that such Certificate of Title could not properly be issued).
w) These core instructions were extended by Clause 6.3(b) of the Retainer in these terms:-
"If in the performance of the Legal Services in relation to a matter [B Legal] identifies an issue not covered by its instructions under clause 6.1 which a reasonable and prudent solicitor acting for a mortgagee would inform his client, [B Legal] shall promptly inform the relevant Underwriter in writing (on a case by case basis) or where applicable to more than one matter to the Head of Underwriting and Credit Risk".
x) A restriction was imposed upon what B Legal could do by clause 6.3(c) of the Retainer in these terms:-
"After reporting … any… matter to [Beacon] [B Legal] will not complete the relevant mortgage until they have received… further instructions (if required) in relation to those matters to as (sic) may have been advised to [Beacon] under clause 6.3(b) … or on receiving specific instructions from [Beacon] to do so".
y) Clause 23 of the Retainer was headed "Manner of Giving Notices" and was in these terms:-
"Except to the extent indicated otherwise in this Agreement each communication made, given or delivered pursuant to or in connection with this Agreement (a) shall be in writing…(b) shall be made given or delivered in one or more of the ways referred to in clause 23.2 using the applicable Contact Details of the recipient…and (c) where the recipient person's Contact Details include a designated recipient for the relevant type of communication shall be marked for the attention of that designated recipient… "
z) Clause 23.2 of the Retainer in fact dealt with the time at which notice was given, but it referred to means of communication by delivery in person, by courier, by post, by fax, by telex and by electronic messaging systems.
aa) Clause 24.1 of the Retainer said that no variation or waiver in respect of any provision of the Retainer should be effective unless and until it was agreed in writing duly executed " by or on behalf of each party": but clause 24 was not one of the clauses named in the third recital as being one for the purposes of which Redstone was a party to the Retainer.
a) Paragraph 5.3.1 of CML Part 1 which was headed "Planning and Building Regulations" required the solicitor to make appropriate searches and enquires and to take all reasonable steps to ensure that the property had the benefit of any necessary planning consents and building regulation approval: but CML Part 2 modified B Legal's obligation in this regard by stating:-
"You do not have to make the appropriate searches yourself as Beacon provides title insurance for each…loan".
b) Paragraph 5.10 of CML Part 1 dealt with leases. CML Part 2 provided that the minimum unexpired lease term that was acceptable to Beacon was 35 years (though in fact this was later increased pursuant to a written or oral instruction to 50 years).
c) In the CML Part 2 B Legal enquired as to the contact point for matters connected with the lease and Beacon responded:-
"Beacon if lease is produced. No lease is required to be obtained where title insurance is available. See Title Verification Standards".
d) The "Title Verification Standards" was a reference to Appendix 3 to a policy of title insurance which Beacon had taken out with First Title Insurance plc in August 2005. The title insurance policy afforded specified cover in relation to each "Insured Mortgage" entered on the policy register. The agreement made on the 8 August 2005 between First Insurance plc and Beacon contained its own definitions of the terms "Loan" and "Mortgage" and excluded from the definition of "Mortgage":-
"… any Loan made in any instance… to finance Property which is the subject of any form of Shared Ownership or… to finance any Property either subject to an existing tenancy or a future tenancy created on or after the date of the Loan which is not an assured shorthold tenancy".
So loans secured on shared ownership leases were not "Mortgages" and fell outside the scope of cover: a matter known to Beacon (and which should have been known to its underwriters) but which did not form part of the formal instructions to B Legal, which was simply referred to the Title Verification Standards.
e) The Title Verification Standards were the requirements imposed by the insurer before it would issue insurance in respect of a "Mortgage". So they did not apply to shared ownership leases. These required Beacon:-
i) To check the description of the property against the mortgage application and to clarify any discrepancy (where necessary obtaining evidence to show that the title relates to the full extent of the property to be mortgaged): and
ii) To look for entries that either contained the phrase "the lessee is under an obligation to offer a surrender as mentioned in the lease" or words of similar effect, because such words indicated that the title was or still is subject to shared ownership.
Two points are to be noted. First, B Legal could not be expected to comply with the first requirement because in the structure set up by the Solicitor's Instruction Letter it would not be sent the mortgage application: so that part rested with Beacon. Second, Beacon (and B Legal whom it instructed to certify title) had to look for "entries" i.e. matters recorded on the registered title. The Title Verification Standards explicitly stated in relation to insured mortgages:-
"Beacon shall not be required to make any examination of any documents filed in the Land Registry or the Registered Lease".
But this does not mean that Beacon (or B Legal) could ignore any documents said to be filed at the Land Registry which in fact did come into their possession.
f) Subject to one qualification, B Legal was not required to obtain clear ground rent/service charge receipts.
g) The mechanics for payment of the completion monies (which as operated differed from that contemplated by the Retainer) was recognised.
h) The minimum notice of drawdown was (under paragraph 10.2 of CML Part 2) only 5 working days instead of the 8 days specified in the Supplemental Instructions to the Solicitor's Instruction Letter.
a) The Retainer recited that the mortgages transferred to Redstone would be the subject of further asset financing of residential mortgages "in connection with a Further Asset Financing Transaction", which, according to the provisions of clause 17.10 of the Retainer might involve the preparation of listing particulars or an information memorandum in support of a private placement:
b) The Certificate of Title was specifically addressed to Redstone:
c) Clause 40 of the MPFA provided that the transfer of a mortgage from Beacon to Redstone would include:-
"All causes of action of the chargee against any person in connection with any report, valuation, opinion, certificate, consent or mortgage or other statement of fact or opinion given in connection with the Charge or affecting the decision to make the relevant advance":
It is therefore common ground (i) that the duties which B Legal owed to Beacon under the Retainer as regards title and in relation to the Certificate of Title were also owed in tort to Redstone (Mr Chaisty QC acknowledging that the relevant principle was that derived from White v Jones [1995] 2AC 207); and (ii) that the rights which Beacon had against B Legal under the Retainer in relation to each mortgage were (by virtue of the terms of the MPFA) enforceable by Redstone against B Legal. But in both these cases the rights which Redstone is enforcing as against B Legal are the rights which Beacon could have enforced against B Legal. If in relation to a particular matter or matters Beacon had given express specific written or oral instructions or had agreed a specific process and B Legal had acted in accordance with those instructions and in the light of them could still properly issue a Certificate of Title, then Beacon would have had no complaint: and so Redstone could have no complaint. That, indeed, was one feature of the action to which Mr McPherson QC drew attention: at trial all the Beacon witnesses agreed that B Legal had done what they expected of it.
a) the mortgage intermediaries (or "packagers") (who were responsible for assembling all the necessary documentation to enable Beacon to process an application by a borrower whom they had introduced);
b) the completion specialists (who were unqualified but generally experienced administrative assistants whose job it was to monitor the progress of an application by reference to a Completions Checklist, checking compliance with each requirement and signing it off, and performing an information liaison role between packager, underwriter and B Legal); and
c) the underwriters (who were persons with previous mortgage underwriting experience and were trained by Beacon and whose role was to appraise the loan applications and decide by reference to the Underwriting Manual whether to make a mortgage offer or not).
"We can from time to time vary the amount of notice required to be given to us for draw down of the loan monies. This will be advised to you orally or in writing as the situation dictates".
The Retainer required 8 days' notice of draw down to be given: but so far as the evidence discloses the procedure actually implemented was much faster. It was also more streamlined. The Retainer contemplated that B Legal would maintain a client account into which Beacon would pay the mortgage advance for onward transmission to the borrower's solicitors. In fact the procedure actually implemented from the outset involved Beacon transferring funds directly to the borrower's solicitors.
1. What were the terms and scope of
(a) the contractual duties; and
(b) common law duties of care (if any)
that were owed by the Defendant to the Claimant on each of the 4 transactions that form the subject matter of these proceedings?
2. By reporting to Beacon as it did on each of the 4 transactions
(a) Did the Defendant discharge such contractual and common law duties as it owed to the Claimant?
(b) If not, what further steps should the Defendant have taken and/or what facts or matters ought the Defendant to have reported to Beacon on each transaction?
Welch
a) Requisition 3.1 required the solicitors to "confirm that the borrower(s) are or will on completion be the only persons aged 17 or over in occupation of the property", which confirmation was given:
b) Having answered Requisition 3.1 in that sense the borrower's solicitors left blank the requisitions relating to occupiers named in the Special Conditions in the Mortgage Offer (of which there were none) and did not give any details of "additional occupants":
c) Requisition 3.4 addressed the position where a Special Condition permitted letting the property, and asked the borrower to supply a copy of any Assured Shorthold Tenancy which would be in place before completion and to confirm that the only persons aged 17 or over who would on completion be in occupation were the persons to whom the property was let under the agreement supplied, to which the borrower's solicitor gave no answer:
d) Having answered the requisitions in that sense the borrower's solicitors did not provide any forms of Consent to Mortgage:
e) They enclosed a draft contract under which the Jacksons contracted to sell 23 Ferndale Road with vacant possession on completion (Mr Jackson signing as vendor and Mrs Jackson signing as occupier):
f) They provided a copy of a Property Information Form in which the Jacksons indicated that they did not have any special requirements as to a moving date.
g) B Legal required (and on 24 October 2005 received) a written undertaking from Ms Welch to carry out the works referred to in the Special Conditions of the mortgage offer (including re-lining and general refurbishment).
a) Ought to have drawn "the discrepancy" between the description of the transaction and the reply to Requisition 3.1 to Beacon's attention;
b) Ought to have investigated "the discrepancy" to ascertain who would be in actual occupation at completion;
c) Ought to have appreciated that this might be a "sale-and-lease back" transaction and drawn that possibility to the attention of Beacon.
Sher
"Has the plan or description of the property in the valuation report been confirmed by the borrower as being the extent of the property to be mortgaged to us?"
The borrower's solicitors answered "Yes" to this. Paragraph 6.2 of the CML Part 2 as agreed between Beacon and B Legal on 3 August 2005 had provided:-
"Instead of checking with the borrower that the plan or description accords with the borrower's description of the property to be mortgaged to us you may rely upon the reply to an appropriate requisition".
If there were any discrepancies then Beacon had to be contacted.
"The title WYK84101 relates to both 36 and 38 North Road. Are BOTH properties being transferred or is this a sale of part? If a sale of Part please can you provide a copy of the TP1?"
In their response the borrower's solicitors did not give a direct answer to the question posed, but did enclose a TP1 (a form appropriate only to a transfer of part). This referred to the property to be transferred as "38 North Road", but the borrower's solicitors did not complete that part of the Transfer which defined what was being transferred by reference either to a signed attached plan or to the title plan for Title No. WYK84101("101"). The TP1 did not deal with any ancillary rights such as might arise when properties in common ownership are separated.
"Attached are the OCE's and filed (sic) for the property which shows the title to this property is combined with the title of number 36 North Road.
I have made enquiries of the Seller's (sic) solicitors who have said that the transaction is for number 38 only i.e. this is a sale of part of title number WYK84101. I also cannot in any way comment on whether this accords with valuation (sic) you have and you may need to refer this to the valuer for the comment. The filed plan may be useful for this! Can you confirm that the security property is 38 North Road only?"
To this is affixed a Post-it tab which reads "Ready to Rock and Roll". There is a second copy of the Sher Memorandum on which is endorsed
" PB – comps
U/W confirmed OK –
COT for completion?"
"a claim for rectification of the Land Register relating to 36 North Road … arising from a legal charge granted … over 38 North Road … which is only half the physical extent of the Property over which [Redstone] had sought security for its advance".
The difficulty posed by B Legal's enquiry of 22 February 2006 and the TP1 sent in response is addressed in the Particulars of Claim in this way:-
"The TP1 Form merely described the property transferred as "38 North Road" but did not attach any plan indicating the extent of the part to be transferred. The adoption in the TP1 form of the description "38 North Road" was ambiguous in that this was capable of referring either to the Front Property or to the Front Property and the Back Property. For the avoidance of doubt, the Claimant avers that the Defendants intended the latter in signing the TP1 Form".
The use of form TP1 itself was not addressed. The position adopted was thus that a mistake had been made in the conveyancing documents embodying an intended charge of both 38 and 36 North Road, and that Beacon had always intended to take a charge over both.
"now clear that none of these documents including the original valuation revealed or represented with any clarity the true physical state of the property."
a) The rectification proceedings were wholly inconsistent with it having been explained to Beacon that it was only getting a charge over No.38. I agree. The rectification proceedings do not reflect well on Beacon or upon B Legal. But they throw no light upon the contemporaneous existence or otherwise of the Sher Memorandum, for they were conducted in any event in the face of the existence of the TP1 and its covering explanatory fax.
b) There was no reference to the existence of the Sher Memorandum in any correspondence with the title insurers when the problem arose in 2008. This is true: but it is difficult to see how the Sher Memorandum could have been relevant to mounting a claim under the policy, given that the claim appears to have proceeded on the footing that a subdivision of the property had happened after the Beacon charge had been granted.
c) There was no reference to the existence of the Sher Memorandum in the initial response to the informal claim by HvB. It is important to note (i) that the complaint of HvB at that stage was that B Legal had failed to a perfect the charge over the security property as represented in the offer of advance, not that it had failed to inform Beacon that there were issues about the identity of the security and (ii) that by that point the title had been rectified to overcome the difficulty. Nonetheless, it is a fair point to say that if the Sher Memorandum had been recollected only four years after the events in question then one might have expected it to be mentioned.
d) There was no reference to the existence of the Sher Memorandum in the initial response to the formal claim so that the only inference to draw is that the insurers did not find it in the copy file with which they were provided. This is a weighty point. Nicola Chard accepted that the Sher Memorandum could not have been copied to the insurers, but said that the copies were found, not in the running file, but amongst the title documents in a wallet annexed to the back of the file, and were considered by her when assisting in the preparation of the formal Defence in this claim.
e) No copy of the Sher Memorandum could be found on the computer system of B Legal. The evidence here was that the conveyancer would have to make a conscious decision to "save" a document that was already being printed out and being put in hard copy form on the file, and the practice in this regard varied. So it does not assist in assessing the truth of Nicola Chard's evidence.
f) No copy of the Sher Memorandum could be found in the underwriting files of Beacon. This shows only that underwriters did not file everything: and it may be explained by the fact that a Beacon copy with "Post-it" note attached was returned to Sarah Lloyd, Beacon itself relying on the notes entered upon Blue.
g) Blue no longer existed. Andrew Townsend was a director of Beacon and the husband of Nicola Chard. At some point following the demise of Beacon's business it was decided to delete all of the material on Blue. The suggestion was made that this was a sinister attempt (influenced by Mr Townsend and implicitly by Nicola Chard) to deprive Redstone of the benefit of the underwriters' notes and of discovering how it was that decisions were taken to release funds in the case of Sher (and other cases). Mr James Ireson had from June 2003 until December 2010 been the IT Manager for Beacon (and had thereafter been a consultant with a company providing services to Beacon). He explained (and I accept) that when it ceased funding Beacon's business in February 2010, Redstone (which had been fined for data protection breaches) became anxious to secure compliance by Beacon with ISO 27001 in relation to mortgages purchased by Redstone: and that in response to that concern (and because Beacon itself could not afford the software licences for the upkeep of the data) all data was destroyed. Contemporaneous e-mails supported his recollection of Redstone's concern. The absence of the Blue data throws no light on the authenticity of the Sher Memorandum.
h) There was no reason why an underwriter who had been alerted to the issue over the identity of the security should have decided to "rock and roll". Mr McPherson QC parodied this argument in this way :-
"There is no sensible reason for making the loan. From that it must follow that the underwriter was ignorant. From that it must follow that B Legal failed to inform the underwriter. From that it must follow that the Sher Memorandum is not genuine".
This of course excludes the possibility that the underwriter did not get the full picture from the completion specialist or made a mistake or knew exactly what she was doing but decided to run the risk (because overall the complexion of the portfolio was good) or decided to treat the case on some other basis as an exception. (Redstone did not disclose what were called "Exception Reports" which were records made of all such decisions: so it cannot be known whether any such decisions were or were not made). In November 2006 HvB commissioned an external audit of underwriting and due diligence performance at Beacon by reviewing the August 2006 completions to ascertain whether underwriting criteria and procedures had been followed, to assess day-to-day practice and to confirm (or otherwise) that the resulting loans would normally be considered to be acceptable to prudent lenders in the same market. 282 files were examined. 41% complied with the lending guidelines in all material respects and passed the "prudent lender" test: the external auditor regarded this percentage as higher than was generally expected and an indication that underwriting was generally sound. A further 43% of cases contained departures that were not serious in nature so that the resulting mortgages would be considered acceptable by a potential buyer of the portfolio, confirming generally good underwriting. But there was a further 10% of cases that had significant and often multiple failures (although they would not automatically be considered an unacceptable risk by a potential buyer of the portfolio). In the remaining 6% of cases there were serious failures representing an unacceptable risk, though the auditor regarded this as an unusually low percentage, suggesting that these mortgages had slipped through the net through carelessness (rather than evidencing any systemic underwriting problems). So the weight of Mr Chaisty QC's argument has to be assessed with those findings about departures from "the straight and narrow" in mind. In a very significant number of cases the rulebook was not scrupulously followed because errors occurred, but it did not often result in disaster.
i) There is no good reason why a memorandum should have been written when an e-mail would have sufficed. That is answered by the fact that the Sher Memorandum attached a copy of the filed plan which had to reach the other side of the office (and a Memorandum annexing it would have been simpler than scanning the plan and attaching it to an e-mail).
j) The Sher Memorandum is dated 22 February 2006 whereas the information it contains was not faxed until 23 February 2006. Mr Chaisty QC submitted that the probability was that someone subsequently creating the Sher Memorandum would have noticed that the letter from the borrower's solicitors was dated 22 February 2006 but not noticed that it was faxed on 23 February 2006. At least an equal possibility is that the date was mistyped (as the security address was mistyped on the Completions Checklist): or that the memorandum was prepared and then revised (which is Nicola Chard's recollection).
k) The suggestion that the Sher Memorandum was found in a wallet at the back of the file and not in the general correspondence file is a most remarkable coincidence (given that this is also the explanation given for the emergence of the Howard Memorandum).
Howard
"This may affect the value of the property as assessed by the valuer i.e. Freehold/Leasehold position".
It then continues:-
"Also today I have had four pages of the (undated) lease under which the property is held Faxed to B Legal. This has raised the question as to "how much" of the property Mr Howard owns. The pages are attached which show a Housing Association/ Housing authority style lease. The Original Lease is not available and cannot be obtained from the LR in time before/for completion.
I need instructions from you as to whether this can proceed. I have not requested further documents at this stage.
I assume you will need to refer this to UW and/or the Valuer and a new offer may be issued."
"Tenure (if leasehold check lease details)"
Against this Mr Bertaut noted on 28 July 2006 that the property was leasehold with an expired term of 99 years from 1990.
"… the fact that the property was a leasehold property was correctly drawn to Beacon's attention and we would refer you to the Certificate of Title dated 28 July 2006 … Furthermore with respect to your allegation that the property was a shared ownership one we would draw to your attention the Official Copy Entry … there was nothing on the Register to indicate the 50% ownership belonging to the Weaver Vale Housing Trust … and as there was no restriction recorded in the proprietorship register in favour of the Trust, it would be reasonable to assume that the staircasing of the lease had now been completed … It would therefore appear that Beacon were fully informed of the nature of the property by the Insured who acted correctly."
There was no mention of the Howard Memorandum. The justification for the transaction proceeding was that the assumption that "staircasing" was complete was a reasonable one: not that specific instructions to proceed had been given.
"…legal advice, like any other communication, should be in terms appropriate to the comprehension and experience of the particular recipient. It is also, I think, clear that in a situation such as this is the professional man does not necessarily discharge his duty by spelling out what is obvious…. If in the exercise of a reasonable professional judgement a solicitor is or should be alerted to risks which might include even an intelligent layman, then plainly it is his duty to advise the client of these risks or explore the matter further ".
Here the client was not Mr Bertaut, but Beacon - a specialist lender operating streamlined business processes with policies and procedures designed to secure that all the issues were dealt with by those with the appropriate mandate. If within Beacon there were procedures as to what should happen it was not up to B Legal to ensure that it did happen. That was a job for the management of Beacon. As Ms Lynne Ward said in evidence, the knowledge and experience of individual employees might vary "but the process was what the process was, and they were supposed to refer to it". The obligation of a solicitor does not fluctuate with the client's recruitment policy, the clarity of its protocols or the performance of its management. B Legal knew its client (Beacon): it did not have to know the abilities and aptitudes of each of Beacon's employees.
McOwen and Parsons
"This is also a shared ownership Lease with the Council which has 60 years remaining after the term of the mortgage."
She enquired whether Beacon was willing to proceed. This enquiry was raised simply because of the nature of the title offered. Karen Shelton had no knowledge of Beacon's underwriting criteria and did not know of its policy in relation to "shared ownership" leases: nor did she know of the terms of Beacon's title insurance policy. But she knew from experience (though not as she recalls from any instruction from Nicola Chard) that "shared ownership" leases were problematic for lenders. But she gave no more thought to the fact that the lease was "shared ownership" than to the fact that it was a lease with 90 years left to run. She simply reported both facts.
"has the normal lease got 60 years remaining".
Karen Shelton replied within minutes confirming that
"..the Lease between the Housing Association and the borrowers have 60 years remaining dated 23 April 1999."
"Spoke with Haley. I asked whether because its shared ownership would Beacon be happy to proceed. She confirmed as long as the term is 60 years after the mortgage term then it will be fine."
This note is initialled by Karen Shelton and timed at 10am on 27 November 2008.