Mortgage fraud: debate over undertakings
A Birmingham law firm is considering action against the Solicitors Regulation Authority (SRA) for failures which it claims led to it being tricked by a bogus practice as part of a mortgage fraud and now facing a court order to repay £184,500 to the lender.
The bogus office was registered with the SRA and Davisons argues that had the authority acted promptly in reacting to a warning that this was not a legitimate practice, the fraud would not have happened.
The timing is embarrassing for the SRA as it has just issued guidance to solicitors to be vigilant about identity theft and bogus law firms.
Davisons acted for the buyer and Nationwide Building Society in the purchase of a £250,000 property in Sutton Coldfield, backed by a £184,500 mortgage, but the money was lost once it was released and it emerged that the ‘solicitors’ purporting to act for the owner had in fact been operating the bogus office of a legitimate law firm.
Catherine Newman QC, sitting as a deputy High Court judge, found that in October 2008, someone pretending to be the owner of legitimate Birmingham firm Rothschild notified the SRA of an intention to open a branch in Small Heath. She said the SRA did not notice that the source e-mail address was not the same as that previously used by the practice and so included the supposed new office of Rothschild Small Heath (RSH) on the SRA records and Law Society’s Find a Solicitor website from the end of October 2008.
The real solicitor became aware of this around December 2008 and promptly notified the SRA. “I was told that, regrettably, the SRA failed to do anything about removing the fake branch office from the records and website until April 2009,” said the judge. She emphasised that this solicitor had nothing to do with the fraud.
The fraud took place in the intervening period, during which Davisons checked Find a Solicitor for the names of both RSH and the solicitor in accordance with the Law Society mortgage fraud green card and the Lenders Handbook.
The court found that Davisons had acted honestly throughout – and had even reported the transaction to and received the go-ahead from the Serious Organised Crime Agency – and had not acted unreasonably in failing to notice what were alleged to be various suspicious features of the correspondence with RSH.
Nonetheless, the court found Davisons in breach of its contract of retainer with Nationwide and that it had acted in breach of trust by failing obtain a fully enforceable legal charge and parting with the advance without an express undertaking from RSH to discharge the existing mortgage on completion. As a result, it was not entitled to relief under section 61 of the Trustee Act 1925.
Davisons had argued that the fact the RSH said in replies to requisitions that the mortgage would be redeemed, and also confirmed it would follow the Law Society’s code for completion by post, left them in no doubt that RSH was giving an undertaking.
Gary Davison, managing director of Davisons, which has four offices across Birmingham, said the firm was preparing to apply for leave to appeal, focusing particularly on the judge’s interpretation of the Law Society code, which he said implies an undertaking that the vendor’s solicitors will discharge the mortgage. “If we’d been dealing with a legitimate firm, did we have enough to enforce [an undertaking] to pay off the mortgage? Yes, we did.”
Mr Davison said he was “astounded and appalled” by the failure of the SRA to respond quickly to the report that RSH was bogus; had it done so, Davisons’ checks would have stopped the transaction in its tracks. Not only had this resulted in a claim against the firm, he said, but it hit its indemnity insurance too.
Davisons had to disclose the pending action when it applied to renew its insurance last year, and as a result its premium more than doubled. Mr Davison said he was seeking advice on whether he could take action to recoup his losses from the SRA.
The SRA’s new guidance states that “the nature of identity theft is that fraudsters may have obtained some form of registration by fraudulent misstatement to the SRA and therefore an entry on Find a Solicitor should not be taken as verification that the firm is genuine”.
An SRA spokesman said: “It is cases such as this, and persistent further frauds or attempted frauds, which prompted the SRA to issue its warning to help the profession reduce its vulnerability to such behaviour. This case occurred in 2008-9, since when the SRA has carried out a substantial tightening of authorisation processes and trained staff in the risks arising from bogus firms or branch offices.
“The case also confirms the risk of firms being held liable by the courts even though they may be characterised as victims of the fraud, as the SRA has warned. In terms of the judgment, the SRA was not a party to the proceedings and it would be inappropriate to comment on the facts.”
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