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September 2018

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Contents
Stoffel & Co v Grondona [2018] EWCA Civ 2031 Mortgage fraud – illegality – sham transaction - professional negligence - quantum Chickombe v Financial Conduct Authority [2018] UKUT 258 (TCC) Regulated agreements – unauthorised broker – validation order – requirement to consider consume detriment
Case name Neutral citation Legal points Case summary Facts Held Comment Stoffel & Co v Grondona [2018] EWCA Civ 2031 Mortgage fraud – illegality – sham transaction - professional negligence - quantum The Court of Appeal reviewed the principles to be applied when considering whether a mortgage fraud was a sham transaction and whether it was tainted by illegality so as to prevent the claimant from suing for damages for professional negligence. Quantum was limited to the value of the property, not the borrower’s ongoing mortgage liabilities. G entered into a mortgage fraud with M to acquire properties and mortgage finance on behalf of M. In respect of one particular property, G retained S & Co solicitors to complete a purchase for £90,000 and register a TR1, DS1 in respect of an existing mortgage, and a new mortgage for £76,500 in favour of Birmingham Midshires. In breach of retainer, S & Co failed to register the same, with the result that title to the Birmingham Midshires security remained outstanding. G defaulted in repayment of the Birmingham Midshires mortgage, and they sued her for a money judgment. G defended the claim by bringing a CPR Part 20 Claim against S & Co. Birmingham Midshires obtained summary judgment for £70,000 (with the balance subject to an account). At the trial of the Part 20 Claim, the judge found in favour of G and awarded damages of £78,000 (based on the value of the property at the time of the transaction) plus interest at 3% over the Bank of England Base Rate. S & Co appealed on the basis that G should be precluded from recovering damages by reason of the illegality principle. G cross-appealed on the basis that damages should be calculated by reference to her contractual indebtedness to Birmingham Midshires. Illegality The judge had been wrong to address illegality in accordance with the reliance test in Tinsley v Milligan [1994] AC 240, since this had been overruled by the Supreme Court in Patel v Mirza [2016] UKSC 42. Applying Lord Toulson’s criteria at para [101]. The judge had made a finding that the transaction was a sham, but the fact that the mortgage application was fraudulent in that it contained misrepresentations by G does not as a matter of law result in it being sham transaction as between G and Birmingham Midshires. G intended to borrow the money secured on a first legal charge on her registered title to property and Birmingham Midshires intended to lend the money secured in such a way. Moreover, Birmingham Midshires had no knowledge of the misrepresentations or intentions of G and M. Accordingly, the transaction was not a sham and was intended to take effect. Nor does the fact that the sale agreement between M and G was tainted with illegality, because it was entered into with the object of deceiving institutional High Street lenders result in the conclusion that M and G did not intend legal title to the property to pass to G. What is critical in determining whether such an agreement, even if tainted by illegality of purpose, is a sham is an analysis of the intentions of the parties. Applying Lord Toulson’s criteria, it then becomes necessary to consider whether there is any reason why G should not be entitled to recover damages in respect of S & Co’s admittedly negligent failure to register title at HM Land Registry by reason of the illegal purpose of the transaction. There is no public interest in allowing negligent conveyancing solicitors (or their insurers) who are not a party to, and know nothing about, the illegality, to avoid their professional negligence obligations simply because of the happenstance that two of the clients for whom they act are involved in making misrepresentations to the mortgage financier. Having regard also to proportionality, it wold be disproportionate to deny G ‘s claim taking into account the list of non-exhaustive relevant factors set out by Lord Toulson. Appeal dismissed Quantum The judge was correct to measure the quantum of G’s claim as the value of the property at the time of the transaction with interest to the date of payment rather than a sum calculated by reference to her ongoing mortgage liabilities to Birmingham Midshires. G was entitled to be put into the position she would have been in had there been no negligence – she would have had a property in her name, subject to a first legal charge to Birmingham Midshires. Cross-appeal dismissed. This is a helpful authority on the application of the principles of sham and illegality in the context of a mortgage fraud. It also confirms that a conveyancing solicitor, caught in the middle of a mortgage fraud, will not necessarily be relieved of liability on account of the illegality, since the purpose of the transaction is still to transfer and register good title [subject to mortgage], and the solicitor will be liable for the consequences of not achieving this.
Case name Neutral citation Legal points Case summary Facts Held Comment Chickombe v Financial Conduct Authority [2018] UKUT 258 (TCC) Regulated agreements – unauthorised broker – validation order – requirement to consider consume detriment The Upper Tribunal remitted to the FCA a validation order it had made under s 28A FSMA 2000 and directed it to consider the extent of consumer detriment BPF, a finance company, obtained from the FCA a validation order entitling it to enforce 1,444 regulated credit agreements under which it had advanced £47million on ‘borrower-lender-supplier’ agreements as defined in Art 60L of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to secure the acquisition of timeshare accommodation and which had been brokered by an unauthorised broker in breach of the general prohibition in s 19 FSMA 2000. The validation was applied for under s 28A(3) FSMA 2000 and was allowed on the basis that it was just and equitable for the regulated agreements to be enforced and for the money paid under them to be retained. A number of the borrowers referred the validation order to the Upper Tribunal pursuant to s 28B(3) FSMA 2000 alleging they had suffered detriment arising from the conduct of the broker in connection with their entry into the regulated agreements. The FCA had not been aware of these allegations when it made the validation order. It was common ground that the validation order should be remitted to the FCA for redetermination. The only issue was the extent to which the Upper Tribunal should direct that consumer detriment be taken into account. The Upper Tribunal made limited findings of fact but did not determine whether there had been mis-selling. It also reviewed the principles to be applied and reiterated that the FCA was required to consider all relevant factors and conduct a multifactorial assessment by reference to all the circumstances and balancing the various factors which it identifies as being relevant to the matter. S 28A does not limit the FCA’s enquiry. In considering the consumer detriment issue, the question as to what prejudice was caused as a result of the credit broker being unauthorised will have to be weighed in the balancing exercise alongside evidence of consumer detriment generally. Consequently, the FCA will be directed to take consumer detriment int account without placing any further limitation on the scope of what it should consider. The FCA has a general public law duty to act fairly. This is not a mortgage case, but it does involve a useful summary of some of the provisions of ss 19-30 FSMA 2000 concerning the effect of the general prohibition on carrying on regulated activities by unauthorised persons. This case involved regulated credit agreements made through an unauthorised person (broker) in breach of s 27 of the Act and which, being an agreement entered into in the course of carrying on a credit-related regulated activity was caught by the requirements of s 28A which entitled an applicant to apply to the FCA for a validation order to allow the agreement to be enforced, or money paid or property transferred to be retained, if it was just and equitable in the circumstances of the case. Insofar as a regulated mortgage contract is entered into by or through an unauthorised person in breach of the general prohibition, s 28 enables the court (as opposed to the FCA) to grant a validation order if it is satisfied that it is just and equitable to do so. This case contains a comparison of the two sets of provisions and refers to the case of Helden v Strathmore [2010] EWHC 2012 (Ch) (which involved a regulated mortgage contract) and the factors to be taken into account. Both s 28(4)-(6) and s 28A(4)-(6) specifically direct the court’s/FCA’s attention to the issue of whether the relevant firm reasonably believed that it was not contravening the general prohibition. Beyond this, the issue is whether it is just and equitable in all the circumstances to allow the agreement to be enforced etc. In this case, the Tribunal specifically drew attention to the requirement to consider consumer detriment, as a result of the unauthorised activities. Mortgage borrowers should bear in mind that under s 28(7) FSMA 2000, if the person against whom the agreement is unenforceable (the borrower) elects not to perform the agreement, or recovers money paid or property transferred by him under the agreement, he must repay the money and transfer any property received by him under the agreement. In Dickinson v UK Acorn Finance Ltd [2015] EWCA Civ 1194, the Court of Appeal said that unenforceability depends on the borrower’s election and is conditional on the return of the money lent (per Longmore LJ at [20]). This case contains a comparison of the two sets of provisions and refers to the case of Helden v Strathmore [2010] EWHC 2012 (Ch) (which involved a regulated mortgage contract) and the factors to be taken into account. Both s 28(4)-(6) and s 28A(4)-(6) specifically direct the court’s/FCA’s attention to the issue of whether the relevant firm reasonably believed that it was not contravening the general prohibition. Beyond this, the issue is whether it is just and equitable in all the circumstances to allow the agreement to be enforced etc. Mortgage borrowers should bear in mind that under s 28(7) FSMA 2000, if the person against whom the agreement is unenforceable (the borrower) elects not to perform the agreement, or recovers money paid or property transferred by him under the agreement, he must repay the money and transfer any property received by him under the agreement. In Dickinson v UK Acorn Finance Ltd [2015] EWCA Civ 1194, the Court of Appeal said that unenforceability depends on the borrower’s election and is conditional on the return of the money lent (per Longmore LJ at [20]).