Maria Grondona dishonestly obtained a mortgage advance so that Mr Mitchell could raise finance, and her solicitors then failed to register the transfer and the related charges. She claimed the loss caused by that failure. The Supreme Court held that her mortgage fraud did not bar the claim.
Ms Grondona agreed to obtain mortgage finance in her own name as part of an arrangement with Mr Mitchell.
The property and the dishonest application
The transaction involved a leasehold flat and an existing mortgage. The solicitors were to register the transfer, discharge the earlier charge and register the new lender’s charge.
The trial judge found that the advance was obtained by fraud. Grondona dishonestly stated that the sale was not a private sale, that the deposit came from her own resources, and that she managed the property. The purpose was to raise finance for Mitchell from a high-street lender which he could not otherwise obtain. The judge also found that Mitchell retained practical control, that Grondona was his nominee, and that the 50 per cent share was her payment for obtaining the advance. She did, however, take on legal responsibility for the Birmingham Midshires mortgage.
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What the solicitors failed to do
Stoffel & Co acted for Grondona, Mitchell and Birmingham Midshires. On or about 31 October 2002 Mitchell signed and delivered to them the Land Registry transfer. On 1 November 2002 they paid the £76,475 advance to BM Samuels so that its charge could be released, and BM Samuels supplied the release form. The solicitors did not register the transfer, the release or the Birmingham Midshires charge. The transfer had not been stamped and was returned; later applications were rejected or cancelled. Mitchell therefore remained the registered proprietor, BM Samuels remained the registered chargee, and further advances were later made to him on that charge.
Registration matters because, until a transfer of registered land is completed by registration, the seller remains the legal owner on the register. The new lender’s charge also could not be properly protected without the transfer being registered. By the time registration should have taken place, Birmingham Midshires had already advanced the money. Lord Lloyd-Jones later treated the fraud as complete by then: registration was not a step needed to carry it out.
The claim and the earlier decisions
In 2006 Grondona defaulted. Birmingham Midshires sued her for the debt, and she brought a Part 20 claim against Stoffel & Co for breach of duty and breach of contract. By trial the solicitors admitted that the failure to register was negligence or breach of duty, but said that illegality prevented recovery because they had been instructed only to further the fraud. Birmingham Midshires’ claims against BM Samuels and the solicitors were settled. Summary judgment was entered against Grondona on 29 May 2014 for £70,000, with the balance to be assessed. On 22 April 2014 BM Samuels had sold the leasehold for £110,000 towards Mitchell’s debt.
Her Honour Judge Walden-Smith found the fraud and the dishonest statements proved. Applying the then-binding reliance test in Tinsley v Milligan, she held that the claim against the solicitors was conceptually separate from the fraud and did not depend on relying on the illegality. She awarded £78,000, the value of the property in November 2009, plus interest. The parties later agreed that, apart from illegality, this was the right measure: had the solicitors done their job, Grondona would have had an otherwise unencumbered property available as security when it would have been sold to meet her arrears.
The Court of Appeal, Gloster LJ with Flaux LJ agreeing, held that the judge had been wrong in law to treat the mortgage as a sham as between Grondona and Birmingham Midshires, and wrong to hold that there was no intention to transfer legal title. Both sides intended the loan to be secured on her registered title, and clothing her with legal title was the point of the arrangement with Mitchell, whatever was to happen to the beneficial ownership. Applying Patel v Mirza, which had been decided after the trial, the Court of Appeal held that illegality did not bar the claim and dismissed both the appeal and a cross-appeal on the amount.
The test applied by the Supreme Court
Permission to appeal was limited to whether the Court of Appeal had misapplied Patel v Mirza. The Supreme Court did not reopen the conclusions that the sale was not a sham and that legal title was intended to pass. It was agreed that, subject only to illegality, Grondona had a complete claim: negligence was conceded, causation was established, and the loss was the agreed £78,000 plus interest.
Lord Lloyd-Jones, with whom Lord Reed, Lord Hodge, Lady Black and Lady Arden agreed, applied the approach in Patel. The question is whether allowing a claim tainted by illegality would damage the integrity of the legal system. The court considers the purpose of the prohibition that was broken and whether refusing the claim would further that purpose; any other public policy affected by refusal; and, where the balance points towards refusal, whether refusal would be proportionate. The assessment is structured, not a free choice of the desirable result, and it is aimed at avoiding incoherent contradictions in the law.
Deterring and protecting against mortgage fraud
The Court accepted that the background was a serious fraud. Grondona had knowingly deceived Birmingham Midshires, and Lord Lloyd-Jones recorded that her conduct would at that time have been an offence under section 15 of the Theft Act 1968. The solicitors were innocent of the fraud but had been retained in a transaction which facilitated it.
Deterrence is one purpose of the criminal law against fraud, but Lord Lloyd-Jones doubted that a civil claim of this kind would undermine it. Someone planning a mortgage fraud is most unlikely to be influenced by the risk that, if the solicitor later fails to register the documents, there may be no negligence claim. Another purpose is to protect the public, particularly mortgage lenders, from loss. Refusing this claim would not serve that purpose. The advance had already been made and received before the breach. Registration was in Birmingham Midshires’ interest as well as Grondona’s, because its charge depended on registration and because she needed assets if sued on her personal promise to repay. Compensation from the solicitors could be used towards that liability. Birmingham Midshires also had its own claim against them, which had been settled for an unknown sum. At the least, barring Grondona’s claim would not improve the protection given to mortgagees.
Solicitors’ duties and the property right already acquired
Against that were policies that conveyancing solicitors should act diligently and that clients should be able to sue for loss caused by negligence. Letting solicitors escape liability because a misrepresentation to a lender is discovered afterwards would run counter to those policies, unless giving a remedy would make the law incoherent. Lord Lloyd-Jones also agreed that fraud is more likely to be prevented if solicitors question irregularities. He rejected the suggestion that nothing here could have put them on notice: they acted for both Mitchell and Grondona as well as the lender; Mitchell had acquired the property in July 2002 and purported to sell it in October; and the stated price had risen sharply. That was not a finding that they knew of the fraud. It was accepted that they did not.
A further policy came from the property consequences of the transaction. Unless statute says otherwise, property can pass under an illegal contract. Lord Lloyd-Jones agreed with the Court of Appeal that this mortgage was intended to take effect and that Mitchell and Grondona intended legal title to vest in her. Had the transfer been registered, legal title would have passed under section 27(1) of the Land Registration Act 2002. It was not registered, but Mitchell had signed and delivered the transfer and done everything he could. Grondona therefore had an equitable interest: an equitable right to be registered as proprietor. It would be incoherent for the law to recognise that interest despite the illegal sale, yet refuse her a claim against a third party for failing to protect it by registration.
On that balance, allowing the claim would not undermine the policies behind criminalising mortgage fraud and could protect the lender. Refusing it would conflict with compensation for solicitors’ negligence, discourage diligent performance, and contradict recognition of her equitable interest. Proportionality therefore did not have to be decided, but the Court considered it.
Proportionality, and not a claim for profit
Several suggested reasons for treating refusal as disproportionate carried little or no weight. Birmingham Midshires’ failure to plead fraud did not matter: it could recover on the debt and her personal covenant, and her central role was established. The absence of evidence from the conveyancer about fraud did not help, because he was not aware of it and her part was proved objectively. Payments made on the mortgage for some years did not make the application honest.
The substantial point was that the illegal conduct was not central to the breach. A solicitor had to be retained to keep up the pretence and obtain the secured loan, but that was only the background. The duty broken was the duty to register. By then the loan had been advanced and used to discharge the BM Samuels charge, and Grondona already had equitable title. The Court found support in the analogous reasoning in Sweetman v Nathan, while noting that that case concerned a strike-out application and the pre-Patel law. After Patel, a claimant no longer loses merely because the claim relies on illegal conduct, but reliance can still illuminate centrality. Here the essential facts could be proved without the illegality, as the trial judge’s decision under the old test showed.
The damages compensated for the value of the property interest the solicitors had negligently failed to protect. The award did not enforce the dishonest bargain or pay a reward for the wrongdoing.
Verdict: The Court unanimously dismissed the solicitors’ appeal. Their illegality defence did not bar the negligence claim. The existing damages award stood.
