05 Mar 2013
In two recent cases - Cheshire Mortgage Corporation Ltd and Blemain Finance Limited ('the Lenders') - lenders have recently failed in an attempt to recover losses caused by fraudulent mortgage applications. In both instances, the Lenders were victims of mortgage fraud perpetrated by individuals pretending to be owners of heritable property in order to execute standard securities. Ryan McKay, Partner looks at the implications of the decisions.
In two recent cases - Cheshire Mortgage Corporation Ltd and Blemain Finance Limited ('the Lenders') - lenders have recently failed in an attempt to recover losses caused by fraudulent mortgage applications. In both instances, the Lenders were victims of mortgage fraud perpetrated by individuals pretending to be owners of heritable property in order to execute standard securities. Ryan McKay, Partner looks at the implications of the decisions.Ryan McKay, Partner looks at the implications of the decisions.
Grandison (who was the Judicial Factor appointed in respect of the now former firm of Longmuir & Co.) and Balfour & Manson LLP ('the Firms') had represented the fraudsters in the transactions in question and the Lenders sought to sue them for the losses suffered through breaches of warrant of authority on the grounds that the Firms impliedly warranted the identity of their clients (the fraudsters in this instance).
Warranty of Authority
It was generally accepted in Scotland that the concept of warranty of authority could be summarised as follows:
"If he (the agent) honestly thought he had the principal's authority, as where an auctioneer, by mere mistake, sold a horse which was not for sale, or solicitors believed that they were representing a trust when in fact there was no trustees, the agent will incur liability on the theory that an agent impliedly warrant that he has the authority of the principal whom he names, and is liable in damages for breach of that warranty" (The Law of Scotland, 12th Edition, Gloag and Henderson at paragraph 19.26)
In light of the above, the Lenders sought to recover their losses from the Firms on the basis that they had warranted that the parties they represented were the owners of the properties and as the properties were not in fact so owned, the Firms were in breach of their warranty of authority.
On Appeal, as was argued at Proof (Trial), the Lenders argued that the solicitors had been in breach of their implied warranty of authority as agent. The court held that the Firms' only representation was that they were acting for the people with whom the Lenders were already engaged in a process of finalising a loan transaction and that it did not follow from the rule of implied warranty of authority "that, in every case, an agent must be regarded as warranting the identity of his client and not merely the fact that he has authority to act on the client's behalf." The court further added that "there are no reasons in principle or practice, for extending the somewhat limited scope and nature of the implied warranty of agents in the way in which the reclaimers' (the Lenders) submissions in the present cases contend for".
Implications arising from the Decision
While the decision of the Inner House of the Court of Session is clearly not 'lender friendly', the decision should, in theory, be of limited application in practice. In these particular transactions, the properties were, rather unusually, not registered in the Land Register of Scotland, but rather were recorded in the Register of Sasines (the Register of Sasines is the Scottish equivalent to unregistered property). Accordingly, the title to the properties had not been guaranteed by the state. While registration in the Land Register would not have altered the decision of the Inner House, registration could have potentially provided the Lenders with an alternative route for recovering their losses.
Had the properties been registered in the Land Register, before the fraudulent securities could be removed from the relevant title sheets, the true owners would require to make an application to the Land Register requesting the removal of those securities. Such removal is known as ‘rectification’ and the Land Registration (Scotland) Act 1979 specifically provides that where the Register is ‘rectified’, any party who suffers a loss as a result of that rectification is entitled to be compensated by the Keeper of the Land Register. Accordingly, had the properties been registered in the Land Register, the Lenders would not have required to pursue the claim they did, but rather could have sought payment from the Keeper in respect of the value of the security lost as a result of rectification of the Register.
I am currently acting for a number of secured lenders facing claims similar to those of both Cheshire Mortgage Corporation Ltd and Blemain Finance Ltd, however, in these instances, claims have been intimated to the Keeper, as opposed to pursuing the borrower’s solicitor and, while these cases are in their infancy, early success has been enjoyed in some of those cases.
While the decision of the Inner House is clearly not favourable from the point of view of a secured lender, the case should be viewed in isolation and given the statutory entitlement to recover losses from the Keeper in certain circumstances, the decision of the Inner House does not, fortunately, mean that secured lenders require to consign themselves to writing off debts where they have been the victims of mortgage fraud.