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Lender professional negligence and negligent misrepresentation

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Posted by Susan Hopcraft on 12 April 2016

Susan Hopcraft - Professional Negligence Lawyer
Susan Hopcraft Partner

Chief Land Registrar v Caffrey & Co [2016]

The Land Registry recently obtained judgement against solicitors who enabled a borrower’s fraud by failing to spot forged discharge documents.  The Land Registry had indemnified the lender and made the claim by way of subrogation to recover its loss.

The claim failed in negligence but succeeded on misrepresentation.  This case comes with a health warning because the defendant did not appear but nonetheless the judge tested the claim as far as he could and narrowly allowed it to succeed. Chief Land Registrar v Caffrey & Co [2016] therefore provides some guidance on how the courts deal with the issue of duty of care in the context of lender claims and release of registered charges.

What happened?

Mr and Mrs Turner charged their farm to DB Bank (the “Bank”) as security for a loan in 2007. The charge was registered at the Land Registry.

In October 2009, a firm of solicitors (Caffrey & Co) acted for Mr and Mrs Turner in relation to the discharge of their mortgage. The couple provided Caffreys with a DS1 to cancel the registered charge but the DS1 had not in fact been signed by or on behalf of the Bank at all: it was forged. The solicitor did not contact the Bank, or their alleged solicitor, to verify the form and they duly submitted the discharge form to the Land Registry and the charge was removed.

Mr Turner borrowed money from Santander UK plc in order to purchase Mrs Turner’s share of the property and he became the sole proprietor of the farm.

In 2011, the Bank realised that its charge had been removed and applied to alter the register to have it reinstated. Santander objected.  In 2012, it was decided by a Land Registry adjudicator that the charge should be reinstated, but that it should rank after Santander’s charge.  

The Bank obtained an indemnity from the Land Registry for its losses as a result of the transaction, but Land Registry sought to recover that from the solicitors.

The claim

Land Registry made 2 claims; a negligence claim and a negligent misrepresentation claim. The negligence claim, standing in the Bank’s shoes, was based on the duty allegedly owed to take reasonable care to verify the DS1.  The negligent misrepresentation claim arose from its own right to bring a claim for the misrepresentations made by the solicitors in submitting the documents to the Land Registry.  

The Negligence Claim:

In order to establish a negligence claim, there must be a duty of care. The Land Registry’s argument that the solicitors were negligent failed because the solicitor did not owe a duty of care to the Bank.  Caffrey & Co were not retained by the Bank and acted only for Mr and Mrs Turner. The solicitor was therefore under no obligation to advise the Bank (as an adverse party) to take its own legal advice; or to verify the genuineness of the information that it gave to the Land Registry. The court held that it would not be reasonable to impose a duty of care on solicitors in respect of the risk of fraud.

The Negligent Misrepresentation Claim:

Land Registry was successful in the claim for negligent misrepresentation.  Although there is no general duty of care to avoid negligent misstatements, the court found (however reluctantly) that the solicitors had assumed a duty to take care in the representations which it made to the Land Registry. This was because the solicitors had volunteered information which they knew or ought to have known the Land Registry would rely on. For example the solicitors impliedly represented that they had verified the validity of the DS1.

Conclusion  

The Bank was not owed a duty of care here, despite a careful review of the authorities on duties owed by solicitors to third parties. Had they not obtained an indemnity from Land Registry they would not have been able to recover in these circumstances.

This case did not benefit from a detailed review of the facts, since the judge had to assume that the facts as pleaded by the claimant were correct.  The outcome could have been different if the defendants had been represented, but nonetheless it shows how the absence of a duty of care in negligence may not always be fatal where Land Registry needs to recover in circumstances such as this.  It imposes a high threshold of care on solicitors in passing on information to Land Registry, although it must be noted that Land Registry guidance has tightened the requirements in verifying identity since the fraud that caused this loss was perpetrated, meaning that hopefully this type of fraud happens less now.  It is nonetheless worth being aware of this case since it may ease the path for lenders when trying to obtain a Land Registry indemnity. 

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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