Patel v Freddy's Ltd & Ors [2017] EWHC 73 (Ch)

Case No HC-2015-005075[2017] EWHC 73 (Ch.)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, 7 Rolls Buildings, Fetter LaneDate 24 th January 2017
London, EC4A 1NL
Before
Tribunal Judge Elizabeth Cooke(Sitting as a Deputy High Court Judge of the Chancery Division)
Between
Ashokkumar Somabhai PatelClaimant(1)Freddy’s LimitedDefendants(2) The Chief Land RegistrarDefendant(3) Simon FinegoldDefendant
Mr Martin Dray (instructed by J E Kennedy & Co) for ClaimantMr Patrick Rolfe (instructed by Prince Evans LLP) for First DefendantThe Second Defendant was not present or representedMr Simon Finegold appeared in Person for in personHearing Hearing dates: 6,7 and 8 December 2016
JudgmentJUDGE ELIZABETH COOKE:Introduction
[1]In 1996 the Claimant, Mr Ashokkumar Somabhai Patel, bought Sai Villa, a five-bedroomed house in Pinner. In September 2014 he discovered that he was no longer the registered proprietor. Sai Villa had been transferred, on 19 June 2014, first to Mr Simon Finegold, the Third Party, and then on the same date to Freddy’s Ltd, the First Defendant.[2]The Claimant seeks rectification of the register to restore him as registered proprietor. Alternatively he seeks an indemnity from HM Land Registry, the Second Defendant. Proceedings against the Second Defendant have been stayed, and it has agreed to be bound by my findings of fact. The First Defendant resists rectification; but if the register is to be rectified then it claims damages from Mr Finegold for breach of his covenants for title.[3]The action has taken a procedurally roundabout route. The Claimant applied for alteration of the register on 26 September 2014. The First Defendant objected and the matter was referred to the Land Registration Division of the First-tier Tribunal pursuant to s 73 of the Land Registration Act 2002 (“the LRA 2002”). On 30 October 2015 a judge of the First-tier Tribunal made an order under s 110 of the LRA 2002 staying the tribunal proceedings and referring the matter to the High Court. Directions given by Master Teverson on 7 May 2016 provided that the trial of the main action should also be the first part of a split trial of the action by the First Defendant against the Third Party so as to determine liability and then, if necessary, to give directions for a determination of quantum.[4]The trial took place before me on 6 to 8 December 2016. The Claimant was represented by Mr Martin Dray of counsel and the First Defendant by Mr Patrick Rolfe of counsel. Mr Finegold appeared in person. I am grateful to all three for their helpful arguments.[5]The claim for rectification fails, as I explain in paragraphs 6 to 68 below. Had I ordered rectification of the register, I would also have found the Third Party to be liable to the First Defendant on the covenants for title, for the reasons given in paragraphs 69 to 82 below. The rectification claim The facts in outline

The rectification claim

[6]The following is a brief outline of the factual background to this action. It is not now in dispute, except where I have indicated otherwise.[7]When the Claimant bought Sai Villa in 1996 he was registered as proprietor in the name “Ashok Patel”, rather than his full name. His address on the register was Sai Villa, although he never lived there. He spent a lot of time in the USA and moved there in 2013. From 1996 Sai Villa was managed by his brother Mr Jayesh Patel (who has his Power of Attorney) as one of a small portfolio of family properties, and was let to a series of tenants. At one stage a cousin was the tenant and allowed 20 or 25 people to live there; later Jayesh Patel let the rooms individually to tenants introduced by the local authority, and on 6 March 2013 it was let for three years to Altwood Ltd whose business was providing social housing. The permitted use under the lease was as a house in multiple occupation; the rent was £4,485 per month and no deposit was taken.[8]By around June 2014 Sai Villa was in a sorry state. It was infested with vermin and the garden was full of rubbish. Eight or nine people were living there. It was a house in multiple occupation, and the licence required for such houses by the Housing Act 2004 (known as an HMO licence) had been obtained by Jayesh Patel in 2006 but had expired in 2011. Moreover, it was occupied in breach of the planning legislation and an enforcement notice was registered against it. The Claimant and Jayesh Patel were asked about these two illegalities in cross examination. I accept the Claimant’s evidence that he was unaware of either. I find that Jayesh Patel was aware of both problems. He knew about HMO licences, having applied for the first one. He claimed not to understand anything about the Enforcement Notice; but he himself appealed the notice, on the Claimant’s behalf, and I find his claims of ignorance, or forgetfulness, implausible.[9]At some point before 1 May 2014, the date of the first disclosed correspondence, Sai Villa was offered for sale, through a Mr Neil Ret of Robsons estate agents of Pinner. Robsons’ client was, or said he was, an Ashok Patel. I shall refer to him as “the fraudster Patel” to distinguish him from the Claimant. In May 2014 the fraudster Patel was in contact by email with a Mr Andrew Sorensen and with Mr Finegold; the two were thinking of buying it together. The fraudster Patel was urging them to complete quickly, explaining that he was unwell and anxious to sell.[10]On 21 May 2014 the fraudster Patel instructed Mr Graham Cuthbert of Cuthbert & Co, a solicitor in Peterborough, to act for him on the sale. Mr Cuthbert has died, and his firm is now the subject of Law Society intervention, but his file has been disclosed. He met the fraudster Patel on 28 May 2014, and received from him copies of his passport and a utility bill by way of identification. The fraudster Patel also produced electricity and gas certificates (now known to be fictional), an energy certificate (genuine – this is a public document), and a document purporting to be an assured shorthold tenancy of the property to an Amit Nagla granted in August 2013 for one year. The documents mentioned Elysium Estates Ltd as the managing agents. A deposit of one month’s rent (£2,800) had apparently been taken but the fraudster Patel could not say where it was. He produced a copy of Mr Nagla’s driving licence. Mr Nagla has never been traced and may be an invented person. A Companies House search has revealed no company, past or present, by the name of Elysium Estates Ltd.[11]The Housing Act 2004 requires that a deposit taken from a tenant under an assured shorthold tenancy must be held by an authorised deposit scheme. A purchaser as landlord may be liable to repay it threefold to the tenant, and may be unable to serve notice to quit under s 21 of the Housing Act 1988.[12]On 10 June 2014 Mr Sorensen dropped out of the purchase, and Mr Finegold proceeded alone. BSG Solicitors LLP acted for him. He wanted to find a sub-purchaser for the property. Mr Farhad Davarzani, the managing director of Freddy’s Ltd, the First Defendant, was introduced to him by Robsons. Mr Davarzani instructed his solicitor Mr Robert Martin of Seddons Solicitors early in June. Freddy’s Ltd is in the business of buying distressed properties and selling them on, sometimes improved, sometimes not, depending on the capital it has available.[13]Both Mr Finegold and Mr Davarzani visited the property, separately and without an appointment. They spoke to occupiers and neighbours. Mr Davarzani saw there a van bearing the name of Altwood Ltd, and met a caretaker who was employed by Altwood Ltd. Mr Davarzani’s concern was whether he was going to be able to get vacant possession and he took the view that he would. As he put it, he inspects properties every day; he made a confident judgment about the occupiers of the property on the basis of what he had seen there.[14]The fraudster Patel had his ear to the ground; just a couple of hours after Mr Finegold’s visit he sent him an email asking him not to visit again because the tenant, Mr Nagla was away, and also confirming that there were 8 adults living at the property including the tenant.[15]Mr Martin received the draft contract and supporting documents from BSG Solicitors on 11 June, and was asked by them to exchange that day. He declined to do so, but carried out his searches and took the documents home to study. The following day he wrote to Mr Davarzani with reports on the searches, the Seller’s Property Information Form (“the SPIF”) (which of course came from the fraudster Patel via Cuthbert & Co and BSG Solicitors) and the planning situation. He noted that some replies on the SPIF were inaccurate – in particular the statements that there were no disputes or planning issues in relation to the property, and the mention of only one occupier, Mr Nagla, when there were clearly several others. Mr Martin wrote in strong terms: “I really do not believe that you should proceed with buying this property” and explained the multiple problems with planning, the lack of an HMO licence, and the likely difficulty in obtaining vacant possession, as well as the absence of information about liability for contributing to the upkeep of the adjoining private road.[16]Mr Davarzani’s response was not to pull out but to use that advice as a lever to negotiate a lower price. Contracts were exchanged simultaneously on 13 June 2014, between the fraudster Patel and Mr Finegold for £339,400 and between Mr Finegold and Freddy’s Ltd for £450,000; completion of sale and of sub-sale took place on 19 June 2014.[17]There remained essentially two tasks. For Mr Martin there was the registration of his client’s purchase. He sent to HM Land Registry the transfer to Mr Finegold for registration on 9 July 2014 and it was registered on 4 August 2014 with effect from 14 July. He then applied for registration of the transfer to Freddy’s Ltd; it was registered on 20 August 2014, backdated to the date of receipt which was 12 August.[18]For Mr Davarzani there was the need to obtain vacant possession of the property – which despite Mr Martin’s warnings did not cause him any problem at all. He contacted Altwood Ltd and asked for Mr Nagla. Altwood’s staff told him that the person to speak to was Mr Pabari, and on 7 August 2014 he met Mr Pabari at the Harvester Inn nearby. He explained his position as the purchaser and said that he wanted vacant possession; Mr Pabari told him something of Altwood Ltd’s business and agreed to get the property empty in four to six weeks. I say more about this conversation at paragraph 61 below.[19]By the end of August Sai Villa was empty. Freddy’s Ltd moved contractors in on or around 1 September 2014, and by 5 September the property had been gutted. On 9 September Jayesh Patel had a call from Altwood Ltd; a member of staff had returned from holiday and asked if he had sold Sai Villa. Altwood Ltd put Jayesh Patel in touch with Mr Davarzani, and all was revealed.

The law, and the issue to be decided

[20]At common law the transfer from the fraudster Patel to the Third Party would have been of no effect and the Claimant would still own Sai Villa. But the world of registered titles is very different. The First Defendant is the registered proprietor, and it owns the property, as a result of the “statutory magic” wrought by section 58 (1) of the LRA 2002:
“58(1) If, on the entry of a person in the register as the proprietor of a legal estate, the legal estate would not otherwise be vested in him, it shall be deemed to be vested in him as a result of the registration.”
[21]Accordingly the First Defendant is (and the Third Party was, for a few days) the legal and beneficial owner of the property by virtue of registration; it is now established that the reference in section 58 to the legal estate does not imply any separation of the beneficial interest in the land (Swift 1st Ltd v Chief Land Registrar [2015] EWCA Civ 330). The registered proprietor is the legal and beneficial owner in the absence of any circumstances that might constitute him a constructive trustee for the Claimant (and there is no suggestion that there are any such circumstances here).[22]However, there is a mistake on the register. If the registrar had known that the transfer to the Third Party had been executed by a fraudster he would not have registered it, nor would he have registered the transfer to the First Defendant. Note that the transfer to and registration of the Third Party is irrelevant to the legal analysis here; Mr Finegold was not the registered proprietor of Sai Villa when he sold to the First Defendant. Had he never been registered as proprietor that would have made no difference to the outcome of the action brought by the Claimant against the First Defendant.[23]Schedule 4 to the LRA 2002 provides for the circumstances when the register may be altered to correct a mistake. Paragraph 1 defines “rectification”: “1 In this Schedule, references to rectification, in relation to alteration of the register, are to alteration which—”(a) involves the correction of a mistake, and(b) prejudicially affects the title of a registered proprietor.[24]Accordingly, what the Claimant seeks is rectification, to correct the mistaken registration of the First Defendant as proprietor. The relevant parts of paragraphs 2 and 3 of Schedule 4 tell us when rectification may or must be done:
“2 (1) The court may make an order for alteration of the register for the purpose of—” (a) correcting a mistake … 3 (1) This paragraph applies to the power under paragraph 2, so far as relating to rectification. (2 ) If alteration affects the title of the proprietor of a registered estate in land, no order may be made under paragraph 2 without the proprietor’s consent in relation to land in his possession unless— (a) he has by fraud or lack of proper care caused or substantially contributed to the mistake, or (b) it would for any other reason be unjust for the alteration not to be made. (3) If in any proceedings the court has power to make an order under paragraph 2, it must do so, unless there are exceptional circumstances which justify its not doing so.”
[25]It is common ground that the First Defendant is in possession of Sai Villa. Therefore no order for rectification can be made unless the First Defendant has “by fraud or lack of proper care caused or substantially contributed to the mistake” or it would for any other reason be unjust for the alteration not to be made. The Claimant does not say that the First Defendant was fraudulent. He does not (now) suggest that there is any other reason why it would be unjust for the alteration not to be made. His argument is that the First Defendant caused or substantially contributed to the mistake by lack of proper care.[26]If I find in favour of the First Defendant on that point then the effect of paragraph 2 is that an order for rectification cannot be made. If, by contrast, I find that the First Defendant did by lack of proper care substantially contribute to the mistake then the effect of paragraph 3(3) is that an order for rectification must be made unless there are exceptional circumstances that justify letting the registered title remain where it currently lies; and the First Defendant says that there are such exceptional circumstances.[27]So the primary issue is whether or not there can be laid at the First Defendant’s door a lack of proper care that substantially contributed to the mistake.

Did the First Defendant by lack of proper care cause or contribute to the mistake?

[28]The Claimant’s case is that the First Defendant did not take proper care in that it failed properly to check the title of the seller to Mr Finegold, and failed to make proper inquiries of the occupiers of Sai Villa, and that it thereby caused or substantially contributed to the mistake. The Claimant says either that more should have been done as a matter of standard conveyancing practice or that more should have been done than that standard practice requires, in the light of facts about the transaction which should have “set alarm bells ringing”.[29]The First Defendant is a limited company. It can act only through its officers or representatives. So I have to look at what its director, Mr Farhad Davarzani, or its solicitor, Mr Martin of Seddons, did or failed to do. In the light of the way argument and evidence were presented at the trial I discuss this under the following headings: i) Did Mr Martin contribute to the mistake by any lack of proper care in his conduct of the conveyancing? ii) Did Mr Davarzani contribute to the mistake by any lack of proper care before completion of the purchase of Sai Villa by the First Defendant? iii)

Did Mr Davarzani contribute to the mistake by any lack of proper care after completion?

[30]In considering whether either Mr Davarzani or Mr Martin acted with a lack of proper care it is important to avoid the temptation of looking at the sales of Sai Villa with the benefit of hindsight. This is particularly relevant to the idea of alarm bells that the Claimant says rang and should have alerted one or the other to the need for special care and special precautions. Mr Dray’s skeleton argument set out a number of things that were in fact invisible to Mr Davarzani and Mr Martin. Some of them are known only following disclosure of Mr Cuthbert’s conveyancing file; some were known to Mr Finegold but perfectly properly not disclosed to Mr Davarzani or Mr Martin. In particular: i) Neither Mr Martin nor Mr Davarzani knew about the fraudster Patel’s correspondence with his solicitor. They did not know, for example, that he initially lied to Mr Cuthbert about the price. They did not know that he gave an address in Barnet but asked for correspondence to be by email. Nor did they know about mysterious figures who appear on Mr Cuthbert’s file and of which nothing is known, such as a Mr Cozzetto who seems to have had an interest in the transaction and to whom Mr Cuthbert wrote in September that it appeared to have “gone pear-shaped”. ii) Neither Mr Martin nor Mr Davarzani knew of Mr Sorensen’s involvement. Neither knew that Mr Sorensen had written to the fraudster Patel expressing shock that he had changed solicitors three times. iii) Neither knew the price Mr Finegold was paying for Sai Villa.[31]So in analysing the conduct of Mr Davarzani and of his solicitor I take no account of matters that might well have rung alarm bells had they been aware of them, but of which they had, and could have had, no knowledge. I turn now to that conduct, using the headings listed above. In doing so I introduce some more factual details, again making it clear where these are findings of fact rather than being agreed. Did Mr Martin contribute to the mistake by any lack of proper care in his conduct of the conveyancing?[32]I turn to Mr Martin first. He gave evidence at the trial and impressed me as a careful and knowledgeable lawyer. The Claimant’s case is that he was negligent, and I find that he was not. It is worth bearing in mind the words of Lightman J in Prestige Properties Ltd v Scottish Provident Institution [2002] EWHC 330(Ch) at paragraph 45:
“I must begin by making two general observations on the ordinary duties of a solicitor on a conveyancing transaction. First, a solicitor should not be judged by the standard of “a particularly meticulous and conscientious practitioner… The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession”: per Oliver J in Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384, 403. Second, in determining whether a solicitor has exercised reasonable skill and care, he should be judged in the light of the circumstances at the time. His actions and advice may with the benefit of hindsight be shown to have been utterly wrong, but “hindsight is no touchstone of negligence”: Duchess of Argyll v Beauselinck [1972] 2 Lloyd’s Rep 172, 185.”
[33]Conveyancing is a process of risk assessment. In the nineteenth century, and to some extent still today in unregistered land, the assessment of the risk of accepting a particular title was a difficult enterprise. Today, with generally simpler titles and in any event mostly registered titles, the conveyancing process has become simpler; but it is still a matter of balancing caution and efficiency. The client is in a hurry: should the conveyancer hold up completion, potentially losing the deal, for the sake of one more search that is unlikely to reveal any problems? Is the risk of not doing so a sufficiently serious one for the solicitor to warn the client and advise him not to continue, or at least seek explicit instructions?[34]This was a property fraught with risk because of its multiple occupiers and the illegality of its use in the light both of the planning legislation and of the lack of an HMO licence. Mr Martin was alive to the risk and took great care. He dispatched his searches on 11 June 2014 and refused the invitation from BSG Solicitors to exchange contracts that day, instead taking the papers home to read that evening. The following day he warned Mr Davarzani not to go ahead. He made an assessment of risk and decided that the risk was so great that his client should not merely be asked for instructions but should be positively advised not to buy. Despite being under great time pressure – his client wanted to exchange contracts within 48 hours of giving instructions – he was alive to risk and was taking great care for his client. It was put to him by Mr Dray that he – in effect – cut corners because of the rush and he rightly rejected that suggestion.[35]The Claimant’s specific case is, first, that he should have investigated the identity of the vendor to Mr Finegold, and, second, that he should have given his client more advice about making inquiries of the occupiers of the property.[36]As to the first point, as Mr Martin explained and I accept, it is the task of the vendor’s solicitor in a conveyancing transaction to check the identity of his or her client, establishing not only that the vendor’s name is what the vendor says it is but also that the vendor really is the owner of the property. So it was for Mr Cuthbert first to carry out the “Know Your Client” procedure required by the money-laundering legislation; hence the obtaining of the passport and a utility bill to ascertain that this client really was an Ashok Patel who lived in Barnet. But it was also for Mr Cuthbert to ascertain that this was the Ashok Patel who was the registered proprietor of Sai Villa. How this is done depends upon whether the client is a new one. If the client is not already known to the solicitor, there may be aspects of the transaction that link him to the property, such as a record of mortgage payments. What Mr Cuthbert did to check that this was the Ashok Patel, and whether he did so adequately, is not known. The important point is that this is the vendor’s solicitor’s duty, because he is the one with access to the client and to his client’s documents. The purchaser’s solicitor may need to check that the vendor’s solicitor is a solicitor if he does not know the firm, and Mr Martin did so using the ”Know Your Solicitor” procedure (checking with the Law Society); but it is not for the purchaser’s solicitor to duplicate the actual checking of the vendor’s identity, nor to check that the vendor’s solicitor has done so.[37]This is evident from Mr Cuthbert’s reaction to BSG Solicitors, who tried to do just that. They wrote to Cuthbert & Co on 5 June 2014 as follows:
“Whilst we are going through the documentation with our client, our client has raised a slightly unusual point. He has been aware of several fraudulent transactions and has asked us to provide proof of ownership and identity in respect of your client. As we say this is rather unusual but nevertheless, would you please be able to supply copies of the usual identification documentation which no doubt you have received in order to act for this client.”
[38]That this was a question a purchaser’s solicitor does not normally ask is evident from the way in which the letter is phrased. Mr Cuthbert’s response was frosty. In a letter to BSG Solicitors he said:
“You already have office copy entries showing proof of ownership. I have taken proof of identity and proof of residence from my client and have no intention of proving to Mr Sorensen that I’m capable of doing my job.”
[39]Mr Martin knew nothing of this exchange of letters, of course. I quote it because it corroborates Mr Martin’s evidence as to what was standard conveyancing practice.[40]Accordingly I accept that it was not normal professional practice for a purchaser’s solicitor to check the identity of the vendor. But were there special circumstances that could have justified Mr Martin’s doing so? A few have been suggested. One is the fact that this was a tenanted property with no mortgage, and therefore fell within those properties identified by the Law Society’s Practice Note on Property and Registration Fraud (October 2010) as being more than usually vulnerable to fraud (see paragraph 2.3). Was that vulnerability a reason why Mr Martin’s duty extended beyond normal professional practice? I take the view that it did not. It should have made Mr Cuthbert take particularly careful steps to check who his client was. But it is only with hindsight that we see just how vulnerable this property was, and as matters appeared to Mr Martin this was a tenanted property without a mortgage like so many others.[41]A further factor that is said to have given Mr Martin a duty to follow up the checking of the vendor’s identity was his own client’s question in an email of 6 June 2014. This was Mr Davarzani’s very first “heads up” to his solicitor, alerting him to the fact that formal instructions would be on their way shortly for the purchase of Sai Villa. The email is just a few lines long and reads as follows (I reproduce the spelling and spacing to give the flavour of the email, but I have italicised the crucial words):
“Sai Villa, 24 Nugents Park, PinnerHA5 4RA. Hi Richard, The floor plan is attached. There is a Enforcement Notice No. ENF/0258/11P on this propertyAlso there is a Pillon a few doors downMr Simon find Gold is the intermediary who will be flipping the property. Exchange in his name and we completeing preferably 2/3 weeks from exchange or try 28 days.I would like you to confirm Landowner is the same as the seller and has the right to sell this property. Agreed price is £475k but if he returns the tenants deposit of circa £5k(not with DPS) then it will be £480k. This will be done under Freddy’s Ltd, 1021 Harrow Road, Wembley, Mddx. HA0 2SJNo Mortgage, cash deal.Once I have their solicitors details I will forward to you.RegardsFreddy Davarzani.”
[42]Did those italicised words amount to a request, or were they a reason, for Mr Martin to depart from normal practice and to make a direct check of the identity of the current registered proprietor who was to sell to Mr Finegold? At the trial Mr Martin did not have a clear recollection of this email and of what he understood the question to mean at the time, but clearly it did not jump out at him as a request to do anything out of the ordinary or to go beyond the purchaser’s solicitor’s obvious duty to check the name of the registered proprietor on the register. I take the view that there was nothing here to require the purchaser’s solicitor to go further. Had anything more been meant, as a result of an unusual concern, Mr Davarzani would have repeated the request when he gave formal instructions on 11 June, and no doubt Mr Martin would then have asked him why he required such an unusual step.[43]Even less plausible are the other factors that should, it is said, have rung alarm bells with Mr Martin as to the vendor’s identity. There were the inaccurate replies on the SPIF. I accept Mr Martin’s explanation that those replies did not lead him to doubt the seller’s honesty, let alone his identity, because the inaccurate completion of these forms is not uncommon. He did not pursue the inaccurate responses because, as he said, he and his client knew about the enforcement notice and the occupation of the property, and there was nothing to be gained by extracting an admission, as it were, about either. Nor was there anything to be gained from pursuing the insurance details – which it is now known that Cuthbert & Co did not have – or the gas and electricity certificates when his client was going to develop the property and insure it himself. These details are not obtained by the purchaser in order to check the vendor’s identity, but for the practical purposes of arranging for insurance and services; had Mr Martin followed up any of these things, it is only a remote possibility that the fraud would have been revealed, but he did not do so because they were not relevant to his client.[44]BSG Solicitors of course carried out a bankruptcy search, which revealed entries against an Ashok Patel. They therefore required certification from Cuthbert & Co, and they also sought a declaration of solvency from the fraudster Patel. In a letter of 11 June 2014 they told Mr Martin that they would pass these documents on to him, but they did not do so. He did not chase for it because there was no reason for him to do so. It was for BSG Solicitors to make a bankruptcy search against their vendor; there was no need for two solicitors to do so. Had Mr Martin seen the declaration that Cuthbert & Co actually provided, he might well have raised an eyebrow and perhaps made an enquiry, because it was defective: Mr Cuthbert had administered the declaration to his own client. But he did not see it because there was no need for him to see it.[45]Mr Martin did not obtain from BSG Solicitors an authority for the tenant to pay rent to the new landlord, because his client did not require it. Had he obtained one, it is implausible to suppose that it would have revealed the fraud. Cuthbert & Co did not provide, and so Mr Martin did not get from BSG Solicitors a land certificate (which the Claimant had, because he purchased in 1996) nor any pre-registration deeds. I accept Mr Martin’s evidence that their absence would be quite unremarkable in a sale of registered land. He was also asked whether the fact that the vendor had solicitors in Peterborough should have set alarm bells ringing. Again, I accept his response: no alarm bells rang because Peterborough has a large Asian community. A solicitor in Bodmin would have been odd; a solicitor in Peterborough might well have been the family solicitor.[46]There is nothing here that could have justified, let alone required, Mr Martin’s departing from normal professional practice of leaving the vendor’s solicitor to satisfy himself that his client is the registered proprietor of the property. That that practice is standard among conveyancers can be seen from the apologetic way in which BSG Solicitors made an inquiry on this point to Cuthbert & Co, and from Mr Cuthbert’s response. And from that response it can also be seen that had any inquiry been made it is unlikely that much information would have been given. There was no lack of proper care here, nor any contribution to the mistaken registration.[47]The other limb of the Claimant’s case in respect of Mr Martin is that he did not advise his client to inspect the property. He said that it would have been insulting to do so in the light of his client’s experience and business practices – and that is obviously correct; his client inspected without being told to. Nor did he advise Mr Davarzani to seek a waiver of rights from the occupiers so as to prevent their having any overriding interest in the property under paragraph 2 of Schedule 3 to the LRA 2002. It may be that such waivers are not normally asked for in multi-occupied houses of this nature; the likelihood of occupiers placed there by a social housing agency having an option to purchase the house or being the beneficiary of a constructive trust of the property is remote. Had Mr Martin given that advice and had it been followed, it would have yielded the names of the occupiers, and disclaimers sufficient to satisfy the requirements of paragraph 2 of Schedule 3, but it is fanciful to suppose that that would have uncovered the fraud.[48]I have gone through what Mr Martin did and did not do in some detail because it is important that conveyancing practice is understood, and that the transaction is considered without the benefit of the hindsight that all concerned now have. I find that Mr Martin adhered carefully to the standards required of professional conveyancers, and that there was nothing that might have required him to depart from normal practice. There was no lack of proper care on his part, nor indeed anything that could be said to have caused or to have contributed at all, let alone substantially, to the mistake. Did Mr Davarzani contribute to the mistake by any lack of proper care before completion of the purchase of Sai Villa by the First Defendant?[49]Again the Claimant’s case is that Mr Davarzani did not take proper care either in that he did not check the identity of the vendor (that is, the vendor from whom Mr Finegold was purchasing) and did not make proper inquiries of the occupiers.[50]As to the identity of the vendor, I have quoted above (paragraph 41) Mr Davarzani’s initial email to his solicitor on 6 June 2014 in which he said “I would like you to confirm Landowner is the same as the seller and had the right to sell this property.” He was asked about this in cross-examination: why did he not follow it up? His answer, which I accept, was that this was not a question about identity fraud. He relied on his solicitor to check the register, and he was aware of Land Registry’s indemnity, so fraud was not what he was getting at at this point. He wanted his solicitor to check that the name on the property register because he was anxious to ensure that he was not going to be wasting time. And he did not chase for an answer because he relied on Mr Martin, who had acted for him several times before, to let him know if there was a problem – and in any case, as it happens, he actually checked the register himself. It is unrealistic to suggest that a purchaser of property, in this case or in general, shows any lack of proper care in not asking his solicitor to check the vendor’s identity; in any event, had he done so the answer would have been that this is the responsibility of the vendor’s own solicitor.[51]As I said above, this was a risky property. Should some of the problems that were evident in the transaction and from his solicitor’s advice have put Mr Davarzani on inquiry about identity fraud? Should he for example have been suspicious of the vendor because of the inaccurate responses on the SPIF (see paragraph 15 above)? Again, inaccurate responses are not unusual. I agree with Mr Davarzani that there was nothing here to ring alarm bells about the identity of the vendor. As Mr Rolfe put it, these answers were not a surprise from a vendor anxious to offload, quickly, a distressed property.[52]Similarly, he was aware of a whole raft of other problems with the property – the unregistered deposit, the absence of insurance details, the lack of an HMO licence. The property was so problematic that his solicitor advised him not to go ahead. Should he not have investigated the problems thoroughly rather than just getting a price reduction? Should he not have asked for more details about the planning enforcement proceedings, for example? Had he done so, would not the truth have been revealed?[53]I find that Mr Davarzani did not act with any lack of proper care in the circumstances. And “in the circumstances” is an important point. He was in the business of buying distressed properties. He expected problems. He knew that often managing agents do not register deposits. He knew that the house was in a poor condition and he knew about the illegalities arising from the multiple occupation. He looked round and reached his own judgement about whether or not he could get vacant possession. As it happens events proved him right on that point; even had they not done so, I would have found that this was a risk he was perfectly entitled to take given his experience and the nature of his business. There was no lack of proper care; there was simply a calculated and experienced approach taken to a certain kind of risk, namely the risk of having difficulty in getting vacant possession. Even if I am wrong about that, I take the view that this rather ingenious fraudster would not have been revealed by further enquiries.[54]That takes us to the other criticism made of Mr Davarzani, that he should have made more enquiries about the occupiers. Again, he made a choice based on his own assessment of the likelihood of getting vacant possession. He could have had some further conversations; he could have ascertained the names and ages of the occupiers if they happened to be willing to tell him. I find that there was no lack of care on his part, merely a pragmatic decision in the circumstances; again, if I am wrong about that, enquiries of the people who lived in Sai Villa would not have exposed the fraud.[55]But what about Altwood Ltd, whose van Mr Davarzani had seen? Should he have investigated the company, and should he have told his solicitor about it? Again, hindsight is tempting; sight of Altwood Ltd’s tenancy would have led Mr Davarzani to Jayesh Patel and would have revealed the truth. But again I accept Mr Davarzani’s evidence that he did not contact Altwood Ltd because he knew that at that stage, before exchange of contracts, the company would not give him information as a mere prospective purchaser. Instead he focused on the occupiers. Mr Martin also took the view that such an enquiry would have been futile. And there was nothing in Altwood’s obvious involvement, in the shape of the caretaker’s van, to make Mr Davarzani think “perhaps the tenant is not Amit Nagla” – let alone “perhaps the seller is not the registered proprietor”. He might have asked more questions of the caretaker, but there is no knowing whether that would have revealed anything useful.[56]In his witness statement Mr Davarzani said that he thought Altwood Ltd might have been a sub-tenant of Amit Nagla. At the trial he did not recall having taken this view at the time, and I think it probable that he did not, and that his witness statement had a flavour of hindsight about it on this point.[57]Mr Davarzani looked at Sai Villa with the eyes of an experienced property buyer who had the confidence to purchase without a valuation or a survey. He made certain decisions about what information he needed. He did not make all the enquiries that most domestic purchasers would have made, because his concerns were quite different – and indeed a purchaser looking to buy their own home simply would not have bought this property. There was no lack of proper care on Mr Davarzani’s part. Nor can it be said that anything he did or did not do caused or substantially contributed to the mistaken registration. Did Mr Davarzani contribute to the mistake by any lack of proper care after completion?[58]This is at first sight a strange question. Once the transfer to the First Defendant had been executed the deal was done and could not have been reversed, so how might the First Defendant have contributed to the mistake at this stage? The answer is that the mistake under consideration is not the transfer itself but the registration of the transfer; had the registrar known that the transfer to Mr Finegold was void for fraud he would not have registered it, nor would he then have registered the transfer to the First Defendant. Accordingly, says the Claimant, if the First Defendant through Mr Davarzani, through lack of proper care, failed to discover the fraud after completion and before registration of the second transfer, then he contributed to the mistake. Specifically, if he had discovered or even suspected the fraud at that stage he should have told his solicitor, who would have been under a duty not to register the transfer or to alert the registrar and halt the registration process.[59]I allowed on the final day of the trial a very late amendment to the Claimant’s Statement of Claim, namely the additional allegation that the First Defendant showed lack of proper care as just described. It is said that on 7 August 2014 Mr Davarzani became aware that Altwood Ltd had a three year tenancy on terms that were inconsistent with the supposed tenancy to Mr Nagla, that he should at that point have told his solicitor and made detailed inquiries which would have revealed the fraud, and that he should have alerted HM Land Registry and so prevented the mistaken registration.[60]I allowed that amendment despite its being made so late in the day because it was important that the issue be resolved at a point when witnesses were available to deal with it. However, having heard submissions about it from both Mr Dray and Mr Rolfe I came to the conclusion that even if I were to find Mr Davarzani had become aware of the tenancy to Altwood Ltd on 7 August 2014 he could not be said to have shown a lack of proper care that substantially contributed to the mistaken registration; it was agreed that I would give my reasons in full in my written decision. Accordingly no further witness evidence was called to deal with the amendment.[61]Having now considered the evidence I find as a fact that Mr Davarzani was not told about or given a copy of the tenancy in favour of Altwood Ltd at that meeting. That was his evidence, and it rings true. He had on 7 August a practical conversation with Mr Pabari, a member of staff from Altwood Ltd. He believed Altwood to be responsible for managing the property and he did not ask for a tenancy agreement because he already had it – or so he thought. He did ask about vacant possession, and a fruitful discussion was had.[62]An attendance note made by Mr Jacobs of Seddons solicitors dated 16 September 2014 refers to the Altwood tenancy agreement, but it is written from the point of view of the solicitor catching up with the facts at that stage, and I do not take that note to mean that Mr Davarzani had the Altwood tenancy or knew about it on 7 August 2014.[63]Accordingly the additional allegation of lack of proper care fails at the first fence. However, it is worth noting that more fences would have had to be crossed in order to make the Claimant’s point. If Mr Davarzani had had the Altwood tenancy on 7 August, should he have told his solicitor about it? He said in evidence that he might have done so but that it is often easier to deal with people face to face; he might reasonably have continued to make his own enquiries because – in the absence of any suspicion of fraud in the conveyancing transaction - it would have been the Altwood tenancy that looked wrong. He knew (so he thought) that the tenant was Amit Nagla. He knew (so he thought) what the rent was, and Mr Finegold had passed on to him the rent for July. He knew (so he thought) that the property was held on an assured shorthold tenancy and that there was therefore a problem with the deposit. Sight of the Altwood tenancy, which was inconsistent with all these points, would not initially have revealed a fraudulent sale; it would have rung alarm bells about the status of Altwood Ltd. True, it would also have led him to Jayesh Patel, and that would have revealed the truth. But that is unlikely to have happened as early as 7 August 2014, and by that stage the process of registration was already in train.[64]So it is not possible to say that Mr Davarzani, on behalf of the First Defendant, showed a lack of proper care after completion that substantially contributed to the registration of the transfer to the First Defendant. It is not even the case that Mr Davarzani showed a lack of proper care at all; so far as he was concerned everything was going well, he had had a good discussion with the company that managed the property, and the occupiers were going to be moved out. Alarm bells were not ringing and there was no reason, until Jayesh Patel got in touch in September, why they should have done.[65]Taking a further counterfactual: even if Mr Davarzani had had the Altwood tenancy and had shown it to Mr Martin before 20 August 2014 (when the registration of the First Defendant’s title was completed) it is not clear that he or Mr Martin could or should have halted the registration process. Mr Martin’s primary duty was to get the transfer registered; it is fanciful to say that he had at that point, and before any contact from Jayesh Patel, a duty to halt the registration as a result of puzzling evidence about the company managing the property.

Conclusion on the claim for rectification

[66]Accordingly, the Claimant’s arguments on lack of proper care have failed. There is nothing here that can be regarded as the cause of the mistaken registration. The First Defendant did not initiate that registration – that was done by the fraudster Patel – and there is nothing here that can be regarded as a cause of the mistake in the sense that butfor the failure to take a particular step the fraud would have been revealed. Nor can it be said even that there was a substantial contribution to the mistake in the sense that a step not taken by Mr Martin or Mr Davarzani would probably have revealed the fraud. Certainly there were steps not taken. But there is nothing that would probably have revealed the fraud.[67]Accordingly rectification must be refused, and the question whether there are exceptional circumstances justifying the refusal of rectification does not arise. Much of the exploration of the evidence of the Claimant and, even more so, of Jayesh Patel at the trial was directed towards this point, because the First Defendant’s argument was that even if it had shown a lack of proper care, the neglect of the property by the Claimant and his brother and their disregard for the planning legislation and the need for the licensing of the multiple occupation left the property open to fraud. I have made findings of fact about the conduct of the Claimant and his brother, but in the absence of any lack of proper care by the First Defendant I cannot make the sort of comparison of the behaviour of the two parties that would be required for a finding of exceptional circumstances.[68]The First Defendant is entitled to the special protection afforded to the registered proprietor in possession of the property. That leaves the claimant to his indemnity from Land Registry, which will no doubt now be pursued.

The First Defendant’s claim on the covenants for title

[69]The third party claim is not now relevant. As Mr Rolfe put it, if the register is not rectified against the First Defendant then it has no quarrel with Mr Finegold. Had I made an order that the register be rectified, then the third party claim would have been relevant, as follows.[70]The transfer from Mr Finegold to the First Defendant, dated 19 June 2014, was expressed to be made “with full title guarantee”. That means that there are implied in the transfer, by section 1 of the Law of Property (Miscellaneous Provisions) Act 1994, covenants by the transferor, including one “that the person making the disposition has the right (with the concurrence of any other person conveying the property) to dispose of the property as he purports to.”[71]On 19 June 2014 Mr Finegold was not the legal or beneficial owner of Sai Villa. All he had was a void transfer, from the fraudster Patel. The covenant is that he “has” the right to dispose of the property, at the point at which he does so; the fact that he later becomes the registered proprietor of the property does not mend matters so far as this covenant is concerned.[72]Mr Finegold agrees that this covenant was given and that he was in breach of it. He does not agree that that breach caused loss to the First Defendant because, he says, if the register is rectified the First Defendant will be entitled to an indemnity from Land Registry, pursuant to Schedule 8 of the LRA 2002.[73]The First Defendant says that this is irrelevant because it is entitled to pursue Mr Finegold on his covenants for title rather than claiming an indemnity, and might well choose to do so. Had I found that the First Defendant by lack of proper care had substantially contributed to the mistake, and made an order for rectification on that basis, the First Defendant’s claim for an indemnity might have been vulnerable to the same reasoning. Paragraph 5 of Schedule 8 to the LRA 2002 states: “No indemnity is payable under this Schedule on account of any loss suffered by a claimant … wholly as a result of his own lack of proper care. …Where any loss is suffered by a claimant partly as a result of his own lack of proper care, any indemnity payable by him is to be reduced to such an extent as is fair having regard to his share in the responsibility for the loss”.[74]In the light of that provision, if I had found a lack of proper care on the part of the First Defendant, I would also have had to make a finding as to the extent to which the First Defendant was responsible for his loss. And had I done so, the First Defendant would have claimed to be entitled to pursue the whole of its loss from the Third Party rather than claiming a partial indemnity and then picking up the rest from the Third Party.[75]Mr Finegold, on the other hand, argues that the First Defendant in these circumstances would have had a duty to mitigate its loss by seeking an indemnity first, even if that turned out to be only a partial one.[76]I have not been referred to any authority as to whether there is a duty to mitigate loss in the context of covenants for title. But it seems to me that on these facts, given the availability of mitigation in the form of Land Registry’s indemnity, Mr Finegold’s argument would have succeeded. There are jurisdictions (some states in Australia, for example) in which it is not possible to seek an indemnity from the land registry without first pursuing any available civil claim against another party to the transaction. But that is not the rule in this jurisdiction. Certainly – to turn the point on its head - the First Defendant would be entitled to seek an indemnity without first pursuing Mr Finegold on the covenants for title. And it seems to me that as a matter of policy that must be what Parliament would have intended the claimant for an indemnity to do. The indemnity offered by HM Land Registry, and funded by the fees paid by applicants for registration, is intended to be a matter of first recourse and persons in the position of Mr Finegold are entitled to expect that Land Registry’s indemnity will be called upon before the covenants for title are enforced.[77]Two further matters point me to that conclusion. One is that Mr Finegold is vulnerable to an action on the covenants for title only by an accident of conveyancing procedure. Had his purchase been registered before he entered into a sub-sale he could have transferred the land to the First Defendant with the benefit of section 58, which conferred the legal estate upon him, and without liability on the covenants for title. Equally, had the conveyancers decided to have Sai Villa transferred direct to the sub-purchaser, bypassing Mr Finegold, the latter would not have incurred any liability. There are reasons why the deal was not structured in either of those ways; but as a result of the structure, if I had ordered rectification, Mr Finegold would have incurred a liability on the covenants for title. This was probably not something that he could have anticipated; he pointed out in evidence that he was aware of Land Registry’s guarantee of title, and I suspect that not only he but also the solicitors involved might well not have realised that the structure of the deal was going to deprive him of that guarantee. At the very least he should be entitled to have the First Defendant mitigate its loss by seeking an indemnity from land Registry.[78]The other matter that points to that conclusion is Land Registry’s right of recourse. Paragraph 10 of Schedule 8 enables the registrar to recover anything paid by way of indemnity by enforcing any right of action that the claimant for an indemnity would have had if the indemnity had not been paid. Accordingly, all the parties at the trial took the view that had the registrar paid a full or partial indemnity to the First Defendant it would have been entitled to recover that loss from Mr Finegold. If that were true then the imposition of a duty to mitigate would be pointless because paragraph 10 of Schedule 8 would in effect have preserved Mr Finegold’s liability; either the First Defendant would seek an indemnity and the registrar would then pursue Mr Finegold, or the First Defendant would go straight to Mr Finegold, cutting out the registrar as middle-man. It would not make any sense to say that the First Defendant had to mitigate its loss by doing so when that would not avail Mr Finegold in the long run.[79]However, I do not think that that argument holds good. The Claimant has referred me – in the context of solicitors’ duties to Land Registry – to the Law Commission’s consultation paper, Updating the Land Registration Act 2002, (Law Comm CP no 227, 2016). Chapter 14 of that paper relates to indemnity and includes a discussion of Land Registry’s right of recourse. It records the commitments made to Parliament by government in 1997 and again in 2001, that Land Registry would not use its right of recourse against solicitors who were not at fault. The following is an extract from paragraphs 14.47 – 14.49:
“During the passage of the Land Registration Act 1997 through the House of Lords… Baroness Trumpington gave the following assurance: “It is neither the practice nor the intention of HM Land Registry to resort to its rights of recourse against those who are neither fraudulent nor negligent. It is a power that will continue to be used only in bad cases”. (Hansard (HL), 18 November 1996, vol 575, col 1166).”
[80]This assurance was repeated by Baroness Scotland during the passage through the House of Lords of the LRA 2002. Baroness Scotland noted that Land Registry’s practice in respect of the right of recourse would continue. (Hansard (HL), 8 November 2001, vol 628, col 313.)[81]Those assurances were given in the context of the liability of solicitors. The policy argument for not exercising that right of recourse against innocent individuals seems to me to be even stronger. No evidence has been heard, of course, as to whether Land Registry would seek to exercise the First Defendant’s rights against Mr Finegold on his covenants for title, but it seems to me that in view of the commitment given to Parliament about the liability of solicitors, members of the public might well benefit from the same protection. Accordingly the existence of the right of recourse is not an argument against the existence of a duty to mitigate on the part of the First defendant.[82]Therefore it seems to me to be clear that if I had ordered rectification of the register the Third Party would have been liable to make good the First Defendant’s loss, as a result of the covenant for title, but only to the extent that it had suffered loss following a claim for indemnity from HM Land Registry. I would then have given directions for the determination of quantum. But that does not arise and so I do not give directions.

Conclusion

[83]As discussed above the Claimant’s action against the First Defendant fails, and accordingly I do not order rectification of the register. Nor do I therefore make any finding about liability in the Third Party claim, and there is no need for further directions in that respect. I have not heard submissions on costs, and the parties may make any such submissions in writing within 28 days of the date of this decision.

Cited in 1 later judgment