Stoffel & Co v Grondona

An illegal purpose does not by itself make a conveyance or mortgage a sham. Where the parties intended legal title or an interest to pass, the transferee may acquire proprietary rights and remedies. Applying the public-policy approach in Patel v Mirza, a civil claim against negligent solicitors was not barred where the solicitors were unaware of the fraud, the retainer was lawful, the claimant sought no profit, and refusing relief would not advance the prohibition against mortgage fraud. Damages were compensatory and limited to the value of the lost security, rather than the claimant’s entire continuing mortgage debt.

The claimant instructed the defendant solicitors in connection with the purported purchase of a leasehold property and the related mortgage finance. The solicitors admitted failing to register the transfer, discharge of the existing charge and new mortgage charge. The trial judge found that the claimant had participated in a mortgage fraud but held that illegality did not bar her negligence and breach of retainer claim, awarding £78,000 plus interest by reference to the property’s value in November 2009.

The defendant appealed on illegality. The claimant cross-appealed on quantum, contending that damages should reflect her continuing mortgage indebtedness. The central issues were whether the claim was barred under the approach in Patel v Mirza and how the claimant’s loss should be assessed.

1. The appeal and cross-appeal were dismissed. Lady Justice Gloster gave the judgment, with which Lord Justice Flaux agreed.
2. The trial judge’s conclusions that the mortgage was a sham and that there was no intention to transfer legal title were legal analyses, not findings insulated from appellate review. As between the claimant and Birmingham Midshires, both parties intended the mortgage charge to take effect. Under Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at p 802, a sham requires a common intention by all parties to create different legal rights from those appearing to arise. The claimant’s undisclosed intentions could not affect the lender’s rights.
3. Illegality did not prevent legal title or an interest from passing. The principles illustrated by Singh v Ali [1960] A.C. 167, Taylor v Chester (1869) L.R. 4 Q.B. 309, Feret v Hill (1854) 15 C.B. 207 and Tinsley v Milligan [1994] 1 AC 340 establish that an executed transfer may vest property or an interest in the transferee despite an illegal purpose. The transferee may then assert the resulting proprietary rights against the transferor and third parties, subject to better title.
4. Under sections 24(b) and 27(1) of the Land Registration Act 2002, the claimant had an equitable interest and a right to registration when the TR1 was not registered; registration would have transferred legal title despite the illegal agreement. The solicitors’ obligation was to protect that interest and the mortgage security. The illegal features of the agreement were irrelevant to that professional obligation.
5. The court applied the three public-policy considerations stated in Patel v Mirza [2016] UKSC 42: the purpose of the prohibition, other public policies affected by denying relief, and proportionality. Mortgage fraud was serious, but denying recovery by an innocent solicitor’s client would not further that prohibition. The retainer was otherwise lawful, the claimant sought no profit from the fraud, and refusal of relief would be disproportionate.
6. Quantum was correctly assessed at £78,000, the value of the unencumbered property when the loss crystallised, with interest. The claimant was entitled to the position she would have occupied had the documents been registered, not compensation for the whole of her continuing mortgage debt, which resulted from her decision to take out the loan and the arrears existing by November 2009.

1. Court of Appeal (Civil Division): The defendant’s appeal and the claimant’s cross-appeal against the order of 11 April 2016 were dismissed. See [2018] EWCA Civ 2031.
2. County Court at Central London: HHJ Walden-Smith found for the claimant on negligence and breach of retainer and awarded £78,000 plus interest. The judge held that illegality did not bar the claim and assessed loss by reference to the property’s value in November 2009.