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Mortgage fraud and HMLR indemnity claims

Background

Historically, and obviously dependent upon the facts of each case, it often proved exceptionally difficult for a lender to recover loss suffered following removal of a fraudulent charge in its favour from the security property’s title. Where a sophisticated fraudster succeeded convincingly in concealing any warning signs of dishonesty from the lender’s professional advisors, it could be very problematic for the lender to try to establish a cause of action in negligence against them. Almost inevitably, the fraudster’s whereabouts and asset position would be unascertainable, leaving little prospect of making a recovery from them either as the principal debtor.  

Prior to Swift, HM Land Registry (HMLR) typically resisted lender claims for an indemnity in such circumstances on the basis - broadly speaking - that the fraudulent charge had no true value in any event and thus its removal from the register did not cause any real loss to the lender. The Court of Appeal in Swift confirmed, however, that an exception should be made for a claim made in good faith under a forged disposition, following the addition of wording to Schedule 8 of the Land Registration Act 2002 , changing the previous position in the Law of Property Act 1925.

Impact for lenders

A number of indemnity claims to HMLR were put on hold pending the Court of Appeal’s decision in Swift.  Since the position was clarified, our experience for a number of bank/lender clients is of a marked positive difference in how these claims are now dealt with. Aside from the fundamental point that, provided the facts fit a Swift-type scenario, liability (at least to some degree) appears to be accepted by HMLR almost from the outset, responses to correspondence are also provided much more quickly.  The delays experienced previously are significantly reduced. 

The recovery rates achieved, both in terms of the substantive indemnity and costs (see further below), have also been extremely positive, at around 95% if not 100% in the majority of cases.  This is significant given that even if the facts of a particular matter did disclose a viable cause of action against the lender’s professional advisors (for example, the borrower’s ID documents provided were clearly forgeries) a good result typically for a lender in any professional negligence action would be to recover around 70% of its loss, subject to any contributory negligence arguments, and a similar percentage of its costs.

Practical Points

Limitation

Similarly to actions in negligence and breach of contract, the relevant limitation period for a claim for an indemnity is 6 years.  This time period runs from the date on which rectification of the register (to remove the charge in question) is said to take effect, being the earliest possible point at which the lender could be aware of the cause of action for an indemnity as a result of rectification. 

Slightly counter-intuitively, the date that rectification is deemed to take effect is the date the application for rectification is made, not the date that it is granted.  It is therefore important to diarise and work to the date 6 years (less one day) from the date the application to remove the charge was made to HMLR.  

HMLR ought to specify the date of the application when notifying the affected lender that an application has been made. Needless to say, if there is any doubt over the precise date, the lender should err on the side of caution.  

In the main of course a lender will take steps very quickly upon receipt of notice of an application having been made, not least to assess in the first instance whether there is any merit in lodging an objection. 

Costs

To maximise its costs recovery a lender should request HMLR’s consent at the outset (i.e. upon receipt of notice of the application) to incur costs investigating the matter and taking steps to protect its position.  Updates on the costs position and requests for further consent as necessary will further assist.

Whilst HMLR has the discretion to consent to costs retrospectively and/or make an offer reflective of the actual costs position (if/as distinct from the consented position), this can of course result in increased correspondence and delay.

Looking ahead

With the increasing number of positive results in indemnity claims against HMLR, lenders should be encouraged to consider and pursue these where a charge is removed from a security property’s title on the basis it was entered into fraudulently. The longer term impact for HMLR obviously remains to be seen.  It will be in HMLR’s interests more than ever to identify fraudulent transfers prior to registration – thereby pre-empting any application for rectification and subsequent indemnity claim. Given the ever present and seemingly ever increasing risks posed by fraud to lenders, however, HMLR indemnity claims seem set to remain as a key, if not the primary, option in recovering monies lost to mortgage fraud.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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