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Josephine Hayes succeeds in appeals of two mortgage lenders who were victims of forgeries

Mr Justice Morgan has allowed the appeals of two mortgage lenders each of which had made loans intended to be secured by registered first legal charge to finance a property purchase, unaware that each transaction involved (as the trial judge found) the forgery by one joint proprietor of the other’s signature on the contract of sale and on the transfer to the purchaser. The co-owners had succeeded before the trial judge in arguing that the transfers were shams without any effect. The appeal judge, rejecting that contention, held that in each case the forger’s equitable interest had been conveyed and charged to the lender.

The appellant lenders each advanced monies in May 2013 to finance a buy-to-let purchase in the expectation of getting a registered first legal charge over the purchased property. The purchasers executed charges to the lenders. In each case the same man, the forger, was in a business relationship with the purchasers’ sole director. The two of them had devised an elaborate scheme for sharing the properties and the proceeds. Following a trial in the county court in Central London, the co-owners’ signatures were found to be forgeries. It was common ground that the property register and charges register must be rectified; but the judge below, considering himself bound by Penn v Bristol & West Building Society [1995] 2 FLR 938, held that in each case the transfer was a sham, so that the forger’s equitable interest had not passed to the purchaser, and he dismissed the lenders’ claims to have each acquired an equitable charge. The appeal judge considered that the judge below had confused fraudulent transactions with sham ones: there was no finding that the forger and purchaser intended that the transfers would have no effect, and the purchaser’s awareness of the forgery did not entail that each transfer was a sham in its entirety. Each transfer was a conveyance to which section 63 of the Law of Property Act 1925 applied, so that, as the decision in Ahmed v Kendrick (1987) 56 P&CR 120 confirmed, the transfer had no effect on the co-owner’s equitable interest in the property but passed the forger’s own equitable interest in it to the purchaser. That interest was charged to the lender. The same result was reached by an illegality analysis: the illegal nature of the enterprise did not prevent property from passing by the transfer, and on the principles in Patel v Mirza [2017] AC 467 and Grondona v Stoffel & Co [2021] UKSC 540, policy considerations as to the integrity of the legal system, public morality and the purpose of the prohibition on fraud pointed overwhelmingly in favour of the same result.

Josephine Hayes appeared for the appellants, Shawbrook Bank Limited and OneSavings Bank PLC, in the High Court exercising its Chancery Appeals jurisdiction. Judgment was handed down on 27th August 2021 and can be read here.