No recovery where breach did not affect decision to lend

The recent case of Godiva Mortgages Limited v Khan and Keepers Legal LLP[1], involved a claim against solicitors for negligence and breach of contract for failing to draw to the lender’s attention various matters in respect of a mortgage transaction. Although the lender established a breach of contract on behalf of the solicitors, the court was not satisfied that it would have refused to lend even if properly advised. As such, the lender had suffered no loss and was entitled to only nominal damages in respect of the breach of contract.

The claim

Keepers Legal LLP acted for Godiva Mortgages and Mrs Khan in the purchase of a property. The property was to be purchased from Mrs Khan’s brother-in-law. The price stated in the contract was £495,000, of which £173,250 had already been paid by way of deposit direct to the seller, and the balance of £321,750 was provided by Godiva.

The transaction was a sham and the mortgage advance disappeared. Mrs Khan’s brother-in-law had died a year previously, and his signature on the contract documentation had been forged.

Godiva brought proceedings against Mrs Khan, alleging fraudulent misrepresentation in respect of her application, and a claim against Keepers for breach of contract and negligence.

The judgment

The court found that Mrs Khan was liable to Godiva for the losses flowing from the advance as it had undoubtedly relied on her representations, in the sense that it clearly would not have proceeded with the transaction if told that her representations were false.

Godiva established a breach of contract against Keepers as it had failed to disclose factors which might reasonably be considered important to a lender, including the fact it was not informed that:

  • Mrs Khan had paid £173,250 to the seller as a direct deposit
  • the receipts provided by Mrs Khan in support of this did not add up to the figure claimed
  • the price of the property was effectively reduced by £16,375 upon completion.

The claim in negligence was more problematic. The court held that, if Keepers had done as it should, it was not inevitable that Godiva would have refused to lend. In the context of a family sale with a substantial apparent security margin and an apparent confirmation from the seller's solicitor that the deposit had been paid, Godiva might well have been prepared to proceed. Accordingly, Godiva established a breach of contract by Keepers and a breach of duty in negligence, but not that it had suffered any loss thereby.

Although the position may have been different had the transaction not involved a family sale, this case highlights circumstances where, even if a lender was negligently advised, it may have not been inevitable that it would have refused to lend.

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[1] Godiva Mortgages Limited v (1) Sophie Khan (2) Keepers Legal LLP [2012] EWHC 1757