Compensation Fund could pay the price after High Court buy-to-let ruling

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Lenders would not have gone ahead if aware of “gifted deposit”

The Solicitors Compensation Fund could be hit by a new wave of property claims after a High Court ruling on two test cases relating to a buy-to-let scheme.

Judge Behrens, sitting as a High Court judge, said that although Karon Brown, who acted as solicitor in the transactions, was struck off for dishonest conduct four years ago, it would be “wrong for me to treat this as a case of fraud”.

Instead he said “breaches of fiduciary duty” were established and awarded the claimants a total of almost £300,000.

Judge Behrens warned:  “It remains to be seen whether any of the claimants will recover the fruits of any judgment. Karon Brown is bankrupt and it appears unlikely that much will be recovered by way of dividend by the unsecured creditors.

“Watson & Brown’s professional indemnity insurers have refused to indemnify the firm because of the dishonesty. Thus the only hope of recovery may lie in a claim to the Solicitors Compensation Fund.”

The court heard that Karon Brown was the sole principal of Watson & Brown in South Shields. In each of transactions she acted for purchaser and lender. The properties were part of a portfolio marketed to investors by the Morris Properties Group.

Delivering judgment in Morkot and others v Watson & Brown [2014] EWHC 3439 (QB), Judge Behrens said: “Typically they were marketed on the basis that investors would be able to obtain a 100% mortgage and then be able to let the property. It is said that the price of each of the properties was significantly above its then market value.

“Morris Properties offered a ‘gifted deposit/seller’s cash back scheme’ which represented the deposit necessary to obtain a mortgage.”

The judge went on: “In each of the cases with which I am concerned the principal allegation against Watson & Brown is that Karon Brown did not disclose to the lender that the deposit was in fact being provided by the vendor as part of the gifted deposit scheme.

“Equally she did not disclose to the purchasers that she had failed to disclose the existence of the gifted deposit to the lenders. If the lenders had known about the gifted deposit scheme they would not have gone ahead with the loans.”

Judge Behrens said that in October 2010 Ms Brown was struck off the roll of solicitors, after the Solicitors Disciplinary Tribunal found four “serious allegations” proven against her, including that “she acted deliberately so that her conduct was dishonest”.

Following the hearing, he said “a number of purchasers” had launched proceedings against Watson & Brown. The judge said he had ordered all claims to be stayed pending quantification of the test cases. He said Karon Brown was bankrupt and neither she nor her trustee in bankruptcy had taken any part in the proceedings.

“I agree that breaches of fiduciary duty are established,” Judge Behrens said. “I agree that there was an actual conflict of interest in relation to the gifted deposit. I agree that Watson & Brown knew about the gifted deposit.

“I agree that Watson & Brown intentionally preferred the interests of Morris Properties because of the substantial fees to be earned from them.

“By 2006 a gifted deposit was a well-established badge of a mortgage fraud. In those circumstances I also agree that Watson & Brown were under a duty to disclose the gifted deposit to the lender and to advise the purchasers that it was unlikely that they would be made a mortgage offer.”

Judge Behrens assessed the damages at £4,840 in the first case, where the transaction did not go ahead, £155,131 for losses on the purchase of a one flat in the second case, and £131,804 for losses on the purchase of another.