In the first reported case concerning a breach of trust by a seller’s solicitors of duties owed to the buyer, the court found the solicitors liable. Douglas Rhodes looks at the important lessons all conveyancers should take away from the decision.
What’s happened?
A solicitor who acted for a fraudulent seller in a conveyancing transaction was found jointly liable, along with the buyer’s solicitor, to the buyer for breaches of trust which took place when completion monies were transferred to the fraudster on the purported completion of the sale.
The facts
The fraudster, Mr Dawson, instructed the first defendant, A’Court & Co (ACC) on a quick sale of an unencumbered, vacant, relatively high value property. Proof of address was provided by a utility bill in Maidenhead, which matched neither the address of the Cambridge property to be sold, nor the address for service recorded on the Land Registry official copies of title.
The first attempted sale of the property fell through when the buyer, amongst other enquiries, asked for proof of employment from the hospital in Abu Dhabi where the fraudster apparently worked, which led to the fraudster pulling out of the sale. ACC did not have any documentation linking their client to the property to be sold and did not request any.
The claimant instructed the second defendant, House Owners Conveyancing Ltd (HOC), to act on the purchase. HOC raised additional enquiries which asked for confirmation that ACC were familiar with the sellers and would verify that they were the sellers and check identification documentation to support this.
In their response, ACC stated that prior to this transaction, they had no personal knowledge of the seller, but had met them in person and seen their passport together with utility bills ‘showing his UK address as notified to us’. Elsewhere in its replies, ACC stated: ‘For the avoidance of doubt, we have no documents whatsoever relating to this property, save for the ones we have already sent you’, none of which linked the seller to the property. HOC did not advise the claimant of these answers or raise any further enquiries or concerns.
Completion took place and the purchase monies were transferred by HOC to ACC and by ACC to a bank account in Dubai on their client’s instructions. The fraud was only uncovered when attempts were made to register the property and Land Registry contacted the actual registered proprietor at the address for service on the official copies.
The claim
The claimant brought a claim in negligence against their own conveyancer, but also claimed against both conveyancers in breach of trust, on the basis that each held the purchase money from when they received it until completion on trust for the claimant purchaser as beneficiary.
Since there was no actual completion but the monies were paid to the fraudulent purchaser anyway, it was accepted by both defendants that a breach of trust had occurred. The question for the court was whether either or both defendants should be exonerated under section 61 of the Trustee Act 1925, which provides that if a trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust, then the court may relieve them from liability.
The court’s judgment
The court found that HOC was liable for breach of trust, breach of contract and negligence. This was on the basis that, whilst the enquiry regarding the seller’s identity was not one that is usually asked, the answer received was clearly ambiguous and unsatisfactory, and HOC ought to have advised their client not to proceed with the transaction until satisfactory responses had been received. If such advice had been given, the court found that it was inconceivable that the claimant would have proceeded.
The court found that ACC was also liable for breach of trust and should not be relieved of their liability, because ACC had failed to carry out their anti-money laundering obligations in accordance with reasonable practice and that failure increased and caused the loss by fraud. It was irrelevant that ACC’s anti-money laundering duties were not owed to the claimant, because it was accepted that ACC was in breach of trust and their failure to follow reasonable practice meant that they should not be relieved from their breach.
Each solicitor was therefore found jointly liable and ordered to each bear half of the loss.
Why is it important?
This is the first reported case concerning a breach by a seller’s solicitor of duties owed to the buyer. This may come as a surprise to some conveyancers, given that there is generally no duty owed in tort by a seller’s conveyancer to the buyer. However, it emphasises the importance of understanding that where completion monies are held by a buyer’s solicitor pending completion, those monies are held on trust for the seller and there is an absolute obligation not to release the money before completion. Completion in this context means a genuine completion that gives the purchaser the means of registering the property that they have agreed to buy.
The court’s finding of joint liability emphasises the importance of ensuring compliance with anti-money laundering duties and following the Law Society’s Property and Registration Fraud Practice Note, which the court had specific regard to when considering whether the conveyancers had acted reasonably.
How does it fit into existing law and practice?
The case develops the law on the standard to be applied to conveyancers for breaches of trust, following on from several cases over the past few years (e.g. Lloyds TSB v Markandan & Uddin [2012] EWCA Civ 65) which have dealt with claims for relief by solicitors who acted for the lender as well as the purchaser.
The case has clarified that where there is a breach of trust by a conveyancer, the standard of behaviour to which each conveyancer will be held is the same, regardless of whether the conveyancer was acting for the beneficiary or not. The court applied previous Court of Appeal authorities and found that the standard is necessarily a high one, and therefore requires the solicitor concerned to have acted ‘with exemplary professional care and efficiency’ and to be ‘careful, conscientious and thorough’, although the test remains one of ‘reasonableness not perfection’.
The court nevertheless recognised that what each conveyancer has to do in order to fulfil the standard of behaviour may be different because of the different roles each one has.
How does this case affect practitioners?
Practitioners need to be aware of the risks of failing to make full and proper checks that their client is who they purport to be. As is made clear by paragraph 3.1.1 of the Property and Registration Fraud practice note, compliance with the Money Laundering Regulations 2007 (MLR 2007) ‘means more than just finding out that they want to sell a property. It also encompasses looking at all the information in the retainer and assessing whether it is consistent with a lawful transaction. This may include considering whether the client is actually the owner of the property they want to sell’.
Failure to comply with the MLR 2007 can result in regulatory enforcement action and criminal prosecution, and could also result in a claim for breach of trust by the victim of a fraudulent transaction.
What should I be doing differently?
If it isn’t already, the Property and Registration Fraud practice note should be printed and put on the wall of all conveyancers. Given the increased incidence of property fraud, it is crucial to follow the guidance and be alert and vigilant to the risk of fraud.
Practitioners should also think carefully about whether flags have been raised requiring additional enquiries concerning the other party’s identity. Where enquiries are raised and ambiguous, or unsatisfactory answers are given, these must be reported on to the client. Whilst it may not always be necessary or usual to raise enquiries concerning the seller’s connection to the property, where there are particular risk factors (e.g vacant, unencumbered, relatively high value property, unregistered property or unusual instructions), careful attention needs to be paid to the risk of fraud.
If you are acting for a client who is the owner of property that is particularly vulnerable to fraud, you may wish to use Land Registry’s Property Alert facility. This is a free service where Land Registry will send an email alert each time there is significant activity that may result in a change to the register of a property being monitored.
