Allyson Colby reviews a recent case which ruled on a solicitor’s liability for breach of trust
Key point
• A seller’s solicitor may be liable to a buyer for breach of trust if a client purports to sell a property that he does not own
What is the position if a seller’s solicitor pays away money sent to him on completion of a transaction, in accordance with his client’s instructions, only to find that his client had impersonated the proprietor in order to relieve an unsuspecting buyer of his cash? Purrunsing v A’Court & Co [2016] EWHC 789 (Ch); [2016] PLSCS 111 is a landmark case in which a solicitor acting for a seller, who was in fact a fraudster, was held liable to a defrauded buyer for breach of trust.
Identity fraud
The fraudster instructed solicitors to act for him on the sale of an unencumbered residential property. He stated that his father had given him the house, which was unoccupied; he lived elsewhere and required a quick completion because he needed the cash. He produced a bank statement, utility bills and a forged passport as evidence of his identity. None of the documents linked him to the property and the address that he gave did not match either of the addresses for service registered by the proprietor at the Land Registry, but the lawyer did not investigate further.
The fraudster’s first attempt to sell the property fell through when the buyer asked for confirmation of where the seller worked and if the fraudster’s solicitors had verified their client’s identity. The fraudster took fright and instructed his lawyers to request the return of the papers. He said that he had found another buyer, who was prepared to move quickly, and did not want to lose him while the previous buyer dallied.
The second transaction was rushed through. The buyer funded the transaction himself, since there was not enough time to put a mortgage in place, and the fraudster’s solicitor transferred the money to an account in Dubai in accordance with his client’s instructions. The fraudster vanished. The Land Registry smelled a rat and rejected the buyer’s application for registration – and the buyer was left out of pocket to the tune of £470,000.
Breach of trust
When the proceedings were heard, the buyer had extracted an admission of liability from his own conveyancer, and had obtained judgment against the seller’s solicitors for breach of trust. Consequently, the trial concerned their respective applications for relief from liability under section 61 of the Trustee Act 1925.
HH Judge Pelling QC explained that sellers’ solicitors hold purchase money on trust while it is in their possession pending completion of a transaction, in the same way that buyers’ solicitors do. Furthermore, Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65; [2012] PLSCS 27 had established that the trust on which a buyer’s solicitor holds money is discharged only by the genuine completion of a purchase, or by the return of the cash. The same principle applied to the sellers’ solicitors as well and, since the transaction had never completed, it followed that both conveyancers were liable to the buyer for breach of trust.
Liability for breach of trust is strict. Trustees must restore the amount lost from the trust fund, unless the court decides that they have acted honestly and reasonably and ought fairly to be relieved, either wholly or partially, from liability: section 61.
Section 61
The honesty of the conveyancers was not in doubt, but the reasonableness of their actions was. Santander UK plc v RA Legal Solicitors [2014] EWCA Civ 183; [2014] 2 EGLR 73 confirmed that the court must examine a trustee’s conduct as a whole when considering applications for relief. Conduct that played no part in the loss may be disregarded. However, the court should not disregard departures from best or reasonable practice that had some causative connection, or that materially increased the risk of loss caused by fraud, and must also consider the impact on those to whom the duty was owed.
Unusually, the buyer’s conveyancer had asked questions about the seller’s identity and his links with the property. The replies were unsatisfactory, but he had not informed his client or advised him of the risk of proceeding in such circumstances, at breakneck speed, using all his cash savings, together with money borrowed from family and friends. This constituted a failure to act reasonably, which deprived him of relief under section 61.
The judge reached similar conclusions about the fraudster’s solicitor’s behaviour. He drew attention to the Law Society’s property and registration fraud practice note. This states that, in addition to identifying clients, the Money Laundering Regulations 2007 may require practitioners to consider whether a transaction is lawful and whether their clients actually own the property that they want to sell. A judgment will be required in every case, based on the risks posed by the transaction in question.
The fraudster’s solicitor had failed to fulfil his money laundering obligations in relation to his client in circumstances where there was nothing to link him to a high-value property that was unencumbered and unoccupied and, therefore, vulnerable to fraud. The loss in this case might not have been the result of money laundering as we know it (ie as defined in the Proceeds of Crime Act 2002). Nonetheless, the lawyer’s departure from reasonable practice had increased the risk of loss caused by fraud.
HH Judge Pelling QC accepted that sellers’ solicitors do not owe a duty of care in tort to buyers. However, this case concerned the law of trusts. The judge could not see any justification for interpreting section 61 more leniently in favour of a seller’s solicitor than in the case of a buyer’s solicitor, and ruled that the firms should share liability equally between them.
Allyson Colby is a property law consultant
