Mortgage – Release of funds – Breach of trust – Third party fraudulently obtaining funds from mortgage lender – Defendant solicitor acting for claimant lender on transaction – Defendant paying over loan funds to party posing as vendor’s solicitor – Claimant seeking damages for breach of contract or breach of trust – Whether defendant exercising reasonable skill and care – Whether defendant acting honestly and reasonably and relieved from personal liability – Claim allowed
G had established a solicitor’s practice which was properly authorised by the Solicitors Regulation Authority (SRA). In October 2008, someone posing as G notified the SRA of an intention to open a branch office (“the fake office”). In about December 2008, G became aware of this and promptly notified the SRA. However, the fake branch office was not removed from the SRA records and website until April 2009.
In November 2008, P applied to the claimant building society for a loan to be secured by mortgage to purchase a property for £249,995 which was subject to a charge in favour of another lender (GEM). Both the claimant and P instructed the defendant firm of solicitors. The claimant expressly provided that its instructions were on the basis of the then current version of the CML Lenders’ handbook. It was an express term of those instructions that the loan was to be secured by a first legal charge over the property. Further, in accordance with the handbook, the defendant had to register the mortgage as a first legal charge at the Land Registry within the priority period covered by the pre-completion search.
In February 2009, someone from the fake office, purporting to act for the vendor, contacted the defendant which, not having dealt with the firm before, sought confirmation of its identity with the Law Society and the SRA by checking the website which still showed the existence of the fake office. On 12 March 2009, the defendant exchanged contracts by telephone and the transaction purportedly completed. The defendant paid the loan money into a bank account and the purchaser was registered as proprietor but the property was still subject to the pre-existing first charge and no mortgage was registered in favour of the claimant. The borrower disappeared and the claimant lost the whole of the advance.
The claimant commenced proceedings against the defendant for damages for breach of contract or an order for restoration of a trust fund and for equitable compensation. The defendant argued that it had exercised reasonable skill and care and was neither in breach of contract nor breach of trust. However, if it was found to be in breach of trust, the defendant claimed that it had acted honestly and reasonably and should be relieved from liability under section 61 of the Trustee Act 1925.
Held: The claim was allowed.
(1) There was a clear mandatory requirement in the CML Lenders’ Handbook and incorporated into the retainer that the claimant was to have a fully enforceable first legal charge on completion and the pre-existing charge had to be redeemed. The defendant would not be in breach of its contract of retainer if at the moment of completion it had, in addition to a duly executed legal charge from its own client, undertakings from the vendor’s solicitor that he was authorised by GEM to receive money to redeem the GEM mortgage, that he would do so and would provide a certificate of discharge when he had done so.
In a properly conducted transaction the risk of the charge not being completed by registration still existed because the giver of the undertaking might be an impostor. There were frauds which even the most careful solicitor might fall foul of and it was important to have clear wording if an undertaking was to be construed as imposing an absolute, rather than a qualified, obligation to achieve a particular result. In the present case, the defendant was in breach of the terms of its retainer since the claimant had not obtained any charge on the property and did not get what they bargained for.
(2) As for breach of trust, the question was whether the defendant had the claimant’s authority to part with the loan money. Prior to completion the defendant needed not only clear information about the pre-existing charge to be redeemed at completion, but also an undertaking from a solicitor that he had GEM’s authority to receive the sum to repay it and an undertaking from a solicitor to redeem or obtain a discharge of the GEM charge insofar as that had not been done prior to completion. However, the defendant did not have such undertakings; even the most impeccably worded undertaking from the fake office would not be that of a solicitor. Accordingly, the defendant acted in breach of trust in parting with the advance.
(3) Although the careful, conscientious and thorough solicitor, who conducted the transaction by the book and acted honestly and reasonably might still be held to have been in breach of trust for innocently parting with the loan money to a fraudster, he was likely to be treated mercifully by the court pursuant to section 6I of the Trustee Act 1925: Lloyds TSB Bank plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65; [2012] PLSCS 27 applied.
The finding that the defendant parted with the loan money in breach of trust gave rise to the possibility of an exercise of the court’s discretion to relieve it from the consequences of such breach under section 61. It was common ground that the defendant had behaved honestly throughout. However, a careful and diligent solicitor would be expected to be clear in his own mind that he had an express, not an implied, undertaking, still less a mere promise to give an undertaking in the future, on a matter so important. Although the court did not blame the defendant for believing that what it had received was from a solicitor, it had been too ready to act as if it had the necessary authority to part with the money. Accordingly, relief under section 6l would be refused.
Paul Parker (instructed by Eversheds LLP, of Cardiff) appeared for the claimant; Michael Pooles QC (instructed by Berrymans Lace Mawer LLP, of Manchester) appeared for the defendant.
Eileen O’Grady, barrister