Fraudsters sometimes pose as solicitors while relieving lenders of their cash. Consequently, the Law Society advises conveyancers to check the identity of law firms they do not know by consulting the appropriate professional directory.
In Nationwide Building Society v Davisons [2012] PLSCS 95 the solicitors retained by a lender did just that and were reassured to discover that the solicitor and branch office of the firm with whom they were dealing appeared on the Solicitors Regulation Authority website.
The lawyer noted that his client had already paid a substantial deposit and reported this to the lender and to SOCA, not because he suspected criminal activity, but because he could not verify where the money had come from. Both confirmed that they were happy for the transaction to proceed.
The solicitor “exchanged and completed” the purchase simultaneously, only to discover that he and the Solicitors Regulation Authority had been duped and that he had been dealing with a bogus branch office of a law firm. The fraudsters pocketed the mortgage advance and disappeared, leaving the lender without the charge it had instructed its solicitor to obtain and its solicitor to face claims for breach of contract and trust.
Solicitors are susceptible to claims for breach of trust because client’s money is trust money. In addition, the Council of Mortgage Lenders’ Handbook requires solicitors to hold a mortgage advance on trust until completion. Trustees are liable to restore the trust fund if they part with money in breach of trust even though the immediate cause of the loss is the dishonesty or failure of a third party. However, section 61 of the Trustee Act 1925 empowers the court to relieve a trustee from liability if he has acted honestly and reasonably and ought fairly to be excused.
The High Court upheld both the lender’s claims. Their solicitor had parted with the mortgage advance without obtaining a genuine undertaking to redeem the existing mortgage and had failed to secure the first legal charge that he had been instructed to obtain. Consequently, he was in breach of contract and had parted with the lender’s money in breach of trust.
The court refused to excuse the law firm from liability under section 61. The judge was prepared to forgive the lender’s solicitor’s failure to question curiosities in the letterhead and the provision of a mobile telephone number for the bogus branch office, poor spelling in their correspondence and also other oddities that, with hindsight, might have suggested that something was wrong.
However, the lender’s solicitor had parted with the mortgage advance too readily because he had not received anything that could be construed as an undertaking to discharge the existing mortgage. The replies to requisitions were unsatisfactory and referred to an undertaking to be given on completion (Form Con28B). The adoption of the Law Society’s Code for Completion by Post was insufficient and no separate undertaking to discharge the mortgage was ever given.
The judge accepted that the lender’s solicitor had behaved honestly and did not blame him for believing that he was dealing with another solicitor. Nonetheless, she refused to grant relief under section 61.
Allyson Colby, property law consultant