Santander UK plc v RA Legal Solicitors (a firm)
Solicitor – Breach of trust – Mortgage – Defendant firm of solicitors acting for claimant mortgage lender on transaction involving mortgage loan to borrower for purpose of purchasing property – Fraud perpetrated by firm of solicitors purporting to act for vendor – Defendant paying over loan funds to that firm but completion not occurring and no charge executed in claimant’s favour – Whether defendant acting in breach of trust – Whether appropriate to discharge defendant from liability pursuant to section 61 of Trustee Act 1925 – Claim dismissed
In 2009, the claimant made a mortgage loan of £150,000, plus fees, to a borrower to finance his purchase of a property over which the loan was to be secured by a first legal charge. The defendant firm of solicitors acted for both the claimant and the borrower on that transaction. The claimant’s instructions to the defendant incorporated Parts 1 and 2 of the Council of Mortgage Lenders (CML) handbook (2007 ed), including the requirement under para 5.6 for the defendant to provide on completion a fully enforceable first legal charge over the property executed by all owners of the legal estate and, under para 10, for it to hold the loan on trust for the claimant until completion.
The defendant dealt with another firm of solicitors who purported to act for the registered owner of the property as vendor. In fact, the owner had never agreed to sell the property and the firm, although a real firm of solicitors regulated by the Law Society, was acting fraudulently. In July 2009, the claimant transferred the loan funds of £150,215 to the defendant’s account. The fraudulent firm provided the defendant with details of a bank account to which the £200,000 purchase price should be transferred, with a view to achieving simultaneous exchange of contracts and completion. The defendant released that sum, comprising the claimant’s loan and the borrower’s own funds, into that account; the following day, the fraudulent firm purported to effect exchange and completion accordingly. In fact, completion, within the meaning of the CML handbook, never took place and the claimant never obtained any charge or security over the property.
The claimant brought proceedings to recover £150,215 from the defendant by way of restitution for an alleged breach of trust. The defendant denied that it had acted in breach of trust. It submitted that, although it held the loan funds for the claimant, it had done so with the claimant’s authority and instruction to apply them in the completion of the transaction of purchase and mortgage of the property. It further contended that it should be relieved from liability for any breach, pursuant to section 61 of the Trustee Act 1925, on the ground that it had acted honestly and reasonably and ought fairly to be excused.
Solicitor – Breach of trust – Mortgage – Defendant firm of solicitors acting for claimant mortgage lender on transaction involving mortgage loan to borrower for purpose of purchasing property – Fraud perpetrated by firm of solicitors purporting to act for vendor – Defendant paying over loan funds to that firm but completion not occurring and no charge executed in claimant’s favour – Whether defendant acting in breach of trust – Whether appropriate to discharge defendant from liability pursuant to section 61 of Trustee Act 1925 – Claim dismissed
In 2009, the claimant made a mortgage loan of £150,000, plus fees, to a borrower to finance his purchase of a property over which the loan was to be secured by a first legal charge. The defendant firm of solicitors acted for both the claimant and the borrower on that transaction. The claimant’s instructions to the defendant incorporated Parts 1 and 2 of the Council of Mortgage Lenders (CML) handbook (2007 ed), including the requirement under para 5.6 for the defendant to provide on completion a fully enforceable first legal charge over the property executed by all owners of the legal estate and, under para 10, for it to hold the loan on trust for the claimant until completion.
The defendant dealt with another firm of solicitors who purported to act for the registered owner of the property as vendor. In fact, the owner had never agreed to sell the property and the firm, although a real firm of solicitors regulated by the Law Society, was acting fraudulently. In July 2009, the claimant transferred the loan funds of £150,215 to the defendant’s account. The fraudulent firm provided the defendant with details of a bank account to which the £200,000 purchase price should be transferred, with a view to achieving simultaneous exchange of contracts and completion. The defendant released that sum, comprising the claimant’s loan and the borrower’s own funds, into that account; the following day, the fraudulent firm purported to effect exchange and completion accordingly. In fact, completion, within the meaning of the CML handbook, never took place and the claimant never obtained any charge or security over the property.
The claimant brought proceedings to recover £150,215 from the defendant by way of restitution for an alleged breach of trust. The defendant denied that it had acted in breach of trust. It submitted that, although it held the loan funds for the claimant, it had done so with the claimant’s authority and instruction to apply them in the completion of the transaction of purchase and mortgage of the property. It further contended that it should be relieved from liability for any breach, pursuant to section 61 of the Trustee Act 1925, on the ground that it had acted honestly and reasonably and ought fairly to be excused.
Held: The claim was dismissed.
(1) The moneys that the defendant had received from the claimant were impressed with a trust, requiring them to be held for the claimant until completion. The defendant had acted in breach of trust by paying away those moneys prior to completion. It was not a case where the trustees had dealt with the trust asset under a power in the trust. The trust property had been paid away without receiving genuine documents to complete transaction, and that was outside the authority conferred by para 10.3.4 of the CML handbook. The trust required the defendant to retain the fund until the trust was brought to an end by completion. Although the defendant would not have been liable if it had lost the trust asset before completion through no fault of its own, and having taken all proper precautions, that was not what had happened. It had deliberately transferred the funds out of its control by releasing them to persons who purported to be acting for the vendor. It had done so because it thought that completion was to take place and that the trust would be ended, but it was wrong about that. The consequence was that it had deliberately released the trust asset before the trust ended; it was in breach of trust accordingly: Lloyds TSB Bank plc v Markandan & Uddin (a firm) [2012] EWCA Civ 65; [2012] PLSCS 27, Nationwide Building Society v Davisons Solicitors (a firm) [2012] EWCA Civ 1626; [2013] 1 EGLR 73; [2013] 10 EG 148, Target Holdings Ltd v Redferns (a firm) [1996] AC 421 and Speight v Gaunt (1883) 22 Ch D 727; (1883) 9 App Cas 1 applied.
The defendant had paid away the claimant’s funds in two stages: first, when it had transferred them to the fraudulent firm on terms that the firm was to hold the moneys to the defendant’s order pending completion; and second, when it had then released those moneys, believing that it was completing the sale. Although it was not necessary to decide, the better view was that the breach of trust had not arisen at the first stage but only at the second. At the first stage, the defendant had paid the funds into a bank account in return for an undertaking, given by a genuine firm of solicitors, to provide discharge of the existing charge over the property: Lloyds TSB Bank plc distinguished. The defendant was not obliged to keep the claimant’s funds in cash; it had paid them into a bank account so that the trust property was by way of a chose in action against its bank. There was no reason to distinguish that position from the situation where the defendant transferred the funds to the purported vendor’s solicitor, which appeared to be a reliable creditor who was to hold the funds to the defendant’s use. However, once the defendant released that solicitor from its obligation to hold the money to its order, against documents that were forgeries, that was tantamount to transferring the moneys away without authorisation and amounted to a breach of trust.
(2) It was appropriate to relieve the defendant from liability pursuant to section 61 of the Trustee Act 1925. It had acted reasonably and none of the criticisms that the claimant made of its conduct amounted to a sufficiently serious, or involved such a departure from ordinary and proper standards, as to cut the defendant off from the court’s discretion to relieve it of liability. The law generally leant towards confining the responsibility of professional people to a duty to take reasonable care their liability for breach of that duty; in particular, it did not readily impose on them responsibility for loss resulting from the fraud of others: Platform Funding Ltd v Bank of Scotland plc [2008] EWCA Civ 930; [2008] 3 EGLR 83; [2008] 42 EG 168 applied. It was fair to excuse the defendant’s breach of trust.
Neil Mendoza (instructed by Matthew Arnold & Baldwin) appeared for the claimant; Imran Benson (instructed by DAC Beachcroft LLP, of Bristol) appeared for the defendant.
Sally Dobson, barrister
