Who should bear losses caused by conveyancing fraud?

Postal completions save time and money. However, they have also created weaknesses in the conveyancing system for fraudsters to exploit. Ikbal v Sterling Law [2013] EWHC 3291 (Ch); [2013] PLSCS 268 is a sorry story of the purported sale of a property by a fraudster, who absconded with the purchase price without providing the buyer’s solicitors with a transfer form.  The property in question was in a dilapidated condition and had been inhabited by squatters. The title was registered at the Land Registry, but the proprietor had died some years previously and his executors had neglected to have the property registered in their name. The victim of the fraud was a cash purchaser, who only became aware that his ownership was in doubt when the executors discovered that someone had started work at the property, applied to register their title, and began possession proceedings against him. The buyer laid out £350,000 to acquire the property and had spent a substantial sum improving it.  Was he entitled to recover any of these sums from his solicitors on the grounds that they had been negligent, or were in breach of contract, or had paid away trust moneys in breach of trust because they had failed to obtain a valid transfer of the property into his name? The buyer had authorised his solicitors to pay a 10% deposit to the “seller’s” solicitors (which they had done, and had received a contract signed by the “seller’s” solicitors on behalf of their client in return). Therefore, the breach of trust claim related to the balance required to complete, which the buyer had entrusted to his solicitors for that purpose. It transpired that they had sent the money to the “seller’s” solicitors without obtaining an assurance that they would adopt the Law Society’s Code for Completion by Post, which sets out what is expected of practitioners in such circumstances. The judge agreed that this was a breach of trust. In addition, the trust on which the buyer’s solicitors held the money could only be discharged by the genuine completion of the transaction or by the return of the cash. Trustees who are in breach of trust must restore the amount lost from the trust fund unless the court excuses them because they have acted honestly and reasonably and ought fairly to be relieved of liability under section 61 Trustee Act 1925. The judge agreed that the buyer’s solicitors had not been meticulous and that their client had not been well-served, but decided to exercise his discretion under section 61 because the buyer’s loss was caused by a fraud which, at the time, his solicitors had had no reason to suspect and the outcome would not have been any different, had they acted differently. The buyer’s common law claims were marginally more successful. The judge agreed that the buyer’s solicitors should have chased up the missing transfer within days (instead of letting things drift for over three months, by which time, the “seller’s” solicitors had ceased to practice) and should have informed their client that there was a problem. They should also have advised the buyer not to spend any money on the property until things were resolved. However, the judge decided that the buyer’s solicitors’ mistakes were not causative of many of the losses incurred. Consequently, the damages awarded were restricted to £45,000. Allyson Colby is a property law consultant