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Liability of buyer’s solicitors for breach of trust

Business Meeting 8 Print publication

08/03/2017

The High Court has considered the scope of a buyer’s solicitor’s liability in fraudulent property transactions and provided guidance as to whether a buyer’s solicitors are entitled to relief under section 61 of the Trustee Act 1925.  Sandip Singh reviews the recent case of Dreamvar (UK) Limited v Mischon de Reya and Mary Monson Solicitors Limited [1] and explains its importance and implications for buyers, sellers, lenders and conveyancers alike.

The Property Fraud

This case, the latest in an unfortunate trend of cases involving rogue sellers, arose from the fact that a fraudster purported to be (but was not) the registered proprietor and seller of a property.

The claimant buyer (Dreamvar) transferred completion monies for the property to his solicitors, the first defendant, (MdR).  MdR held those monies on trust until they were transferred to the seller’s solicitors, the second defendant, (MMS). MMS, in turn, held the monies on trust until they were transferred to the client account of another firm of solicitors who were purportedly acting for the seller on a different transaction, and lost.

The Legal Case

Dreamvar claimed against MdR for negligence and breach of its duties as a trustee of the completion monies received from Dreamvar.

Dreamvar claimed against MMS for breach of its trustee duties as recipient of the completion monies, breach of undertaking and breach of warranty of authority.

High Court Decision

Claims against MdR

In respect of the claim against MdR, the High Court rejected Dreamvar’s arguments that:

  • MdR had been negligent by failing to identify a number of features relating to the transaction which should have alerted MdR to the risk of fraud and failing to advise Dreamvar accordingly.
    • The court considered all the relevant facts known to MdR at the time of the transaction and considered that MdR’s view was one which a competent solicitor, acting with reasonable care and skill, would have formed.
    • For example, there was nothing in the conduct of the transaction which would have suggested to MdR that MMS was not competent. In addition, the seller had instructed a reputable firm of estate agents, who were also subject to money laundering regulations and could therefore be expected to have complied with their obligations.
  • MdR had been negligent in failing to seek an undertaking from MMS that MMS had taken reasonable steps to establish its client’s identity. (It was Dreamvar’s contention that, as there was no other protection that a competent solicitor should take, then the profession as whole had adopted an approach that was not reasonable.)
    • The court held that MdR had not been negligent in failing to seek such an undertaking from Dreamvar on the basis that the arrangements for completion were dealt with under the 2011 Code and its provisions include undertakings which are to be provided by the seller’s solicitors on completion. In addition, the Law Society had published guidance in the Handbook on Conveyancing as to what a solicitor needs to do to provide a proper level of protection for its client.

In respect of the breach of trust claim, the court found that MdR had breached its duties as trustee of the completion monies which it held on trust for Dreamvar. It was an implied term of MdR’s retainer that the completion monies would only be released on completion of the purchase of the property. Further, the court considered that completion by post, which was subsequently agreed between MdR and MMS, did not affect the conclusion that the completion monies were to only be released for the purpose of a genuine completion. As a result, MdR were only permitted to release the completion monies for the purpose of a genuine completion of a genuine purchase in accordance with the terms of the trust.

However, the High Court had to consider whether MdR were entitled to relief under section 61 of the Trustee Act 1925. The courts have discretion to grant relief where a trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust.

The court accepted that MdR had acted honestly and reasonably in carrying out its role. However, the court held that MdR should not fairly be excused for the breach of trust and, exercising its discretion, declined to grant section 61 relief. The court reached its decision for the following reasons:

  • The effect of the breach of trust had been financially disastrous for Dreamvar;
  • MdR had insurance cover for these types of events and this insurance was sufficient to cover in full the loss suffered;
  • Although it was deemed reasonable for MdR to not have advised Dreamvar as to the risk of fraud or to have obtained greater protection for Dreamvar against that risk (for example through further undertakings), it was considered relevant that MdR was far better positioned to take into account, and as far as possible achieve, greater protection for Dreamvar against the risk of fraud; and
  • Dreamvar had no recourse against MMS and no practical likelihood of tracing or making any recovery from the fraudster. On this basis, the only practical remedy Dreamvar had was against MdR.
Claims against MMS

In the case against MMS, the High Court held that MMS also held the completion monies on trust for Dreamvar but was permitted to release the monies to its client even though there was no genuine completion of a genuine purchase. As such, the court found that MMS was not in breach of trust.

Similarly, the court also decided that MMS was not in breach of the undertaking it gave in accordance with paragraph 7(i) of the 2011 Code and was not in breach of warranty of authority. The court rejected Dreamvar’s argument that in acting for the person purporting to sell the property, MMS had warranted that it had authority of the true owner of the property. The court also rejected Dreamvar’s argument that MMS had warranted that it acted for the person claiming to be the true owner and had exercised reasonable care and skill in establishing the person’s identity.

WM Comment and practical advice

The case will be of interest to all those involved in the conveyancing process, most notably to those acting for buyers and their professional indemnity insurers. The decision may also have wider implications as it will be relevant to all solicitors who hold client monies on trust and are subject to trustee duties in respect of those monies. The case has caused confusion over the extent of a solicitor’s liabilities and what reasonable checks they must undertake during the purchasing process.

The case will be of particular concern because the buyer’s solicitors were found liable even though:

  • there had been a failure by the seller’s solicitors, MMS, to undertake the necessary identity checks on their client;
  • MdR had not been negligent in not recognising, or advising their client as to, the risk of fraud; and
  • MdR had acted reasonably and honestly but the court opted not to exercise its discretion under section 61. Whilst the court considered that the buyer’s solicitors were in a better position to consider and achieve “greater protection” for the buyer against the risk of fraud, the judgment does not provide any guidance as to the meaning of “greater protection” and what steps could be taken to achieve it.

This area of the law is currently in a state of flux and there is a need for clarity as to what a buyer’s solicitors can or should do in order to reduce their risk of liability. Ultimately, this case underlines the necessity that professional advisers remain vigilant to the risk of identity fraud. Each case will depend on its own individual facts, but where there are any unusual or suspicious elements to which could create concern in the view of a reasonably prudent conveyancer, a buyer’s solicitor is under a duty to provide information and advice to its client as to the concerns and risks of any potential fraud.

So far as lenders are concerned, this case also confirms that where its own conveyancers have paid the mortgage advance away, there will likely be a claim for breach of trust if the seller is an imposter.

The High Court has granted leave to appeal this case and it is likely that the appeal will be heard at end of this year, potentially alongside the similar case of P&P Property Ltd v Owen White & Catlin LLP & Anor [2], and the Law Society is considering whether to intervene in the appeal. It is to be hoped that additional guidance may be issued to practitioners on how to protect themselves from identity fraud in the not too distant future.

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[1] [2016] EWHC 3316 (Ch)
[2] [2016] EWHC 2276 (Ch). See our earlier briefing.

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