This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Summary
The High Court decision in Purrunsing v A'Court & Co (a firm) [14 April 2016] is an important case on the liability of a seller's solicitor and buyer's solicitor where the buyer is the victim of a fraudulent seller.
The case highlights that both solicitors can be in breach of trust in paying purchase money to the fraudster and may be unable to obtain relief from liability under section 61 of the Trustee Act 1925 where they have not acted reasonably.
In this case whether the seller's solicitor has acted reasonably was gauged by its compliance with the Money Laundering Regulations and professional guidance in relation to due diligence of its seller client. This is a risk based approach and the particular factors in the case, which together were suspicious, meant that the seller's solicitor should have adopted a stricter approach to due diligence than it did.
The case also provides some important lessons on the warning signs of a fraud.
Facts
The case concerned a claim by the victim of a fraud arising out of the purported sale to the claimant of a property by a fraudster who claimed to be, but was not, the registered proprietor of the property. By the time the fraud was discovered, the whole of the purchase price (£470,000) had been paid by the claimant to his conveyancer ("HOC"), by HOC to the solicitors acting for the fraudster ("ACC") and by ACC to an account at an overseas bank on the instructions of the fraudster. None of the money paid over by the claimant was recovered and the claimant had no entitlement to the property.
There was never a genuine completion of the transaction and the monies paid away by HOC to ACC and by ACC to the fraudster's order were payments made in breach of trust and, therefore, both firms of solicitors were liable to the claimant for breach of trust.
Both HOC and ACC applied for relief under section 61 of the Trustee Act 1925. No allegations of dishonesty were made against the solicitors and ACC was not aware that its client, purporting to be the seller, was in fact a fraudster.
Section 61 gives the court discretion to absolve a trustee from making good a loss, even if the trustee has acted in breach of trust. The discretion applies where the court finds that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust.
Money Laundering Regulations and professional guidance
To determine whether the seller's solicitor ought to be granted relief, the Court considered the Money Laundering Regulations 2007 (MLR) and professional guidance.
The Law Society’s Conveyancing Handbook warns practitioners that the MLR require solicitors to take a risk-based approach to client due diligence including the obligation to obtain satisfactory evidence of their client's identity. This means that the approach that should be adopted will depend on the circumstances surrounding the particular transaction. What will be appropriate in relation to a sale by the owner-occupier of a modestly priced residential property that is subject to a building society charge may not be appropriate in relation to the apparent sale of a high value unencumbered property being offered for sale by a registered proprietor whose claimed address is not that of the property being sold or any other address for service on the Register.
The Law Society's Property and Registration Fraud Practice Note warns specifically of a rising incidence of "fraudsters targeting the properties of individuals" by means that can include identity fraud, and identifies certain properties as vulnerable to registration frauds. Five types of property are listed including unoccupied properties and high value properties without a legal charge. The Note repeats Land Registry advice that the registered proprietors of vulnerable properties should "keep any addresses they have registered for service at Land Registry up to date", emphasising the point that where an address given by a fraudster is not an address registered for service at the Land Registry, this is something that ought reasonably to put a seller's solicitor on enquiry as to why the address he was supplied with was not registered, and/or of the need to communicate with the fraudster at the registered address, or at least to seek instructions to do so for the purposes of complying with the MLR.
The Note also warns that identity documents may not conclusively prove that the person is the person they are purporting to be or that such person is the registered proprietor of the property. The relevant MLR obligation also encompasses looking at all the information in the retainer and assessing whether it is consistent with a lawful transaction. This may include considering whether the client is actually the owner of the property that they want to sell. That will not be necessary or appropriate in every case in which a solicitor is retained to act for the seller of residential property, but in the Court’s judgment, the factors in this case set out below pointed towards the need for such consideration.
Factors suggesting increased chance of fraud
- While one factor viewed in isolation may not put a solicitor on notice of a possible problem requiring further investigation, if combined with other factors it may well be more significant. It is necessary for a court to consider all the information available to the solicitor together at key stages rather than each item of information separately, to decide whether a claim for relief under s61 should be granted.
- Two addresses were given for the registered proprietor on the registered title to the property, neither of which was the address supplied by the fraudster to ACC. ACC did not write to their client, the fraudster, at both addresses, but had they attempted to contact the fraudster at the second address, they would have made contact with the real owner and the fraud would have failed.
- The property was unoccupied, of high value and not subject to a charge.
- ACC could have asked their client for utility bills or council tax documentation for the property to connect their client to the property, but failed to do so.
- Inconsistent information had been provided by the fraudster when compared to the local search results.
- On a previous abortive sale of the property, when the prospective buyer’s solicitor asked for confirmation of where the seller worked (abroad), the seller told ACC that he no longer wished to proceed with the sale as he considered that the prospective buyer was trying to prolong doing the transaction. However, the provision of that information would not have delayed the transaction.
- The fraudster was abroad and would not be returning to the UK before completion.
- ACC had no knowledge of the fraudster other than that obtained following his original approach to ACC.
Seller’s solicitor as trustee of purchase money
The seller's solicitors (ACC) held the purchase money from when they received it until completion on trust for the buyer as beneficiary and despite there never being a completion (because the completed transfer was invalid as it was executed by the fraudster), ACC still paid the money to the fraudster. It follows that they did so in breach of trust and are liable to the buyer. The seller's solicitor is as much a trustee of the purchase money while it is in his possession pending completion as is the buyer's solicitor. The liability that arises from a breach of that obligation is strict because of equity's high expectations of a trustee discharging fiduciary obligations.
Once it is found or admitted that a seller's solicitor is a trustee of the purchase money and has parted with it in breach of trust, there is no obvious justification for interpreting s61 more leniently in respect of such a breach by a seller's solicitor than would be the case in relation to such a breach by a buyer's solicitor. Each has breached the trust with which the purchase money was impressed and each has breached equity's high expectation of a trustee discharging fiduciary obligations. It follows, therefore, that for each, the same standard of reasonableness applies, though what each has to do to fulfil that standard may be different because of the different roles that each has in relation to the transaction.
If liability for that breach is to be avoided under s61 it has to be shown by the trustee that any departure from best or reasonable practice on his part did not increase the risk of loss by fraud. ACC failed to carry out its MLR obligations in accordance with reasonable practice in the circumstances and that failure increased the risk of loss by fraud. A reasonable solicitor in ACC’s position carrying out client due diligence as required by the MLR and adopting a risk-based approach taking account of the risk factors mentioned above ought clearly to have considered whether the fraudster was the owner of the property to assess whether the transaction was a lawful one. ACC simply did not know of the terms of the rules and guidance to which he was subject and had those enquiries been made as and when they should have been, it was unlikely the fraud would have occurred in the way it did.
So ACC failed to discharge the burden resting on it to establish that it acted reasonably in the circumstances and, therefore, it was not entitled to the benefit of s61.
HOC, the buyer’s solicitor, was also in breach of contract and/or duty to the claimant in failing to inform him that an enquiry had been raised, the purpose of which was to attempt to establish a link between the property and the apparent seller, and the answers received showed that ACC had not verified and had not confirmed from the information available to it a link between the seller and the property, and consequently there was a risk in proceeding with the purchase. HOC was also unable to rely on s61.
The Court held that HOC and ACC must each bear equal liability for the buyer’s loss.
Conclusion
The case is a real warning of the dangers of fraud and points to watch out for and how the MLR and professional guidance require conveyancers to be alert to such suspicious factors in relation to client due diligence. Failure to act reasonably may prevent a successful relief claim from liability for breach of trust for paying purchase money to a fraudster.
