Are solicitors to blame if they send purchase money to fraudsters?

Sat 26 Jul 2014 by Lorraine Imhoff

Written by Lorraine Imhoff

This and some other interesting questions for conveyancing solicitors were raised before the Court of Appeal in Santander UK Plc v R.A. Legal Solicitors ([2014] EWCA Civ 183.) Following the judgement buyer's conveyancing solicitors may now need to ask whether they are under any obligation to check whether a seller is genuinely selling the property.

In this case the solicitors who were purportedly acting for the seller turned out to be rogues and thieves. In fact they were not acting for the seller at all, and after the supposed completion of the sale they vanished, taking all the money from their client account including the purchase money.

Lord Justice Briggs, giving the leading judgement, found that the failings of R.A. Legal, the solicitors who acted for the buyer and his mortgage lender, amounted to “the shoddy performance of a conveyancing transaction from start to finish.”

Consequently they could not fairly be excused for their breach of trust in sending the purchase money to the rogue solicitors because although they had acted "honestly” they had not acted “reasonably.”

The details of the judgement do throw up some points which may worry even the most diligent of conveyancing solicitors.

Rogue solicitors were not instructed to sell by the owner

Put briefly, the facts were that RA Legal Solicitors were instructed to act on behalf of a purchaser. They were advised that the owner and seller of the property was a Ms. Emma Slater, and that her solicitors were Sovereign Chambers LLP ("Sovereign").

RA Legal also received instructions from their client's mortgage lender, Abbey National PLC (subsequently Santander) in the usual way.

Sovereign had not in fact been instructed by Ms.Slater at all, and she knew nothing about the supposed sale. But that was not known by RA Legal, and as far as they were aware the transaction was a perfectly genuine one, and proceeded in the normal way.

After a simultaneous 'exchange and completion' RA Legal received a signed contract and transfer – the signatures were forgeries but they did not know that. They only discovered that things were wrong when they never received notification of the discharge of the existing mortgage on the property.

And by that time Sovereign's client account had been cleared out and the solicitors had vanished.

Sending purchase money to fraudsters amounts to a breach of trust

Santander sued R.A. Legal (or their insurers) to recover £150,000 which they had lost when their mortgage could not be registered. They alleged that RA Legal were in breach of trust because they had released the mortgage advance to Sovereign without completion ever having taken place.

It was agreed that once they received the mortgage funds RA Legal held the money as trustee for Abbey. The question was whether they were in breach of that trust when they sent the money to Sovereign.

It was accepted by the courts that RA Legal had acted honestly and were totally unaware of the fraud being perpetrated by Sovereign. They did in fact check that Sovereign was a genuine firm of solicitors before sending them the completion money.

Notwithstanding that Lord Justice Briggs decided that RA Legal was in breach of trust. He said

“ … it by no means follows that the purchaser's solicitors have the lender's implied authority to transfer the trust money pending completion to the client account of any other solicitor than the firm which is in fact acting for the owner and intending vendor of the Property upon which the lender is to obtain a charge on completion. In the present case, Sovereign did not fit that description. It was not acting for the owner of the Property, had no instructions either to contract for or complete its sale … and had not the slightest intention of using any part of the money transferred to its client account for the purpose of discharging the existing first mortgage on the Property. For that simple reason I consider that the transfer of the money to Sovereign's client account on 28th July was a breach of trust.”

How can a buyer's solicitor check a seller's bona fides?

This decision raises the question as to how buyer's solicitor are supposed to check a sellers bona fides. Professional etiquette will normally rule out a direct approach to the registered owner, unless a seller is acting for himself. Even then it could turn out that a fraudster has stolen the true owner's identity.

Until now it has always been considered sufficient if the seller is represented by a firm of solicitors or licensed conveyancers who are assumed to have checked their clients' ID in the usual way. Certainly the land registry seems to accept this, only requiring evidence of ID from buyers or sellers who are not professionally represented.

Obviously it is good practice nowadays to check that the seller's solicitors are genuine, especially when you have not had previous dealings with that firm. But RA Legal had done that, and it is difficult to see what else they could have done to find out about the fraud in advance of completing.

Perhaps solicitors should now also ask sellers agents for confirmation that the sale is genuine, just to be on the safe side. But even then, fraudsters can deceive agents as well.

Buyer's solicitors failings did not excuse the breach of trust

Having decided that there was a breach of trust  Lord Justice Briggs then had to consider whether RA Legal had a defence under section 61 of the Trustee Act 1925, on the grounds that they had acted "honestly and reasonably, and ought fairly to be excused for the breach of trust."

At first instance the judge had accepted this defence and dismissed Santander's claim. However the Court of Appeal would have none of this and decided because of a catalogue of failings in the way the solicitors had handled the work it would not be fair to excuse them from liability.

Failings by the solicitors included:

  1. They had submitted an unqualified Certificate of Title at a time when they were still awaiting copy of a document referred to in the title register.
  2. RA Legal paid the funds to Sovereign relying only on inadequate replies to Requisition of Title  
  3. They released Abbey's funds to Sovereign the day before contracts had been exchanged, and without a letter to Sovereign stating that the money had been released or requiring that they be held to the order of RA Legal.
  4. They released funds to Sovereign on 28 July 2009, although alleged completion did not take place until the following day.
  5. They did not notify Abbey until 23 October 2009 that the transaction had been delayed because Sovereign had failed to provide proof of discharge of the prior charge, and they did not tell Abbey that they could not register the charge before 19 November 2009

Much of the judgement looked into the detail of these alleged failings.

For instance the court heard that an unqualified certificate of title had been sent to Abbey at a time when RA Legal was still waiting for a copy of an old deed containing some restrictive covenants.

They had done so because they were under pressure to complete and wanted to make sure of getting the mortgage funds in good time. They also said that in their experience it was extremely unlikely that the covenants would affect the value of the property.

RA Legal did in fact get a copy of the missing deed before completion, and it was accepted that the covenants were of no significance to the mortgage.

It was stated to the court that it was probably quite a common occurrence for certificates of title to be submitted in this way, and no problems would arise provided that solicitors do in fact get copies of any missing deeds before completing and check that it does not adversely affect the title.

It was also stated out that Sovereign’s replies to the usual requisitions relating to the arrangements for the discharge of the existing mortgage were wholly unsatisfactory. In particular it was unclear whether Sovereign were giving the usual undertaking to redeem the existing mortgage or to complete by post under the Law Society protocol.

However it was agreed that Sovereign would no doubt have given  specific undertakings if they had been pressed, but they would have been as worthless as the rest of the documents they supplied.

It is worth mentioning that the requisitions were in an earlier version of the  Law Society standard form. The current 2011 version of TA13 is much clearer, and ticking the 'Yes' box to requisitions 3.2 and 5.2 clearly confirms that undertaking are being given.

The other failings of RA Legal were in failing first to tell Abbey that completion was delayed beyond the date originally specified and then not telling them about the problems with getting the transfer and mortgage registered until long after completion.

As regards the first point it was accepted that if RA Legal had phoned Abbey on the date completion was originally supposed to have taken place Abbey would have authorised them to retain the money for a while.

At the conclusion of his leading judgement Lord Justice Briggs said that while these failings taken individually might be inconsequential, it was necessary to look at the whole course of the transaction. He said:

“ I have come to the clear conclusion that the particular failures which I have described, beginning with the inadequate making of Requisitions on Title, transferring the completion money without the adoption of the Completion Code by Sovereign, and then failing to deal with the absence of a prior mortgage discharge on the pretended completion, were indeed unreasonable, and sufficiently connected with Abbey's loss. In any event, those failings of R.A. Legal formed part of a larger picture of the shoddy performance of a conveyancing transaction from start to finish, which leaves me in no doubt that it would not be fair to excuse the firm from liability, in whole or in part.”

Presumably if RA Legal had carried out their work impeccably they might have been excused for the breach of trust.

This judgement should come as a warning to all practitioners that while it may frequently be possible to get away with slipshod work and cutting corners, when things go wrong they can end up facing substantial financial penalties.

It also sends out a warning that solicitors must be ever-more alert for frauds of all kinds.

It should just be mentioned that the Solicitors Regulatory Authority intervened into Sovereign's practice on 17 September 2009, but by then there was nothing left in the firm's bank accounts. RA Legal ceased to practice as from 1 October 2009 due to their failing to obtain competitive Professional indemnity insurance.

The judgement of Mr Andrew Smith in the High Court ([2013] EWHC 1380 (QB)) sets out the details of the case admirably and is worth reading.


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