Source: http://propertylawuk.net/cgi-bin/pluk.py/article?PageRequest=mortgagesolicitorsnegligence.html
Timestamp: 2019-04-21 00:15:37+00:00

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Mortgage fraud - relief from liability: The trust imposed on a mortgage advance sent to solicitors could only be discharged by completion of the purchase or the return of the money to the lender. Since this had not occurred the solicitors were in breach of trust. However, they would be relieved from liability under s61 of the Trustee Act 1925. They had acted honestly and reasonably, even if they had not complied with best practice, and ought fairly to be excused.
Solicitors' negligence - equitable compensation for breach of trust: Solicitors acted in breach of trust in relation to the circumstances under which they parted with a mortgage advance. Where some security was obtained, equitable principles of compensation required the court to have regard to causation and remoteness. Compensation would be assessed as the loss in value of the lender’s security, not the whole amount of the advance.
Failure to achieve completion: A solicitor who parted with a mortgage advance without achieving completion committed a breach of trust and would ordinarily be liable to repay the advance, but on the facts the solicitor had acted honestly and reasonably and ought fairly to be excused.
The trust imposed on a mortgage advance sent to solicitors could only be discharged by completion of the purchase or the return of the money to the lender. Since this had not occurred the solicitors were in breach of trust. However, they would be relieved from liability under s61 of the Trustee Act 1925. They had acted honestly and reasonably, even if they had not complied with best practice, and ought fairly to be excused.
The case involves a mortgage fraud involving a fictitious branch of a firm of solicitors, purportedly established by a genuine firm, and registered with the Law Society and Solicitors Regulation Authority.
A purchaser obtained an offer of loan from the claimant Building Society to assist in the purchase of a property. They both instructed the defendant firm of solicitors (Sols) to act for them. The Building Society’s instructions were in accordance with the Council of Mortgage Lenders’ Handbook. On completion the Building Society required a fully enforceable first legal charge and that all existing charges be redeemed. Pending completion, Sols were to hold the advance on trust for the lender.
Sols received communications from the fictitious branch who purported to act for the seller saying that they had received a deposit from the purchaser and that the vendor was gifting the stamp duty. Since Sols defendant firm had not dealt with with the fictitious branch before, in accordance with the Law Society Green Card warning on mortgage fraud, they checked with the genuine firm and also the Law Society and SRA. The gift of stamp duty and the position relating to the deposit was notified to the claimant Building Society.
The fictitious branch agreed to give Sols an undertaking to discharge a pre-existing charge in favour of the existing lender on completion. Sols provided a Certificate of Title and proceeded to exchange and complete. Nothing more was heard from the fictitious firm.
The purchaser was registered as proprietor, but subject to the old mortgage which had not been discharged. The Building Society’s charge could only be protected by a unilateral notice.
The Building Society sued Sols for breach of contract and breach of trust. It was common ground that the mortgage advance was held by the defendant on trust.
At first instance, it was held that the Building Society did not get the first legal charge as it required and that Sols were therefore in breach of their contract of retainer.
As for breach of trust, the issue was whether Sols had the Building Society’s authority to part with the mortgage advance. This depended on whether there had been completion. In order to achieve this, Sols needed an undertaking from a solicitor to redeem the existing charge, which, given that the vendor’s solicitors were fictitious, Sols did not have. The court considered a number of previous decisions including Lloyds TSB Bank Plc v Markandan and Uddin  EWCA Civ 65 and held that the defendant solicitors were in breach of trust.
It was common ground that the defendant solicitors behaved honestly throughout. The court held that a careful and diligent solicitor would expect to have an expressly worded undertaking, and would not rely on a proposal to adopt the Law Society’s Code for Completion by post as being the giving of the undertaking. The court refused to grant relief under s61 and gave judgment for the Building Society.
The Court of Appeal allowed the appeal and found in favour of Sols.
As to whether Sols were liable for breach of contract depended on the construction of the CML Handbook’s requirement to obtain first legal charge. The requirement to obtain a fully enforceable first legal charge involved issues of title and the exercise of professional skill. Similarly the requirement that all existing charges must be redeemed necessarily involved reliance on the acts and omissions of the vendor’s solicitors. Each of those ingredients was inconsistent with an absolute obligation – per Barclays Bank Plc v Weeks Legg & Dean  QB 309 and Patel v Daybells  EWCA Civ 1229. If it was the intention to impose absolute obligations, the rest of the CML Handbook would be redundant. Therefore, the obligation goes no further than an obligation to exercise reasonable skill and care in seeking to procure these outcomes. Sols were not in breach of their retainer.
Compliance with the CML Handbook’s requirement to verify unfamiliar firms did not confer on Sols the authority of the Building Society to pay the purchase money to the fictitious firm so as to discharge them from the relevant trust imposed by the CML Handbook. The trust imposed on the loan moneys in the hands of Sols could only be discharged by completion of the purchase or the return of the money to the claimant. No such completion ever took place (Lloyds TSB Bank Plc v Markandan and Uddin  EWCA Civ 65 applied) and the money was not returned. Sols were therefore in breach of trust.
Trustee Act 1925, s.61 imposed three conditions: honesty, reasonableness and the exercise of the court’s discretion. It was common ground that the defendant acted honestly. The requirement of reasonableness does not require a solicitor to necessarily comply with best practice in all respects. The requisite standard is reasonableness not perfection. In all the circumstances, Sols acted reasonably. Even if Sols had insisted on answers to its requisitions and on separate written undertakings, it is probable that the imposter would have complied and the matter would have proceeded as it did. The lapse from best practice did not cause the loss to the claimant. Given that Sols acted honestly and reasonably, they should be granted relief from all liability.
Conveyancing solicitors will probably breathe a sigh of relief after this decision. Whilst the Court of Appeal held that the solicitors had acted in breach of trust in parting with the loan advance when completion had not taken place, they were relieved from liability for breach of trust under s61. They did not have to comply with best practice, but simply to act reasonably. Their conduct also had to be gauged against the loss that occurred. Here the Court held that it would have occurred anyway.
As for breach of the contract of retainer, it is important to note that the Court held that the the obligation contained in the CML Handbook to obtain a first legal charge was not absolute but merely imposed a requirement of reasonableness.
How is the sum assessed?
Solicitors acted in breach of trust in relation to the circumstances under which they parted with a mortgage advance. Where some security was obtained, equitable principles of compensation required the court to have regard to causation and remoteness. Compensation would be assessed as the loss in value of the lender’s security, not the whole amount of the advance.
The borrower arranged to re-mortgage her property, then valued at £4.25m with the Lender for £3.3m. A firm of solicitors acted on behalf of both the Borrower and the Lender. The Lender required that an existing charge to Barclays be discharged on completion. The Barclays charge secured borrowings of about £1.5m on two accounts.
The Lender obtained a “Mortgage Valuation Statement” from Barclays which contained a statement that it was not a “redemption statement”. On completion the Solicitors telephoned Barclays and were given a redemption figure of £1.23m, which they paid to Barclays and paid the balance of the Lender’s net advance to the Borrower.
The Solicitors failed to notice that the redemption figure only related to one of two accounts and so was insufficient to redeem Barclays’ charge. They admitted negligence. The Lender’s charge was not registered until almost two years later following agreement with Barclays that it should be registered as a second charge.
The borrower defaulted in repayment of the Lender’s charge (and was subsequently made bankrupt). The Lender repossessed the property and sold it for £1.2m. After redeeming Barclays’ first charge, this left the Lender with £867,697.00.
The Lender sued the Solicitors for damages for professional negligence, alleging that the Solicitors acted in breach of trust by paying the net advance without obtaining a first charge and that in consequence they were liable to reconstitute the trust fund of £3.3m with interest, credit being given for the £867,697.00 actually recovered.
The Solicitors argued that payment was not a breach of trust, or if it was, their liability was limited to the loss in value of the Lender’s security caused by their failure to pay off the whole of the Barclays charge, being about £300,000.00.
At first instance the High court held that there had been a breach of trust. However, it did not follow that the whole of the payment out of £3.3m was made in breach of trust. The difference between what the Solicitors did and what they ought to have done if they had complied with their instructions was the approximate amount of £300,000.00 that should have been paid to Barclays but was instead paid to the Borrower. Accordingly that sum plus interest was the extent of their breach of trust.
The Lender appealed, contending that it was entitled to equitable compensation in an amount (after giving credit for recoveries) which would restore it to the position it was in immediately before the breach occurred.
The Court of Appeal allowed the appeal in part, but confirmed the amount of the award of damages.
The first issue was whether there had been a breach of trust, and if so was it limited to the release of the additional sum paid to the Borrower, rather than Barclays. It was common ground that the mortgage advance remained trust monies in the Solicitor’s hands unless and until disbursed in accordance with the authority of the Lender. The Court of Appeal held that the Solicitors did not have a redemption statement from Barclays or any undertaking to discharge the Barclays charge on completion. (These requirements were referred to in Lloyds TSB Plc v Markandan  EWCA Civ 65 and Davisons Solicitors v Nationwide Building Society  EWCA Civ 1626 - see above). It therefore followed that the Lender had not been authorised to release the funds. The Court held that therefore the judge was wrong to treat the breach of trust as limited to that part of the mortgage advance that was paid to the Borrower instead of Barclays.
The second issue related to remedy. As to causation and remedy, the case was fundamentally different from Markandan and Davisons. In a case such as the present one Target Holdings Ltd v Redferns  AC 421 establishes that equitable principles of compensation, although not employing precisely the same rules of causation and remoteness as the common law, do have the capacity to recognise what loss the beneficiary has actually suffered from the breach of trust and to base the compensation recoverable on a proper causal connection between the breach and the eventual loss. Here the Lender’s loss was that it enjoyed less security for its loan than would have been the case had there been no breach of trust. It was not open to the Lender to contend that but for the breach of trust it simply would have asked for its money back. The fact that the Lender did not obtain a first charge is irrelevant to the question of what loss the Lender suffered as a result of the breach.
The judge’s order, which calculated equitable compensation in the sum of £323,501.38, was affirmed.
The Lender wasn’t suing for common law damages for professional negligence. (In fact the result would probably have been the same). They were suing for breach of trust to reconstitute the entirety of the trust fund (the mortgage advance). The Court of Appeal accepted that completion had not taken place but did not like the consequences. The case was different to Markandan and Davisons, which both involved fraud, and in which the lenders didn’t obtain any security. Here, the Lender obtained security, albeit not as valuable as it would have liked. Accordingly, equitable compensation was assessed having regard to rules of causation and remoteness as the difference in value of the security.
A solicitor who parted with a mortgage advance without achieving completion committed a breach of trust and would ordinarily be liable to repay the advance, but on the facts the solicitor had acted honestly and reasonably and ought fairly to be excused.
A lender (L) agreed to lend a purchaser (B) a sum of money to assist in purchasing a property, subject to taking a first legal charge. Both L and B instructed a law firm, RA, to act for them. RA were retained by L in accordance with Parts I and II of the CML Handbook (as at June 2007). The vendor’s solicitors (S) were a genuine firm but fraudulently represented that they acted for the vendor.
In due course L transferred the mortgage advance money to RA’s bank account. S notified an account to which the completion monies should be sent and RA transferred the completion monies to this account (initially to be held to order, but subsequently released). However, completion did not in fact take place. S produced forged documents, and L did not obtain a first legal charge.
L then sued RA for repayment of the advance on the grounds of breach of trust, alternatively L claimed damages for professional negligence.
Whether RA could rely on the statutory defence under s 61 Trustee Act 1925 on the basis that it had acted honestly and reasonably, and ought fairly to be excused.
L acknowledged that if they did not succeed on the breach of trust claim, they could not expect to succeed on their damages claim.
The High court (Andrew Smith J) dismissed the claim and found for RA.
It was common ground that the advance received by RA from L was impressed with a trust to be held for L until completion. "Completion" meant the "completion of a genuine contract by way of an exchange of real money in payment of the balance of the purchase price for real documents that will give the purchaser the means of registering the transfer of title to the property" (per Rimer LJ in Lloyds TSB Bank Plc v Markandan  EWCA Civ 65).
Further, a "trustee who wrongly pays away trust money, like a trustee who makes an unauthorised investment, commits a breach of trust and comes under an immediate duty to remedy to remedy such breach" (per Lord Browne-Wilkinson in Target Holdings Ltd v Redferns  AC 421).
RA did not necessarily act in breach of trust in remitting the advance to S’s nominated account on the basis that it was to be held to their order pending completion. A "trustee sufficiently discharges his duty if he takes in managing trust affairs all those precautions which an ordinary man of business would take in managing similar affairs of his own" (Speight v Gaunt (1883) 9 App Cas 1).
However, RA did act in breach of trust in releasing S from its obligation to hold the money to order against documents that were forgeries. This was tantamount to transferring the monies away without authorisation.
Three conditions must be satisfied under s61 Trustee Act 1925: (1) whether RA acted honestly – this was not in issue, (2) whether RA acted reasonably, and (3) whether they ought fairly to be excused for the breach of trust.
"The law generally (although not invariably) leans towards confining the responsibility of professional people to a duty to take reasonable care their liability for breach of that duty, and in particular does not readily impose on them responsibility for loss resulting from the fraud of others: see Platform Funding Ltd v Bank of Scotland Plc,  EWCA Civ 930 para 48 per Rix LJ. This, to my mind, confirms that it would fair to excuse RA Legal's breach of trust or to grant them relief from all liability for it."
This is another in the recent series of breach of trust/negligence claims against solicitors caught up in mortgage fraud. See also Lloyds TSB Bank Plc v Markandan  EWCA Civ 65; Nationwide Building Society v Davisons  EWCA Civ 1626 and AIB Group (UK) Plc v Mark Redler & Co  EWCA Civ 45 - see above.
The cases show that the courts are ready to impose liability for breach of trust upon a solicitor who parts with the mortgage advance but doesn’t obtain a good title and security, but may relieve him of liability if he has acted honestly and reasonably in accordance with standard conveyancing practice, so that the loss will then fall on the lender.

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