Property Fraud: Breach of trust claims against solicitors

There have been a spate of recent cases where conveyancing solicitors acting for lenders may have been honest but these solicitors’ actions resulted in loss of monies through fraud. When a lender and/or borrower suffers losses on residential or commercial loan transactions, a claim often follows against the lender’s professional solicitor conveyancers.

The Court of Appeal have just handed down judgment in Davisons Solicitors (a Firm) v Nationwide Building Society [2012] EWCA Civ 1626, the latest in a line of claims for breach of trust against solicitors’ firms arising out of the recent property market crash.

Leading members of Inner Temple’s Hailsham Chambers, Michael Pooles QC and William Flenley QC, acted for the solicitors and the financial institution respectively. The claim arose out of an identity fraud in which a fraudster purported to be the branch office of a genuine firm of solicitors. As a result, the defendant sent the mortgage advance to someone who was not in fact a solicitor and who could not give an enforceable solicitors’ undertaking to discharge the pre-existing charge on the property; the Court of Appeal held, following Lloyds Bank v Markandan & Uddin [2012] EWCA Civ 65, that there was a breach of trust by reason of the defendant firm having parted with the loan money prior to completion. It was no defence to this allegation that the defendant had otherwise complied with the CML Lenders’ Handbook or had an undertaking to redeem the relevant prior charge from the person he reasonably believed to be the seller’s solicitor; however, the defendant was relieved from liability for that breach pursuant to s.61 of the Trustee Act 1925. Acting reasonably, the Court said, did not “predicate that [the defendant] has necessarily complied with best practice in all respects” and, it seems, any unreasonable conduct by a solicitor will need to be causatively linked to the loss in order to disentitle that solicitor to relief; and the contractual obligations imposed on the defendant by the CML Handbook were not strict. As usual in professional negligence, they were obligations of skill and care only.

The decision is both good and bad news for lenders and defendant solicitors. Findings of breach of trust will, it seems, become more common, but so too will relief from any consequential liability and breach of contract is unlikely to provide an alternative route to (effectively) strict liability.