Paperless conveyancing has led to a sharp increase in fraud- conveyancers acting for both the sellers and buyers of a fraudulent property purchase held to have breached their duty of trust to the buyer.
Some readers will recall that Max Hastings recently wrote about how his wife (who was the sole owner of a valuable un-mortgaged property in West London) was almost the victim of an awful fraud. In fact, the Land Registry spotted an inconsistency and thwarted the fraudsters. However, unfortunately since paper Land and Charge Certificates were abandoned in favour of an electronic register, there have been a number of successful frauds where conmen pose as the true owner of a property and by the time the fraud is discovered the funds have been sent out of the jurisdiction and become untraceable. A number of cases have been commenced in the courts seeking redress from the professionals involved and from their insurers.
Purrunsing v (1) A'Court & Co and (2) House Owners Conveyancers Limited  EWHC 789 (Ch) is yet another example of this. The proceedings concerned the obligations owed to a buyer by both its conveyancers, House Owners Conveyancers Limited, and the seller's solicitors, A'Court & Co. The seller had fraudulently held himself out to be the registered proprietor of the property. No genuine completion of the transaction took place, but the purchase price in the region of GBP 470,000, was paid by ACC to the fraudster's bank account in Dubai. The Claimant buyer therefore sued the seller's solicitors for breach of trust and its own conveyancers for breach of trust and also breach of contract and duty.
Both Defendants claimed relief under Section 61 of the Trustee Act 1925. Section 61 states that where there has been a breach of trust but the trustee has acted "honestly and reasonably, and ought fairly to be excused for the breach of trust" then "the court may relieve him either wholly or partly from personal liability".
The issues to be determined at trial by Judge Pelling QC in the High Court of the Chancery Division were:
(i) whether either defendant should be granted relief under Section 61
(ii) whether the buyer's conveyancers were liable to the Claimant either for breach of contract or negligence and
(iii) whether and if so what contribution should each party be ordered to bear in respect of any liability that they might have to the Claimant
Of particular importance was the argument made by the seller's solicitors that a lesser standard of reasonableness should be applied to a seller's solicitor than to a buyer's conveyancer in relation to Section 61 relief.
The Judge held that a solicitor concerned with a transaction of this kind was required to look at all of the available information and assess whether there was consistency with the transaction that the client wished to carry out. The Judge held that the seller's solicitors, in reality, made no serious attempt to carry out proper risk-based due diligence. The seller's solicitors knew the property was unoccupied and knew it was not subject to a mortgage. It should therefore have been of considerable concern to them that the utility bills provided by the seller were not in relation to the address of the property or the alternative service address that appeared on the Proprietorship Register. The Judge held that had the seller's solicitors sought instructions to contact the seller at the alternative service address the fraud would have been unveiled.
The seller's solicitors were held to have been negligent in their inability to note the inconsistencies between the seller's responses to enquiries about the property and what became known to them. The seller had stated that no building work had taken place at the property, but a local authority search conducted by the first purchaser's solicitors showed building work had been carried out. Further, the seller's solicitors should have been particularly concerned as the seller was unable to provide a Certificate of Lawfulness or a Building Control Certificate in relation to the works.
The first purchaser's solicitors also specifically requested that the seller's solicitors confirm that the identity of the seller had been verified to meet the requirements of the Money Laundering Regulations 2007. In the same request, the solicitor's asked a simple question in relation to the seller's employment abroad. As a result of this request, the seller terminated the transaction. The seller's solicitors should have noted that it was exclusively a request for a simple piece of information which had caused the seller to terminate the transaction.
The seller's solicitors were therefore held to have breached their duty of trust. The Judge stated that "the reality is that Mr A'Court [of ACC] simply did not know of the terms of the rules and guidance to which he was subject". The Judge rejected the argument that a lesser standard of reasonableness should be applied to a seller's solicitor in relation to Section 61 relief. The Judge deemed that the purchase monies were held on trust by the seller's solicitors, from when they received the funds until completion, for the buyer as a beneficiary. Once it was found that the seller's solicitors had parted with the purchase money in breach of trust, there was deemed to be no obvious justification for interpreting Section 61 more leniently in respect of such a breach of trust by a seller's solicitor than would be the case in relation to such a breach by a buyer's conveyancer. The seller's solicitors therefore failed to discharge the burden resting on them to establish that they had acted reasonably in the circumstances and thus were not entitled to Section 61 relief.
The buyer's conveyancers were regulated by the Council of Licenced Conveyancers, the Code of Conduct of which particularly required the buyer's conveyancers to provide their clients with the information required to make informed decisions. The buyer's conveyancers were in breach of contract and/or duty to the Claimant in failing to inform the Claimant that the seller's solicitors had given an ambiguous response to additional enquiries made by the buyer's conveyancers in relation to the seller's identity. The purpose of the additional enquires was to establish a link between the property and the seller, a link that had never been established. The ambiguous answer showed that the seller's solicitor had no documents relating to the property and had no personal knowledge of the seller. The buyer's conveyancers had a duty to inform their client that the seller's solicitors had not verified a link between the seller and the property and that there was a risk in proceeding with the transaction.
The Judge dismissed the argument that there was in fact no duty on the buyer's conveyancers to make any additional enquiries into the identity of the seller. The Judge held that although there was no requirement to make additional enquiries, once the buyer's conveyancers were aware of the ambiguous response there was a duty upon them to convey the information to their client. The buyer's conveyancers therefore failed to discharge the burden of proving that they had acted reasonably and were not entitled to relief under Section 61.
In relation to each party's contribution, the Judge concluded that on the principles of equal trusteeship, each party must bear equal liability.
This decision highlights the importance that solicitors, on both sides of a transaction, adhere to client due diligence regulations and rigorously look to minimise risk. The courts will not take a forgiving approach when the indicators of a fraud should have been apparent to the solicitors on either side of the transaction. Solicitors acting for sellers should be conscious of the duty they owe to a buyer as trustee and should be aware that the courts will not condone a lower standard of reasonableness if they do breach their duty of trust. Solicitors acting for the buyer are reminded of the obligation to properly convey all important information to their clients.
The police and the Land Registry are well aware of these international crime rings, however where fraudulent transactions are completed, the professionals involved and their insurers are the principal target for recoveries and they need to be able to demonstrate strict compliance with all regulations and standards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.