Knowledge and approval - When is a will suspicious?
The recent decision in Purrunsing v A’Court & Co  EWHC 789 (Ch) (“Purrunsing”) may prove to be a landmark judgment in the realm of property fraud. For the first time, a defrauded purchaser has brought a claim which tests the reasonableness of the seller’s conveyancer’s conduct, even though no duty of care is owed to the purchaser and there were no allegations of dishonesty or fraud on behalf of the seller’s conveyancer.
The court concentrated on the fiduciary duties that flow from the status of trustee in order to hold that conveyancers on both sides of a transaction are jointly responsible for protecting the purchaser’s money. The judgment places emphasis on the importance of carrying out risk-based due diligence where appropriate and reporting to the client, especially in time-pressured transactions.
A Dubai-based individual stole the identity of the registered proprietor of a £470,000 property in Wimbledon (the “Property”), posing as him in an attempt to sell the Property. For sake of clarity, in this update the term “seller” will refer to purported owner, not the true registered proprietor of the Property. There was a chain of successful payments: from the purchaser’s conveyancer, the House Owners Conveyancers Limited (“HOC”), to the seller’s appointed solicitors, A’Court & Co (“ACC”) and subsequently from ACC to the seller’s bank account in Dubai. The monies have not been recovered.
It is established in case law that failure to hold purchase monies on trust until completion, unless a suitable undertaking is given, will result in a breach of trust. This is in accordance with the leading decision of the Court of Appeal in Santander UK v RA Legal Solicitors  EWCA Civ 183 (“Santander UK”). Both HOC and ACC admitted liability for breach of trust as the TR1 that had been signed by the seller did not constitute genuine completion and therefore the monies should not have been transferred.
Notably the Office Copy Entries for the Property showed two addresses for the true registered proprietor: the Property itself and another property in Cambridge. The fraud was only discovered when the Land Registry wrote to the address in Cambridge after an attempt was made to register the sale. The Land Registry thereby alerted the true registered proprietor of the fraud, albeit after the money had changed hands. ACC had not once written to the owner at the Cambridge address. In the view of Judge Pelling QC, if this had been done, contact would likely have been made with the true registered proprietor of the Property and the attempted fraud would have been discovered at an early stage. At the very least, ACC should have taken instructions as to whether to send correspondence to the Cambridge address or sought an explanation as to why the correspondence address supplied by the seller was not the Cambridge address.
The issues for the court to decide were threefold:
1) Relief under section 61 of the Trustee Act 1925
Judge Pelling QC restated that section 61 of the Trustee Act 1925 imposes a two stage test: firstly, whether the trustee acted honestly and reasonably, and secondly, whether the trustee ought to be relieved of personal liability, wholly or in part. The required approach is dependent upon the circumstances surrounding the particular transaction. Judge Pelling QC further clearly recited past authorities, consolidating the factors to apply when considering the threshold of reasonableness (see para 38 of judgement). In doing so, it was stressed that the standard of reasonableness applied to a solicitor who parts with completion money without obtaining completion is high because of equity’s high expectation of a trustee in discharging his fiduciary obligations (Santander UK).
It was held that ACC failed to take a risk-based approach to client due diligence in accordance with the Law Society’s Conveyancing Handbook and further failed to comply with paragraph 3.1.1 of the Law Society’s Property and Registration Fraud Practice Note which clarifies that the Money Laundering Regulations (“MLR”) may require ‘considering whether the client is actually the owner of the property they want to sell’. Further consideration was deemed necessary in this instance due to several factors, such as:
I. the Property was unoccupied and unencumbered
II. the Property was of high value
III. the address given by ACC’s client was neither of the addresses for service that appeared on the proprietorship register of the Property
IV. Completion was being pressed by the seller
V. A previous sale had been aborted due to the seller’s refusal to provide proof of employment
ACC had failed to comply with the MLR by failing to consider if the seller was the true owner of the Property. The court clarified that if liability for breach of trust is to be avoided it has to be shown by the trustee that any departure from reasonable practice did not increase the risk of loss by fraud. In the view of Judge Pelling QC, 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. As such, ACC was not entitled to relief under section 61 of the Trustee Act 1925.
Likewise, HOC was deemed not to be entitled to the relief under section 61 of the Trustee Act 1925. This is less interesting as HOC was acting for the purchaser and thereby clearly had a duty of care as well as a fiduciary duty as trustee to protect the purchaser’s money.
2) Breach of contract and negligence
HOC was held to also be in breach of contract and the duty owed to the purchaser, by failing to ensure he was properly informed at all times. HOC had asked ACC questions in an Additional Enquiry. The answers showed that there was a real risk in proceeding with the purchase as ACC had no documents relating to the Property, no personal knowledge of the seller and were unable to confirm a link between the seller and the Property. However HOC did not relay the answers to the purchaser. As such, it was deemed likely that the purchaser would have pulled out of the purchase if all the information had been properly presented to him.
Both ACC and HOC were held to be responsible for an equal part of the loss. The argument employed on behalf of ACC, that they should not be held liable to the same extent as the purchaser’s conveyancer as there is no duty of care between a purchaser and those instructed by the seller, was rejected. The Court held that an equal standard of trustee’s duties applied to sellers’ and purchasers’ conveyancers where there is no completion of the transaction. The court made a clear distinction between duty of care in negligence and the fiduciary duties of trustees. In this instance, duty of care in negligence, as well as the absence of a contractual relationship, was irrelevant since there had been a clear breach of trust.
With property fraud on the rise, the public are ever more vulnerable and clients legitimately expect the professionals they have instructed to be able to promptly identify the risks and guard against fraudulent activity at the point of sale and purchase.
While this case serves as a stern reminder to professionals of their professional duties and the need to be ‘careful, conscientious and thorough’ when carrying out due diligence, as per Rimer LJ in Lloyds TSB plc v Markandan & Uddin  EWCA Civ 65, the test remains one of reasonableness not perfection. This can be seen in the case of Nationwide Building Society v Davisons Solicitors (a firm)  EWCA Civ 65 (“Nationwide”) where the Court of Appeal found that a firm of solicitors had acted reasonably in the circumstances despite transferring purchase monies without completion occurring. The fact that the solicitors departed from best practice did not preclude them from obtaining the relief available under section 61 of the Trustees Act 1925, and so they were not made to bear the brunt of a very sophisticated fraud. However, notably in Nationwide, the solicitors had not caused the loss as even if they had complied with best practice, insisting on replies to requisitions on title in the standard format and explicit undertakings, it was probable that these would have been fraudulently provided.
The decision in Purrunsing has created a precedent for joint responsibility of conveyancers, and thus potential joint liability under s.1 of the Civil Liability (Contribution) Act 1978. This can be seen as a positive step in helping to ensure that all parties are more alert to the prospect of fraud, and more cautious when carrying out due-diligence.
Practically, if clients have unoccupied, unencumbered properties which may be at risk of opportunistic fraud then please contact Mary Young at MYoung@kingsleynapley.co.uk about the range of measures offered by the Land Registry to help combat fraud such as the Property Alert service or Form RQ restrictions, created to protect properties which might be at increased risk of fraud.
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