Who is on the hook?

16 December 2016

Should a vendor's solicitor be under the same scrutiny as those representing the purchaser? 

Victims of identity theft or modern scams frequently suffer more inconvenience and stress than permanent financial loss. Customers of financial institutions and law firms can rely on safeguards in any number of transactions when falling victim to fraud or dishonesty. Liability, particularly where the underlying perpetrator is a speck on the horizon, increasingly lands at the door of professional advisers and their insurers. Quite recently, the High Court ruled that both a vendor’s and purchaser’s solicitors may be on the hook in certain property transactions.

Over the last five years or so, there have been a number of reported cases in which mortgage lenders brought claims in breach of trust against the solicitors who had acted for them and their mutual clients in transactions. Claims in breach of trust proved a viable basis for claims that may have proved difficult to establish, such as breaches of duty or contract. Breach of trust had the added benefit of avoiding allegations of and deductions for contributory negligence and avoiding scrutiny of lending practices in the aftermath of the financial crash.

The April 2016 High Court decision in Hurry Narain Purrunsing v (1) A’Court & Co (A Firm) (2) House Owners Conveyancers Limited (“Purrunsing”) established an otherwise undecided issue of the liability of a vendor’s solicitor for breach of trust. The Court further examined, in light of the preceding case law which this article reviews below, whether the tests applied to relieve trustees who have behaved honestly, reasonably and ought fairly to be excused from liability applied equally to solicitors acting for the vendor and the purchaser.

In order to fully understand the practical implications of this judgment on property practitioners, it is helpful to set out how trustee relationships arise in property transactions, when Section 61 of the Trustee Act 1925 relief might be available and the precedents set in the run up to Purrunsing, before analysing the case itself.

What constitutes completion of a property transaction?

In Lloyds TSB Bank Plc v Markandan & Uddin (“Markandan”) the Court of Appeal explicitly approved the finding of Mr Roger Wyland QC, who heard the case at first instance, as to the precise point of completion: “on receipt of the documents necessary to register title or, if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents.”

The Court of Appeal went further (in circumstances when an undertaking had been given by a rogue posing as an employee of a reputable firm of solicitors): “Completion…must mean the completion of a genuine contract by way of an exchange of real monies and 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 that he has agreed to buy and to charge.  An exchange of real money for worthless forgeries in purported performance of a purported contract that was a nullity is not completion at all.”

Purchase Monies Held on Trust

The Council of Mortgage Lender’s Handbook (“CML Handbook”), which applies to transactions involving the purchase of residential properties bought with the assistance of a mortgage, sets out that a purchaser’s solicitor holds loan monies received from a lender on express trust for that lender. The terms of that express trust are that the solicitor must not release the funds until completion. 

Whilst the CML Handbook does not apply to every transaction (such as when there is no mortgage finance or commercial transactions) the principle remains that when purchase monies are paid to a solicitor in advance of completion, a bare trust is created, which survives until formal completion of the transaction. 

By implication any release of purchase monies during the course of a property transaction without receipt of either the documents necessary to register title or a solicitor’s undertaking to provide such documents, will constitute a breach of trust and any solicitor so doing could be liable to reconstitute the trust by repaying the total sum of the monies released.

Statutory Framework - Section 61 Relief

Section 61 of the Trustee Act 1925 provides that, where it appears to the Court that a trustee who is or may otherwise be personally liable for a breach of trust has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, the Court may relieve that trustee either wholly or partly from personal liability for that breach.

Case law on Section 61 Relief

Lloyds TSB Bank plc v Markandan & Uddin

In Markandan, solicitors (“M&U”) were instructed to act on behalf of both the lender and the purchaser in respect of a property purchase and mortgage transaction.  A firm called Deen, acting from a Holland Park branch office, purported to act for the vendor of the property.  However while Deen was a bona fide firm there was no Holland Park branch office.  Instead this was a fictional office which had been created by the fraudsters.

Completion monies were sent by the lender to M&U who transferred them to Deen before the documents necessary to register the transfer and charge had been provided, but following receipt of an undertaking that the documents would be sent.  This undertaking was accepted by M&U despite the fact that Deen had already breached a previous one.

The fraudsters received the funds and promptly disappeared with the purchase monies without completing the transaction, leaving the purchaser with no property and the lender with no security for the loaned monies. Further investigation revealed that the genuine owners of the property had no knowledge of the proposed transaction, had not appointed Deen and had no intention to sell.

The mortgage lender brought a claim against M&U for recovery of the released funds.  It put forward a number of heads of claim including that M&U had acted in breach of trust by releasing the monies to Deen. 

There was no question surrounding M&U’s honesty. Be that as it may, the Court found at first instance and on appeal that by failing to verify the Holland Park branch office and accepting an undertaking rather than requiring the documents to be provided (in the landscape of a previous undertaking having been breached), M&U failed to act reasonably.  The Court found that M&U could not rely on Section 61 relief for their breach of trust.

Mortgage Express v Iqbal Hafeez Solicitors (a firm)

Here, the firm purporting to act for the vendor was not a real firm of solicitors.  Despite not having dealt with this bogus firm before, the fee earner at Iqbal Hafeez relied on a vague recollection of having seen a sign or shop-front featuring that firm’s name as the basis for his continued dealings and went no further in terms of verifying its existence.  The Court was critical of this and commented that relying on undertakings from a firm with whom you were not familiar and whom you had not verified would not constitute reasonable behaviour for the purposes of Section 61 relief.

Nationwide Building Society v Davisons Solicitors (a firm)

This case had underlying facts which were not dissimilar to those in Markandan.  Again, the defendant firm acted on behalf of both purchaser and lender.  As Davisons was not familiar with the vendor’s solicitors, it verified the existence of the firm and its branch office acting for the vendor with the Law Society.

However, whilst the solicitor acting for the vendor was a solicitor practicing at that firm, similarly to Deen, in Iqbal Hafeez, the branch office did not exist.  The details on the Law Society website had been submitted by someone seemingly involved in the fraud.

A form of undertaking had been provided by the vendor’s solicitor to discharge the existing charge on completion although it was provided across a number of documents and was not in standard form.  Nonetheless the purchase monies (including the funds released by the mortgage lender) were sent to the vendor’s solicitors, however the previous lender was not repaid and its charge was not released and remained registered against the title.  The new lender’s charge could therefore not be registered.  The lender did not obtain the security it had expected in exchange for the money it released.

The Court of Appeal found that completion had not occurred and that Davisons had acted in breach of trust. It also found that Davisons had been provided with an acceptable undertaking (notwithstanding the non-standard form) and had therefore acted reasonably. The firm was entitled to Section 61 relief.

The Court’s reasoning relied on the fact that the loss had been caused by a fraudster and that, had Davisons exercised best practice and insisted on the provision of an undertaking in the standard form, it was likely that it would have been provided in any event and subsequently breached.  In the Court's view, the end result would have been the same, and the deviation from best practice did not constitute unreasonableness.

AIB Group (UK) plc v Mark Redler & Co Solicitors

Here, the mortgage lender’s solicitors failed to fully discharge the existing charge registered against the property in question, and paid the balance of the mortgage monies to the borrower.  As the existing lender had not been repaid, its charge remained registered on the title and the new lender, AIB, only obtained a second legal charge.

After the borrower defaulted and subsequently declared bankrupt the property was sold, however AIB was not fully reimbursed from the proceeds of sale. 

AIB claimed that its solicitors, Mark Redler, were instructed to obtain a first legal charge in favour of AIB and only had authority to release monies on receipt of documents or a suitable undertaking that the advance monies would be applied to redeem the charge.  AIB sought to recover the entire amount it leant. The Court found that Mark Redler had acted in breach of trust but confirmed that, as AIB had recovered a proportion of the sum it had leant, the damages to which AIB was entitled were the shortfall, not the entire sum released.

Santander UK v RA Legal Solicitors

If Davisons offered a glimmer of hope to solicitors being accused of breach of trust and seeking relief under Section 61, Santander UK v RA Legal Solicitors dampened it.

This case involved a fraudster purporting to be a solicitor acting for the owner of a property, looking to sell it.  RA Legal acted for the purchaser and mortgage lender.

Monies were released the day before the purported completion of the transaction was scheduled to take place.  In fact no completion occurred and the purchase monies disappeared.

The Court of Appeal found that RA Legal did not have authority (implied or otherwise) to transfer monies pending completion to anyone other than the firm which was in fact acting for the owner and intended vendor of the property.  In this situation the vendor’s solicitors were fraudsters who were not acting for the owner of the property and had no intention to complete the transaction or to secure the lender’s loan by way of legal charge. The transaction was a sham and the transfer of money was a breach of trust.

The question of reasonableness was considered and the Court held that it should not be answered on a matter by matter basis, but by considering RA Legal’s actions as a whole.  A number of steps taken by RA Legal were criticised by the Court and whilst each individual failure by RA Legal might not in and of itself have been considered unreasonable, when assessed as a whole, they went over and above a departure from best practice. RA Legal’s departure from the established (and, the Court stated, sophisticated) regime of legal conveyancing meant that risks which that regime was designed to minimise were increased.  The Court of Appeal therefore found that RA Legal should not be granted relief under section 61.

Purrunsing v A’Court

In light of the extensive case law on the application of Section 61 relief, what makes the more recent decision of Purrunsing so interesting is that the Court dealt with the question of whether a vendor’s solicitor, who did not act for the claimant purchaser, should be subjected to the same rigorous test under Section 61 as a buyer’s solicitor. 

The conclusion of the Court was that solicitors on both sides of the transaction were jointly responsible for protecting the purchaser’s money.  Both firms sought relief for liability for breach of trust under Section 61 and the Court found that neither firm was entitled to such relief. A vendor’s solicitor was not entitled to a more favourable test of reasonableness than would be applied to a purchaser’s solicitor and should be held equally liable.


There was little factual dispute between the parties in the High Court claim. This matter involved an individual posing as the owner of a ‘vulnerable property’. A fraudster based in the Middle East instructed solicitors on the basis he was the proprietor of a relatively high value property in South-West London and had located a buyer with whom he had agreed a quick sale.  For the purpose of this article we refer to the fraudster as the “seller”.

The transaction purportedly completed with monies being transferred from the purchaser’s conveyancing solicitors (the House Owners Conveyancers Limited (“HOC”)) to the “seller’s” solicitors (A’Court & Co (“A’Court”)). Funds were then released to a bank account in Dubai.

Following the money transfers, the fraud was exposed. The purchaser was not registered as owner of the property and the money was never recovered.

Failure of completion and breach of trust

The claimant purchaser brought a claim against HOC for breach of contract, negligence and breach of trust and a claim against A’Court for breach of trust.  Judgment was entered against A’Court for breach of trust. HOC admitted breach of trust but denied breach of contract and negligence.

As such, it was left to the Court to determine:

  1. Whether Section 61 relief should be available;
  2. Whether HOC was liable to the claimant in breach of contract and/or negligence; and
  3. What contributions each defendant should be ordered to bear.

Section 61 Relief

The Court considered that the question of whether Section 61 relief should be granted was answered by way of a two stage process: the first step being to determine whether the trustee had acted honestly and reasonably; the second to determine whether the trustee ought to be relieved of liability.  There were no allegations of dishonesty against either defendant and therefore the issue of the reasonableness of their actions was considered.

A’Court’s actions were criticised by the Court on the basis that they had failed to take a ‘risk based’ approach to client due diligence taking into account:

  1. the value and unencumbered, unoccupied nature of the property;
  2. discrepancies between the addresses for the registered proprietor listed at the Land Registry and the address provided by their client;
  3. the behaviour of their client, the ‘seller’, in trying to push the sale through quickly and threatening to pull out of the arrangement when challenged for information;
  4. their client’s failure to produce any documents linking him to the property; and
  5. that a previous sale had been aborted due to their client’s refusal to provide proof of employment.

The Court stated that if liability for breach of trust is to be avoided, it has to be demonstrated that any departure from reasonable practice did not have the effect of increasing the risk of fraud or loss.  That was not the case with A’Court whose failures to deal with their anti-money laundering requirements and to consider the above five aspects allowed the transaction to reach the stage where monies were transferred out of the jurisdiction.

HOC proceeded with the transaction despite not receiving satisfactory responses to additional enquiries asked of the “seller” via A’Court.  Importantly, one unsatisfactory response was in relation to a question attempting to establish a link between the property and the “seller”.  The response received confirmed that checks had been undertaken, but not that any link had been established between the property and the “seller”.  The Court found that by failing to confirm the unsatisfactory nature of the reply to the purchaser, HOC had failed to act reasonably.

For similar reasons HOC was found to be in breach of contract and to have acted negligently.


The Court held HOC and A’Court to be equally liable, on the basis that HOC were acting for the purchaser and should have advised their client of the inadequate responses to questions raised, and A’Court were acting for the “seller” and should have adopted a risk based approach to their due diligence, being the only ones in a position to confirm their client’s identity.

The implications of Purrunsing

The decision confirmed that, if it releases purchase monies in a sham transaction, a vendor’s solicitor can be liable to a purchaser or lender for breach of trust in the same way as a solicitor acting for that purchaser or lender.  This is in spite of there being no contractual relationship between those parties. Relief will only be available under Section 61 if those solicitors acted honestly and reasonably, as set out in the established case law. It seems open for potential claimants in such scenarios to make breach of trust a primary pleading. It may even be possible to apply for Summary Judgment on liability, thereby saving on time and cost.

Protective steps can also be extremely valuable. The Law Society Property and Registration Fraud Practice Note (the “Practice Note”) asserts the need for caution as criminals will always attempt to exploit weaknesses in lending and conveyancing systems.  Whilst the note is aimed at conveyancers undertaking transactions involving a mortgage, it is no less important to those completing transactions using a sole client’s funds.  The Practice Note lists different forms of fraudulent transactions, but one of the most important sections deals with warning signs.  

Methods used by fraudsters are constantly evolving, but many of the warning signs (some of which were present in Purrunsing and the other cases discussed above) remain strikingly similar.  A client who tries to push the transaction through as quickly as possible should raise suspicion.  Instructions for a purchase of a property nowhere near either your offices or where your client purportedly lives can also be cause for further enquiry. Properties which are not owner-occupied are more susceptible to attack by fraudsters.

Undertaking risk-based due diligence is becoming increasingly important in all areas of law.  Steps such as paying careful attention to client due diligence (insisting on original documents) and taking account of inexplicable refusals to provide information are helpful.  Practitioners should listen to their instincts and apply some thought to the overall matter on which they are being instructed.  A bona fide client should have no objections to providing explanations and documentation required to satisfy you that despite there being warning signs or the transaction being out of the ordinary it is all above board.  If your client is not willing to do so you need to think carefully about whether you can continue to act.  

Likewise, if the other side’s solicitors are unable to give you answers to the legitimate questions you raise, you need to advise your client of your concerns so that they are able to make an informed decision on whether to continue with the transaction.

The above seems to represent a clear message from the Courts that transactional lawyers need to apply common sense to every step of their work.  Responding to a claim, preparing witness statements and analysing files will take significant time out of a fee earner’s year and for those cases which go to trial, there is the reputational damage which can accompany an adverse decision, let alone the increase to insurance premiums. 

It seems sensible to urge protective measures at every level. Non owner-occupied, unencumbered, ‘vulnerable’ properties are at the highest risk.  If you have clients who own such properties it might be sensible to advise them of the range of measures offered by the Land Registry to help combat fraud, such as the Property Alert Service and Form RQ restrictions.

Mary Young and Ben Hillman are Senior Associates in the Dispute Resolution Department at Kingsley Napley LLP

 Legal/Regulatory Framework

Money Laundering Regulations 2007, Regs 3, 5, 7

Section 340(11) Proceeds of Crime Act 2002, ss 327-329, 340

Law Society's Conveyancing Handbook

Law Society's Property and Registration Fraud Practice Note

Council of Mortgage Lenders' Handbook

Council of Licensed Conveyancer's Code of Conduct

Paragraph 17-034 of Chitty on Contracts, 32nd Ed., Vol.1

Section 1 of the Civil Liability (Contribution) Act 1978


Hurry Narain Purrunsing v (1) A’Court & Co (A Firm) (2) House Owners Conveyancers Limited [2016] EWHC 789 (Ch)

Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65

Mortgage Express v Iqbal Hafeez Solicitors (a firm) [2011] EWCH 3037 (Ch)

Nationwide Building Society v Davisons Solicitors (a firm) [2012] EWCA Civ 1626

AIB Group (UK) plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45

Santander UK v RA Legal Solicitors [2014] EWCA Civ 183

A version of this article was first published in the November edition of the Property Law Journal.

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