Conveyancers acting for sellers need to be on their guard
Following the decision in Purrunsing v A’Court & anor. 2016, the fiduciary duties owed to a buyer of property are the same for the seller’s conveyancers as they are for the buyer’s.
If all goes well in a typical conveyancing transaction, there will come a point when the buyer sends the purchase monies to his solicitor to hold pending completion. The solicitor holds those monies on a resulting trust for the buyer. The solicitors will, at the appropriate time, then send the purchase price over to the seller’s solicitors to complete the transaction. At the point the seller’s solicitors receive these monies, they too may be held on trust for the buyer, if held to the seller’s solicitors’ order, before passing them onto the seller.
If the seller’s solicitors go on to disburse the buyer’s money without securing a genuine completion of the transaction because, for example, the seller is, in fact, a fraudster and not the true owner of the property, they will be in breach of trust and liable to the buyer; they will have released the buyer’s funds to someone who is not the actual owner of the property and, in doing so, will have dealt with the funds in a way which is outside the terms of the trust on which they are held. Accordingly, whilst the seller’s solicitor does not act for the buyer and owes no contractual or tortious duty to him, it is established that he can owe a fiduciary duty.
When faced with a claim for breach of trust, a trustee may seek relief pursuant section 61 of the Trustee Act 1925. This provides that the Court may excuse a trustee from what would otherwise be strict liability for breach of trust if it appears to the Court that the trustee has acted honestly and reasonably and ought fairly to be excused. When considering whether a trustee has acted reasonably, the standard to be applied has been established as just that: “reasonableness, not perfection”. What is reasonable will, as ever, depend upon all the circumstances of the case.
A novel question
On 14 April 2016, the Chancery Division handed down its Judgment in Purrunsing v A’Court & anor.  EWHC 789 (Ch), which dealt with a novel question: in a claim for breach of trust by an intending purchaser of property who has been the victim of a fraudulent sale, is the standard of reasonableness to be applied to the seller’s solicitor, who has no contractual or tortious duty to look out for the buyer’s interests, the same as would apply to the buyer’s own solicitor, or should the seller’s solicitor have to meet some lower test?
Purrunsing concerned the sale of 35 Merton Hall Gardens in Wimbledon (the “Property”) from Mr Nicholas Dawson to the Claimant. What no one knew was that Mr Dawson was not, in fact, the real Mr Dawson but a fraudster pretending to be him.
The fraudster was able to pull off the fraud essentially by forging a British passport. Using this document, he was able to retain solicitors (“AAC”) to act for him in the sale of the Property. The fraudster told AAC that he was not living at the Property, but had inherited it some years prior and was looking for a quick sale as he needed money quickly. The fraudster was also able to provide utility bills and a bank statement in the name of Mr Dawson. The documents did not bear the Property’s address, nor the address recorded at Land Registry for Mr Dawson. However, this did not raise any suspicions with AAC.
A sale was agreed in principle to a Mr Crompton. A few further discrepancies then emerged between information given by the fraudster and the facts which were discovered by Mr Crompton’s solicitors as part of their pre-contract investigations. These were not exactly overwhelming in their suspiciousness. However, when they sought evidence of Mr Dawson’s place of work, ostensibly a hospital in Abu Dhabi, the fraudster promptly instructed AAC to abort the sale. As the Court remarked, “It ought to have been apparent to [AAC] that it was exclusively the request for information about Mr Dawson’s employment that caused him to withdraw from the sale…”
The fraudster then found a new buyer in a Mr Abrahams. Mr Abrahams’ licensed conveyancer made a routine enquiry concerning the extent to which AAC had been able to verify the seller’s true identity but received a reply which ought to have been unsatisfactory. AAC simply confirmed that they had no prior knowledge of Mr Dawson but had seen his passport and utility bills. Unfortunately for Mr Abrahams, his conveyancer did not press the issue and the transaction completed, with the fraudster making off with the purchase price and the apparent transfer being, in fact, a complete nullity.
The Claimant brought claims against his own conveyancer for breach of contract, breach of tortious duty, and breach of trust. The Claimant also brought a claim against AAC for breach of trust (the only claim that could be made against them).
AAC sought relief pursuant to section 61 of the Trustee Act 1925 against the claim for breach of trust. AAC’s honesty was never in question. The issue, therefore, was whether their conduct had been reasonable.
Standard of reasonableness
It was argued for AAC that the standard of reasonableness to be expected in relation to them ought to be lower than the standard to be expected of the Claimant’s own conveyancer. After all, it was not AAC’s place to look after the interests of the Claimant – they did not act for him. How could it, therefore, be justified to hold AAC up to the same standard as the Claimant’s own conveyancer, when ascertaining what each ought to be expected to do in order to verify the fraudster’s identity?
His Honour Judge Pelling QC rejected the argument that AAC should be held accountable to some lower standard than that applying to the Claimant’s own conveyancer. It was, of course, true that AAC had no duties to the Claimant in contract or tort. However, where the law imposed the resulting trust, making AAC a trustee of the Claimant’s funds, AAC was as much a trustee as anyone could be, and there was no logical reason to apply different standards to AAC and the Claimant’s own conveyancer, simply on the basis that the latter would owe other duties to the Claimant, in addition, those arising in virtue of the trust.
He said, “Once it is found or admitted that a vendor’s solicitor is a trustee of the purchase money and has parted with it in breach of trust, there is no obvious justification for interpreting s.61 [of the Trustee Act 1925] more leniently in respect of such a breach of trust by a vendor’s solicitor than would be the case in relation to such a breach by a purchaser’s solicitor. In my judgment, once it is established (as it has been in this case) that a vendor’s solicitor has acted in breach of trust in relation to purchase money, there is no logical basis for concluding that [the recognised standard of “reasonableness, not perfection”] should apply to a purchaser’s solicitor but not a vendor’s solicitor […]. It follows therefore that for each the same standard of reasonableness applies though, of course, what each has to do in order to fulfil that standard may be different because of the different roles that each has in relation to the transaction.”
Application of the standard
The crux of the issue was that AAC had not done enough to establish that the person pretending to be Mr Dawson was the real Mr Dawson. The Proceeds of Crime Act 2002 and Money Laundering Regulations 2007 imposed duties on AAC to adequately determine the identity of its clients. The Law Society’s Property and Registration Fraud Practice Note confirmed (if confirmation was needed) that these duties included “looking at all the information in the retainer and assessing whether it is consistent with a lawful transaction. This may include considering whether the client is actually the owner of the property they want to sell“. The Court found on the facts that AAC had failed in these duties, in light of the several discrepancies and absence of any document specifically linking Mr Dawson to the Property, and that this failure at least contributed to the risk of the fraud succeeding.
It was, of course, argued for AAC that its duties under the Money Laundering Regulations were not actually owed to the Claimant. However, this was held to be irrelevant. It was not a case of AAC being liable to the Claimant for breach of its duties under the Regulations; rather, its compliance or otherwise with the Regulations was an indication of how reasonable its conduct had been.
The decision may come as a surprise. It means that, in a claim for breach of trust arising out of a property transaction fraud, conveyancers acting for the seller may well be subject to the same standards of diligence even though the potential victim of the fraud is not the party to whom they owed any contractual or tortious duties.
When acting for the seller, conveyancers, therefore, cannot let their guard down just because it is not their client who would be at risk of fraud. Relying on a “box-ticking” approach to customer due diligence and failing to run discrepancies to ground could see them on the hook for breach of trust further down the line.