Hurry Narain Purrunsing v A’Court & Co and (2) House Owners Conveyancers Limited [2016] EWHC 789 (14 April 2016)

In a case which raises a novel point of law, the High Court has ruled that the vendor's solicitor was equally liable with a property purchaser's conveyancer for loss caused to the purchaser when the purchase monies were released to the fraudster vendor in breach of trust. Whilst there was no suggestion of dishonesty or fraud on their part, neither professional was entitled to relief under the Trustee Act 1925 s.61 as they had not acted reasonably, the same standard of reasonableness applying to both.

This is the first reported case which concerns a claim for relief by a vendor's solicitor. The case shows clearly that the threshold of reasonableness under s.61 is the same for both seller's and buyer's solicitors in relation to purchase monies.

Solicitors, including those acting for a vendor, must be vigilant of fraud and have regard to all circumstances of a sale and respond to warning signs. There are hurdles to be overcome for solicitors who part with completion monies without obtaining completion to prove that they acted reasonably for s.61 relief to apply. Solicitors should carry out due diligence and adopt a risk-based approach to assess whether a transaction is lawful. They should also act in accordance with best or reasonable practice to maximise their prospects of obtaining s.61 relief in order to avoid liability for breach of trust.

Facts

A conveyancer (HOC) acted for the Claimant (P) on a £470,000 property purchase from a fraudster (F) who claimed to be, but was not, the registered proprietor. The Wimbledon property was vacant, and F told his solicitors (AC) that it had been gifted to him by his father and that he needed a quick sale (14 days).

F claimed to live in Maidenhead, and produced bills and a statement to support this; he also produced to AC a British passport in the name of the registered proprietor, which transpired to be a forgery. HM Land Registry gave a different address for the registered proprietor but AC made no further enquiries. F had aborted an earlier sale of the property when the prospective purchaser had sought details of his employment in Abu Dhabi.

It was common ground that there was never a genuine completion of the transaction due to F's lack of title. Before the fraud was discovered, the whole purchase price had been paid by P to HOC, and then transferred to AC before being paid to F. The monies were never recovered, and P sought damages for breach of trust against both professionals.

It was common ground that the monies paid away by HOC to AC and by AC to F were payments made in breach of trust, and thus that both defendants were liable to the claimant for breach of trust. Both defendants sought relief under section 61 of the Trustee Act 1925, and also sought contribution from each other.

Section 61 Trustee Act 1925

Section 61 provides as follows:

If it appears to the court that a trustee … is or may be personally liable for any breach of trust, … but has acted honestly and reasonably and ought fairly to be excused for the breach of the trust … then the court may relieve him either wholly or partly from personal liability for the same.”

There was no suggestion that AC and HOC were dishonest or complicit in the fraud. The main issue was whether they had acted reasonably so as to be entitled to relief under s.61.

Decision

The vendor's solicitor (AC) and the purchaser's conveyancer (HOC) failed to discharge the burden of proving that they acted reasonably and therefore neither was entitled to relief under s.61.

As for the vendor's solicitors, the judge found that a reasonable solicitor in the position of AC carrying out client due diligence as required by the Money Laundering Regulations 2007 and adopting a risk-based approach ought clearly to have considered whether the fraudster was the owner of the property in order to assess whether the transaction was lawful. The relevant circumstances included: the property being vacant, unencumbered and of relatively high value; completion being sought on an expedited basis; HM Land Registry having a different address for service; the inconsistency between the proof of address supplied by the fraudster and the address for service; the absence of any documents showing a link between the fraudster and the property; the inconsistency between the fraudster's position that there had been no building works at the property, and a local authority search which revealed such works; and the manner in which the earlier sale was aborted.

As for the purchaser's conveyancer, the judge found that HOC was in breach of contract and negligent in failing to inform their client that they had been unable to establish a link between the property and the fraudster vendor. A specific enquiry was raised by HOC for this purpose, and the answers showed that AC had no documents relating to the property, they had no personal knowledge of the fraudster and also could not confirm a link between the fraudster and the property. There was a risk in proceeding with the purchase, and P would not have gone ahead if he had been made aware of this.

After considering the relative causal potency as well as the comparative blameworthiness of both HOC and AC, the judge held that they must each bear equal responsibility for the loss caused to P.

Comment

This is the first reported case which concerns a claim for relief by a vendor's solicitor; previous authority concerned claims for relief by solicitors who acted for purchasers and lenders to purchasers. The case shows clearly that the threshold of reasonableness under s.61 is the same for both seller's and buyer's solicitors in relation to purchase monies.

When considering the reasonableness test under s.61, the court rejected the suggestion that a lesser standard of reasonableness should be applied to a vendor's solicitor than to a purchaser's solicitor, even though it is well established that in general a vendor's solicitor does not owe a duty of care to a purchaser. There was an absolute obligation not to release the purchase monies before completion, and the vendor's solicitor was as much a trustee of the money whilst it was in his possession pending completion as the purchaser's conveyancer. Accordingly there was no obvious justification for interpreting the reasonableness test in s.61 more leniently for a vendor's solicitor.

Solicitors, including those acting for a vendor, must be vigilant of fraud and have regard to all circumstances of a sale and respond to warning signs. It will be difficult for solicitors who part with completion monies without obtaining completion to prove that they acted reasonably for s.61 relief to apply. Solicitors should carry out due diligence and adopt a risk-based approach to assess whether a transaction is lawful. They should also act in accordance with best or reasonable practice to maximise their prospects of obtaining s.61 relief in order to avoid liability for breach of trust.

Where one set of solicitors in the circumstances of such cases (which, sadly, are becoming increasingly familiar) faces allegations of this nature, it and its insurers will need to consider bringing the other solicitors involved into the dispute. The only good news for solicitors and their insurers arising from this case is the confirmation of the potential to share the burden of such claims.