Last week the Court of Appeal handed down judgment in Nationwide Building Society v Davisons Solicitors , which is the latest in a recent glut of decisions relating to arguably one of the strongest tools in the lender claims armoury; breach of trust.
It gives further clarity on duties owed by solicitors when releasing mortgage funds and what constitutes reasonable conduct by conveyancing solicitors acting on behalf of lenders, so as to give them a means of potential escape from having to pay damages even if they are found liable for breach of trust.
Key points to note
- Although no new breach of trust principles were established, the Court of Appeal decision reinforces the decision in Lloyds Bank v Markandan & Uddin  that a solicitor will have committed a breach of trust in parting with loan money prior to completion of the purchase;
- In these specific circumstances the defendant solicitor was relieved from all liability for breach of trust for acting honestly and reasonably pursuant to s.61 of the Trustee Act 1925 (s.61);
- Notwithstanding the contractual term in the CML Handbook that the solicitor will obtain a fully enforceable first legal charge on completion, the Court of Appeal decision confirms that solicitors do not warrant or guarantee this. They are only required to exercise reasonable skill and care to redeem all existing charges and obtain a fully enforceable first legal charge.
Davisons Solicitors acted for the purchaser and Nationwide Building Society on a residential mortgage transaction. Davisons checked the details of the seller's solicitors on the Law Society and Solicitors Regulation Authority (SRA) websites and they appeared genuine. The seller's solicitors undertook to discharge the existing charge over the property, prompting Davisons to transfer the mortgage advance to the seller's solicitors and register the purchaser as the new owner. However, the seller's solicitors failed to discharge the existing charge, meaning Davisons were unable to register Nationwide's charge.
It transpired that the seller's solicitor was actually a fraudulent imposter posing as a branch of a genuine firm of solicitors. The undertaking to discharge the existing charge was therefore unenforceable. Nationwide sought to recover its losses from Davisons on the grounds of breach of trust and breach of contract.
The first instance decision
The Judge held that Davisons were in breach of trust because, without an enforceable undertaking from the seller's solicitors to discharge the existing charge, Davisons were not authorised to complete and release the mortgage advance.
The Judge gave no relief under s.61 because Davisons had not acted reasonably; they had proceeded without a clearly worded undertaking concerning the discharge of the mortgage. This is despite the fact that an express undertaking from the seller's solicitors (a fictitious firm) would have been worthless in any event.
In addition, the Judge held that Davisons had breached their retainer because paragraph 5.8 of the CML Handbook (which stipulates that the solicitor will obtain a fully enforceable first legal charge on completion) was a mandatory obligation.
The Court of Appeal's decision
It was held that:
- Davisons had acted in breach of trust because completion of the purchase had not taken place and the mortgage advance was never returned. However, Davisons should be given full relief under s.61 and not be held liable for Nationwide's losses.
It was not disputed that Davisons had acted honestly throughout. In terms of acting reasonably, although it was found that Davisons had fallen short of best practice by not obtaining a clearly worded undertaking, they nevertheless did obtain an undertaking and had complied with the CML Handbook in verifying the identity of the seller's solicitors.
The Judge commented that the departure from best practice had not caused the loss to Nationwide; this was caused by the fraud of an unconnected third party.
Accordingly, the requisite standard under s.61 is that of reasonableness, not of perfection. Provided the solicitor acts honestly and reasonably, he/she will be entitled to s.61 relief.
- Davisons were not in breach of their retainer.
The Judge held that the obligation set out in paragraph 5.8 of the CML Handbook (that the solicitor will obtain a fully enforceable first legal charge on completion) is not strict. It involves a number of ingredients (such as reliance on the seller's solicitors) inconsistent with an absolute obligation.
There are some instances (such as fraud) which even the most careful solicitor cannot protect against.
Provided the solicitor exercises reasonable skill and care to redeem all existing charges and obtain a fully enforceable first legal charge, this will be sufficient to relieve him/her of liability for breach of contract.
The impact for lenders
The case shows increased findings of breach of trust which, until recently, lenders were generally cautious about pleading. It is a powerful claim favoured by claimant lenders as, if successful, contributory negligence is no defence. Furthermore, the lender does not have to mitigate its loss in the same way and the remedy available will be repayment of the mortgage advance plus interest.
We are already seeing more defendants looking to rely on s.61 relief when faced with legitimate breach of trust claims. This claim will be seen by defendants as supporting their position in this regard. However, the reality is that whether a court will find that a solicitor has acted reasonably will still depend on the facts of each case. This case concerned very specific circumstances where Davisons had every reason to believe that they were dealing with a genuine solicitor's firm which would fulfil its duties.
Interestingly, at first instance, in refusing relief under s.61, the Judge did not take into account the fact that Davisons had failed to report on the risks associated with the direct deposit and gifted SDLT. This seems to be because Nationwide themselves had also failed to recognise the magnitude of the risk associated with these factors when reported. Our view is that Davisons' were under a duty to not just report the facts but to also provide enough information and guidance to enable a client to understand the implications of the material which the solicitor is reporting. This failure to advise on the risks could have seen the s.61 relief refused on appeal.