Breach of trust claims against Conveyancers Nigel Clayton

What is this talk all about? An update on the law and principles to be applied in breach of trust claims against conveyancers as a result of four recent appeal court decisions: Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183 AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58

The typical scenario Solicitor instructed by lender and borrower on purchase Solicitor receives advance – ‘completes’ transaction – forwards advance to vendor’s solicitor Transaction goes off – solicitor fails to obtain proper title Lender sues solicitor to recover advance

Four main issues 1. When does a trust arise? 2. When will a conveyancer be in breach? 3. What is the measure of loss or damage? 4. When will a conveyancer be entitled to a s 61 defence?

S 61 Trustee Act 1925 Trustee Act 1925 61 Power to relieve trustee from personal liability   If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

Some general comments… Cases not straightforward/consistent Recent Supreme Court decision makes ‘heavy’ reading Problem areas: Breach of duty Causation Quantum Burden of proof on s 61 Trial judges frequently wrong! “Sure-fire winners or dead-cert losers?”

Other causes of action In each of the cases, the lender pursued alternative causes of action Common law professional negligence Breach of contract of retainer Breach of fiduciary duty Breach of undertaking Breach of warranty

Other causes of action Take care They each involve different principles Do not confuse breach of trust with breach of fiduciary duty See Bristol & West Building Society v Mothew [1998] Ch 1 per Millett LJ at p 16C etc

CML Handbook www.cml.org.uk/cml/handbook The Council of Mortgage Lenders is a trade organisation for banks, building societies and other lenders who undertake about 95% of all residential mortgage lending in the UK. The CML Lender’s Handbook provides instructions to solicitors/conveyancers acting on behalf of member lenders. Part 1 contains standard instructions. Part 2 contains each lender’s specific instructions. Part 3 contains instructions where the borrower is separately represented.

CML Handbook Handbook terms form the basis of the contract of retainer and cover such things as: Safeguarding procedures Acceptable title Circumstances requiring independent legal advice Dealing with the loan/documentation What is expected on completion Requirements on redemption

CML Handbook Note specific terms: 5.1 Title to the property must be good and marketable 5.12 On completion lender requires a fully enforceable first charge. All existing charges must be redeemed on or before completion 6.1 Loan will not be made until conditions of mortgage offer complied with 10.7 Loan is held on trust pending completion 14.1 Must register charge as first legal charge at HMLR

Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 Sale and purchase. Lender instructs M to act on the completion of a mortgage of £742,500 in accordance with CML handbook On ‘completion’ M remits advance to fictitious solicitors Vendor unaware. Documents forged. Solicitors disappear. Lender left with no security Lender sues M for breach of trust claiming the full amount of its loss M admitted it held the advance on trust pending completion Issue was whether there was a ‘completion’

Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 Held: Completion meant a conventional completion – a genuine completion by way of an exchange of real money for genuine documents that will give the purchaser/chargee the means to register title. That hadn’t happened S 61 Trustee Act 1925 provides a defence to a careful solicitor who conducts the transaction by the book On the facts no s 61 defence available

Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Sale and purchase. Lender instructs Davisons to act on completion of mortgage of £187,000 in accordance with CML Handbook Davisons correspond with fictitious firm of solicitors purporting to act for the vendor Fictitious firm offered undertaking to discharge existing charge Davisons complete and release advance to fictitious firm Purchaser registered as proprietor but subject to existing charge which had not been discharged

Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Lender’s charge not registered Lender sues Davisons for breach of trust etc Common ground that Davisons held the advance on trust pending completion Issue was whether Davisons acted in breach of trust in releasing the advance and if so whether they could rely on a s 61 defence

Nationwide Building Society v Davisons [2012] EWCA Civ 1626 Held: The trust imposed on the advance could only be discharged by completion or the return of the money Compliance with CML Handbook did not permit release of advance to fictitious firm Since no proper completion took place, Davisons were in breach of trust. Liable to repay advance + interest As to s 61 defence - Davisons acted honestly. The requirement of reasonableness did not necessarily require compliance with best practice. Court would grant relief.

Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183 RA instructed by lender and borrower on purchase Purchase price £200k Mortgage £150k Vendor’s solicitors were real but acted dishonestly, falsely representing they acted for vendor Vendor’s solicitors purported to exchange and complete and RA paid completion monies to an account nominated by them Vendor’s solicitors produced forged documents. Lender did not obtain first charge Lender sued RA for breach of trust and return of advance

Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183 Held: RA held the advance on trust pending completion. Completion did not take place. RA liable for breach of trust The burden of proof was on RA under s 61 Although RA acted honestly, they had not acted reasonably. This didn’t predicate compliance with best practice but it did require reasonable compliance with conveyancing safeguards Whilst s 61 requires a causal link with the loss caused, the court had to view the solicitor’s conduct in the round RA not entitled to s 61 defence

AIB Group (UK) Plc v Mark Redler [2014] UKSC 58 Mark Redler instructed by borrower and lender on re-mortgage to AIB for £3.3M AIB required existing charge to Barclays to be discharged on completion (charge secured £1.5M on two accounts) Mark Redler failed to notice that redemption figure only related to one account. Remitted £1.2M to Barclays and paid balance to borrower (difference £273k) Mark Redler only able to register AIB’s charge second behind Barclays. Borrower defaults. AIB repossess/sell at shortfall leaving only £867k after discharging Barclays charge

AIB Group (UK) Plc v Mark Redler [2014] UKSC 58 AIB sue Mark Redler alleging breach of trust, claiming £3.3M less recoveries of £867k Trial judge dealt with two preliminary issues: Did MR act in breach of trust? Yes. MR were required to pay Barclays £1.5M and the balance to the borrower £1.8M. In fact they paid £1.2M to Barclays and £2.1M to the borrower. What remedy is AIB entitled to? Equitable compensation – the amount which should have been paid to Barclays which remains secured in priority (£273k + interest) AIB appealed contending that MR had no authority to pay any of the mortgage advance and claiming full repayment

AIB Group (UK) Plc v Mark Redler [2014] UKSC 58 CA held: Obtaining an accurate redemption statement and an undertaking from a solicitor to apply the advance in discharge of an existing charge was an essential pre-requisite to completion – without it Mark Redler was not authorised to release the advance and therefore acted in breach of trust Equitable principles of compensation were flexible – AIB’s loss was the diminution in value of its security (as opposed to its total advance). Judge’s order affirmed. Mark Redler did not seek relief under s 61 AIB appealed

AIB Group (UK) Plc v Mark Redler [2014] UKSC 58 [No issue about trust or breach of trust and MR did not pursue the s 61 point. Only issue was on quantum] SC held: Lord Browne-Wilkinson’s fundamental principles in Target Holdings were affirmed Equitable compensation is designed to compensate a beneficiary for a loss which he has in fact suffered It could not exceed the loss which AIB would have sustained even if the solicitors had acted properly Trial judge’s award upheld (273k plus interest)

A quick summary… Lloyds TSB Bank Plc v Markandan Total loss. No s 61 defence. Lender makes full recovery Nationwide Building Society v Davisons Total loss. S 61 defence. Lender makes no recovery Santander UK Plc v RA Legal Solicitors AIB Group (UK) Plc v Mark Redler Partial loss. No s 61 defence. Lender makes partial recovery

1. When does a trust arise? At common law, purchase money/mortgage advance is client money held on a bare trust Target Holdings Ltd v Redferns [1996] 1 AC 421 Bristol & West Building Society v Mothew [1998] Ch 1 Solicitor usually retained by lender on terms of Council of Mortgage Lender’s Handbook www.cml.org.uk/cml/handbook

1. When does a trust arise? Council of Mortgage Lender’s Handbook Part 1, section 10.7 You must hold the loan on trust for us pending completion. If completion is delayed, you must return it to us when and how we tell you

1. When does a trust arise? For analysis of these provisions, see Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65, paras 13 and 37 Nationwide Building Society v Davisons [2012] EWCA Civ 1626, para 8 etc AIB Group (UK) Plc v Mark Redler & Co [2013] EWCA Civ 45, para 6 Santander UK Plc v RA Legal Solicitors [2014] EWCA Civ 183, para 10

2. When will a conveyancer be in breach? In each of the cases, it was common ground that the trust on which the conveyancer held the purchase money/mortgage advance could only be discharged by completion or the return of the money The key issue was to determine when ‘completion’ actually takes place

What is meant by ‘completion’? In a fictitious transaction in which there is no genuine vendor and only forged documents: “Nothing, said Lear, will come of nothing, and so it was here. Completion in the present context must mean the completion of a genuine contract by way of an exchange of real money in 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. Had that happened in this case, the parting with the loan money would have been a breach of trust” Lloyds TSB Bank Plc v Markandan [2012] EWCA Civ 65 per Rimer LJ at para 50.

What is meant by ‘completion’? ‘Completion’ is used here to determine when the conveyancer discharges his duty. The expression was used differently by the Supreme Court in AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58 to describe completion of a commercial transaction in a general sense (see Lord Toulson at para 74)

What is meant by a genuine completion with real documents? Lloyds TSB Bank Plc v Markandan Bogus solicitors gave undertaking to hand over on completion the transfer, certificate of discharge of existing mortgage, charge certificate and vendor’s part signed contract. They also gave an undertaking to complete by post adopting the Law Society’s Code for Completion by Post These were all considered essential to enable a genuine completion to take place, but since the solicitors were bogus and the documents turned out to be worthless, there hadn’t been a genuine completion per Rimer LJ at para 43

What is meant by a genuine completion with real documents? Nationwide Building Society v Davisons Davisons required clear information about which pre-existing charge was to be redeemed on completion and an undertaking from a solicitor authorised to receive the sum intended to repay it Given that the solicitors were bogus, there was no valid undertaking and no genuine completion per Morritt C at paras 22, 38-40

What is meant by a genuine completion with real documents? Santander UK Plc v RA Legal Solicitors RA Legal did not have authority to transfer the mortgage advance pending completion to the client account of any other than the vendor’s genuine solicitors. In addition, RA Legal did not obtain an enforceable undertaking that the money, when transferred, would be held to order pending completion or a commitment to adopt the Law Society’s Code for completion by per Etherton C paras 17-18, 94

What is meant by a genuine completion with real documents? AIB Group (UK) Plc v Mark Redler & Co (not a fraud case) MR required an accurate redemption statement in respect of the existing charge to Barclays and an undertaking from the vendor’s solicitors to discharge the same. MR failed to follow proper conveyancing practice (the Court of Appeal referred to the Law Society’s Conveyancing Handbook) Without accurate redemption information and a proper undertaking it was not authorised to release the advance per Patten LJ in CA at paras 39-40, 43

2. When will a conveyancer be in breach? Conclusions Court expects substantial compliance with conveyancing practice CML Lender’s Handbook, Part 1, Section 3 – Safeguards SRA warning cards Law Society’s Conveyancing Handbook Law Society’s Practice Notes/Information Breach is almost inevitable if you are dealing with bogus solicitors/ and/or obtain no/worthless documents Only answer may be to rely on s 61 defence

2. When will a conveyancer be in breach? Conclusions It follows that you can be in breach of trust even if you think you have completed a transaction normally!

3. What is the measure of loss or damage? The courts have had to grapple with two issues: What is the correct approach on quantum What role does causation play?

3. What is the measure of loss or damage? In a common law claim for damages for professional negligence, the court has to determine whether the solicitor’s breach of duty caused the damage, with the result that if the damage would have occurred anyway, the breach of duty will not be the cause Jackson & Powell on Professional Liability, 7th Edn, para 11-247

3. What is the measure of loss or damage? Target Holdings Ltd v Redferns [1996] 1 AC 421 affirmed in AIB Group (UK) Plc v Mark Redler [2014] UKSC 58 In claims for equitable compensation for breach of trust, the common law rules of remoteness and causation do not apply Ordinarily the trustee in breach must restore the trust fund/ make good the loss However, there does have to be some causal connection between the breach of trust and the loss Equitable compensation for breach of trust was designed to make good a loss in fact suffered and could not exceed the amount which the lender would have suffered in any event had the solicitors properly performed their duties. The assessment was to be made at trial, with the benefit of hindsight

…conundrum! The role of causation has caused some real problems. In the breach of trust cases, the courts have repeatedly recognised that in cases involving a determined fraudster, the loss would probably have occurred anyway. So, if equitable compensation is designed to make good the loss, but the loss would probably have occurred anyway, what does the court do?

Lloyds TSB Bank Plc v Markandan M parted with the mortgage advance of £742,500 in breach of trust and did not obtain any security - the money was irrecoverable. M ordered to repay £742,500 + interest There was no real analysis of causation issues

Nationwide Building Society v Davisons D parted with the mortgage advance of £185,620 in breach of trust and did not obtain a first legal charge (or the discharge of the existing legal charge) Trial judge gave judgment for £213,490 Court of Appeal acknowledged that the lapse from best practice did not cause the loss – the loss was caused by the fraud of an unconnected third party The issue of causation was not considered in detail – Court of Appeal allowed D’s appeal and relieved them of liability under s 61

Santander UK Plc v RA Legal Solicitors Similar to Markandan and Davisons RA Legal parted with the mortgage advance of £150,000 to bogus solicitors without obtaining security Santander sued to recover the full amount. The trial judge relieved RA Legal of liability under s 61 The Court of Appeal disagreed. The judgment of Briggs LJ contains an analysis of causation issues as part of a review of RA Legal’s s 61 defence

Santander UK Plc v RA Legal Solicitors A strict causation test (a ‘but for’ test) was too restrictive But some element of causative connection had to be shown between the breach of duty and the lender’s loss Conduct which is completely irrelevant or immaterial to the loss will fall outside the court’s assessment of s 61 Held: RA Legal not entitled to a s 61 defence. Although the transcript is silent on the measure of equitable compensation, it is reasonable to assume it was £150,000 + interest following Markandan and Davisons

AIB Group (UK) Plc v Mark Redler AIB loan was £3.3M, out of which MR should have paid Barclays £1.5M but only paid £1.2M (difference £273k) AIB only obtained 2nd charge. Barclays retained priority for 273k AIB repossessed and sold at a shortfall. AIB wanted full repayment £3.3m less recoveries (£867k) Trial judge awarded equitable compensation of £273k (+interest) to reflect the priority retained by Barclays AIB’s appeals dismissed

AIB Group (UK) Plc v Mark Redler Mark Redler misapplied £273k in breach of trust If they hadn’t done so, AIB would still have suffered the shortfall debt (but would have retained priority for £273k) Equitable compensation was designed to make good a loss in fact suffered and could not exceed the amount which the lender would have suffered in any event

4. When will a conveyancer be entitled to a s 61 defence? Trustee Act 1925 61 Power to relieve trustee from personal liability   If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

4. When will a conveyancer be entitled to a s 61 defence? 3-stages: Trustee [Solicitor] must show (1) That he has acted honestly (2) That he has acted reasonably; and (3) That he ought fairly to be excused On the cases - (1) Is usually made out, (2) has been the main battleground, (3) imports a discretion

4. When will a conveyancer be entitled to a s 61 defence? Lloyds TSB Bank Plc v Markandan Trial judge rejected M’s s 61 defence – they had acted honestly but not reasonably: Failing to take proper steps to confirm the identity of the solicitors they were dealing with in breach of the ‘safeguards’ section of the CML Handbook Parting with money when they knew the solicitors were in breach of earlier undertakings No appeal against these findings

4. When will a conveyancer be entitled to a s 61 defence? Lloyds TSB Bank Plc v Markandan “The careful conscientious and thorough solicitor who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan money to a fraudster. He is however likely to be treated mercifully by the court on his section 61 application” (per Rimer LJ, para 61)

4. When will a conveyancer be entitled to a s 61 defence? Nationwide Building Society v Davisons Trial judge rejected D’s s 61 defence. D had acted honestly but not reasonably Failed to obtain a [valid] undertaking to discharge the existing 1st charge on completion, and provide evidence of discharge after completion Court of Appeal disagreed. D had the benefit of an undertaking to redeem the 1st charge from the person he reasonably believed to be the seller’s solicitor

4. When will a conveyancer be entitled to a s 61 defence? Nationwide Building Society v Davisons “The section only requires [the solicitor] to have acted reasonably. That does not, in my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection. It is seldom helpful to compare conduct found to be reasonable or not in one case with that of another…” (para 48). He concluded by saying that the loss sustained by Nationwide was caused by the fraud of an unconnected third party. Even if Davisons had insisted on answers to requisitions on form TA13 and on separate written undertakings it is probable that the imposter would have complied, the matter would have proceeded to apparent completion by post and the imposter would have disappeared with the balance of the purchase money. The lapse from best practice, if any, did not cause the loss to Nationwide (para 50)

4. When will a conveyancer be entitled to a s 61 defence? The problem with this is that it rolls causation arguments into s 61 and in practice means that most solicitors will avoid liability for the fraud of others It seems to have led the trial judge astray in Santander UK Plc v RA Legal Solicitors. Andrew Smith J required Santander to plead and prove unreasonable conduct, but having reviewed the complaints, he held concluded that the loss suffered had no connection with the criticisms of how RA Legal conducted the transaction – the loss would have occurred anyway

4. When will a conveyancer be entitled to a s 61 defence? Santander UK Plc v RA Legal Solicitors Briggs LJ didn’t like this The trial judge had got mixed up. This wasn’t a professional negligence claim. It was a breach of trust claim. The burden of proof on a s 61 defence lay squarely on the trustee [solicitor]

4. When will a conveyancer be entitled to a s 61 defence? “In the context of a routine conveyancing transaction, the incidence of the burden of proof may frequently be crucial to the outcome. This is because transactions are, in the working life of those involved, so routine and so frequent that a specific recollection of any part of one of them, not precisely recorded in contemporaneous correspondence, documents or attendance notes, will rapidly fade. Thus if the reasonableness of the solicitor’s conduct depends on anything not so recorded, the solicitor may simply be unable to discharge the burden of proof on that aspect of the matter, due to a perfectly understandable inability to recollect the detail…” Santander UK Plc v RA Legal Solicitors per Briggs LJ, para 55

4. When will a conveyancer be entitled to a s 61 defence? “…In such circumstances, the benefit of the doubt (or the burden of proof) is not to be given to the solicitor if the relevant question is as to the reasonableness, rather than the honesty of, his conduct. It is therefore likely that, in order to discharge the burden of proving that he acted reasonably under section 61, the solicitor will need to be able to provide a paper trail demonstrating that the whole of his or his firm’s conduct sufficiently connected with the loss satisfied the reasonableness test” Santander UK Plc v RA Legal Solicitors per Briggs LJ, para 55

4. When will a conveyancer be entitled to a s 61 defence? Santander UK Plc v RA Legal Solicitors No answer to say that even if RA Legal’s conduct had been in accordance with best practice, the fraud would still have occurred. The connection test is not that restrictive RA Legal had failed to follow up Requisitions on Title which omitted to deal with the arrangements on completion and the discharge of prior charges – it left RA without an undertaking to obtain the discharge of the 1st charge or any arrangement for the return of the completion monies

4. When will a conveyancer be entitled to a s 61 defence? “The question whether a trustee has acted reasonably in respect of matters connected with the beneficiary’s loss is not in my judgment to be resolved purely by considering each specific complaint separately. The question is whether the trustee’s relevant conduct was reasonable, taken as a whole. Looking at the matter in the round, I have come to the conclusion that that the judge took an altogether too lenient view of the seriousness of RA Legal’s numerous departures from best practice, during the whole of the period from its request for the funds from [Santander], until they were misappropriated from Sovereign’s client account” Santander UK Plc v RA Legal Solicitors per Briggs LJ at para 96

4. When will a conveyancer be entitled to a s 61 defence? “A conclusion that, but for those aspects where RA Legal’s conduct fell seriously and unreasonably short of best practice, the fraud would probably have succeeded by no means leads to the result that those parts of RA Legal’s conduct are unconnected with the loss. They all represent departures from a sophisticated regime, worked out over many years, whereby risks of loss to lenders and lay clients are minimised, even if not wholly eradicated. Where solicitors fail, in serious respects, to play their part in that structure, and at the same time are swindled into transferring and then releasing trust money to a fraudster without authority, they cannot expect to persuade the court that it is fair to excuse them from liability…” Santander UK Plc v RA Legal Solicitors per Briggs LJ at para 99

Conclusion: 6 points to remember Be clear on your cause(s) of action. Different principles apply! 2. Establishing that a mortgage advance is held on trust will in most cases be straightforward but always check: whether/to what extent the CML Lender’s Handbook applies any special terms/conditions   3. The trust is only discharged by completion or the return of the money. Completion means a proper completion – the exchange of real money for real documents. In each of the cases, this meant (amongst other things) undertakings in proper form from genuine solicitors.

Conclusion: 6 points to remember 4. A claim in breach of trust requires some causal connection between the breach and the loss. Equitable compensation will not necessarily involve full restitution of the trust fund. A lender will have to give credit for whatever security or recoveries it obtains. 5. Causation will also be relevant on s 61 6. The burden of proof on a s 61 defence is on the trustee [solicitor] and it is onerous! The court will review the solicitor’s conduct in the round. Departing from standard conveyancing practice may be critical. The court will expect substantial compliance with ‘Safeguards’

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