Don’t go breaching my trust

Fraudulent property transactions have long posed a risk to purchasers and lenders – and their solicitors.

As the recent case of “Purrunsing v. 1) A’Court & Co; 2) House Owners Conveyancers Limited” (2016) EWHC 789 (Ch) demonstrates, frauds are becoming increasingly sophisticated and it is all too easy for a fraudster to now act completely remotely, quickly removing their ill-gotten gains from the authorities’ reach. Solicitors need to take extra precautions to ensure that all parties in a transaction are genuine.

Unusually in this case, and for the first time, the seller’s solicitors were found liable to a defrauded buyer for breach of trust.

Background

The facts are complicated but, in short, the case concerned the fraudulent sale of a property in London, with the sale monies dispersed abroad and the buyer unable to be registered as proprietor. The buyer, Mr Purrunsing, brought a claim against his solicitors for breach of duty, breach of contract and breach of trust. In addition, and more unusually, Mr Purrunsing also brought a claim against the fraudulent seller’s solicitors for breach of trust.

The Court decided that the seller’s solicitors held the completion monies on trust for the buyer, and the same standards were expected of them as of a buyer’s solicitors when in possession of funds. On the facts of this case, the seller’s solicitors were found to be in breach of trust and were afforded no protection under s.61 of the Trustee Act 1925 (by which relief can be granted if the trustee can show that he acted honestly and reasonably). This is mainly because they didn’t adequately verify the identity of the seller, or his links to the property, along with other inconsistencies. The buyer’s solicitors were not afforded any protection under s.61 either, as they failed to report inconsistencies in the responses of the seller’s solicitors to the buyer, who was then unable to make an informed decision.

Consequences

There are some important lessons to learn from this case:

• A seller’s solicitor is a trustee of the completion funds, and is held to the same standard as a buyer’s solicitor when handling and releasing these funds;
• Any diversion from best practice that increases the risk of loss by fraud (even if it is not linked to the loss) will be considered by the Court;
• If a solicitor asks questions about the other party and does not receive a satisfactory answer, this should be reported to their client to enable them to make an informed decision; and
• Buyers and lenders could specifically instruct their solicitor to ask for confirmation of the vendor’s identity and links to the property, to try and avoid issues like this in the first place.

For defrauded lenders and buyers, where matters have gone awry and a fraudster has succeeded, it may be possible to make a recovery from both their solicitors and the seller’s solicitor for breach of trust if the completion monies have not been adequately protected.

If you would like to discuss this article in further detail, please contact Frances Mitchell on 0113 227 0210 or at frances.mitchell@gordonsllp.com or Catherine Woodward on 0113 227 0366 or at catherine.woodward.gordonsllp.com.