Who should bear losses caused by conveyancing fraud?

Postal completions save time and money. However, they have also created weaknesses in the conveyancing system for fraudsters to exploit, leaving innocent victims to litigate with each other to establish who should bear the loss.  Santander UK plc v RA Legal Solicitors [2014] EWCA Civ 183; [2014] PLSCS 64 concerned a fraud perpetrated by a firm of solicitors. The firm in question claimed to have been instructed to act on behalf of the registered proprietor of land, who had not instructed them at all, and, following an “exchange and completion” that took place simultaneously, absconded with the purchase money. The buyer’s solicitors were also instructed by the buyer’s lender, on terms that required them to hold the mortgage advance on trust until completion. Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65; [2012] PLSCS 27 established that the trust on which the buyer’s solicitors hold money in such circumstances is discharged only by genuine completion of the transaction or by the return of the cash. Consequently, the lender sued the buyer’s solicitors for breach of trust. Trustees who are in breach of trust must restore the amount lost from the trust fund, unless the court excuses them because they have acted honestly and reasonably and ought fairly to be relieved of liability under section 61 of the Trustee Act 1925. The lender accepted that the buyer’s solicitors had acted honestly, but criticised the way in which they had dealt with the transaction. It transpired that the buyer’s solicitors had submitted their certificate of title before completing their due diligence, and had then raised inadequate requisitions on title with the “seller’s” solicitors and accepted inadequate replies. To make matters worse, they sent the purchase money to the “seller’s” solicitors without obtaining an assurance that they would adopt the Law Society’s Code for Completion by Post (which sets out what is expected of practitioners in such circumstances). Finally, they were slow to realise that they had been duped, even though it soon became clear that completion had gone awry. The trial judge decided to relieve the buyer’s solicitors of liability for the breach of trust, despite these failings. He thought that it would be unfair to hold them responsible for losses caused by the fraud of an unconnected third party. However, the Court of Appeal has overturned the decision. The court accepted that the premature certificate of title was irrelevant to the loss (but criticised the use of premature certificates to obtain mortgage advances more quickly as behaviour that “borders on dishonesty”). The court was also prepared to assume that the fraud would probably have been successful even if the buyer’s solicitors had adhered to best practice in all other respects, because the fraud was perpetrated by a firm of solicitors, but ruled that the failings identified by the lender had increased the risk of loss caused by fraud.  The court characterised the way in which the transaction was handled as “shoddy … from start to finish”, and ruled that the buyer’s solicitors had failed to show that they had acted reasonably.  Consequently, it was unable to excuse them from liability in whole or part, and would not have regarded it as fair to do so anyway. Allyson Colby is a property law consultant