Off the hook: protecting your firm against mortgage fraud

Just when you thought that the Court of Appeal in Nationwide v Davisons had tipped the balance back in favour of solicitors, its latest decision in Santander UK plc v RA Legal Solicitors has moved it firmly back again in favour of lenders.

In the Davisons case, the firm sent the purchase money to criminals masquerading as a branch office of a genuine firm of solicitors having managed to persuade the Solicitors Regulation Authority to register them as such so that their details appeared in the 'Find a Solicitor' page on the Law Society website.

By contrast, in the RA Legal case, the firm to whom the purchase money was sent, Sovereign, was "a firm of solicitors in good standing with the Law Society" but nevertheless fraudsters.

In May 2009, Abbey National, as they then were, agreed to advance the sum of £150,000 for the purchase of a property in London and together with the proposed purchaser instructed RA Legal to act for them. RA Legal were advised that the owner and seller of the property had instructed Sovereign Chambers LLP as her solicitors in connection with the sale. The transaction proceeded normally with the proposed simultaneous exchange of contracts and completion on 29 July 2009. In fact, the seller had never instructed Sovereign to act for her and the matter was never completed.

Honestly and reasonably

The mortgage advance together with the buyer's own contribution was lost to the criminals and inevitably Abbey sought reimbursement from RA Legal for breach of trust. The lender was unsuccessful in the High Court which found that although RA Legal had paid out the advance in breach of trust, they were entitled to relief under Section 61 of the Trustee Act 1925, having acted honestly and reasonably, and ought fairly to be excused from the breach. The High Court determined that the various criticisms of RA Legal's conduct were not sufficiently connected with Abbey's loss and that RA Legal should therefore to be excused from liability - the loss being caused by the fraud of Sovereign.

The question now for conveyancers to decide is when might one reasonably expect to be excused under Section 61 should you find yourself in a similar predicament and, better still, how do you avoid finding yourself in that situation in the first place?

The first point to recognise is that the problems which have given rise to these cases occurred some years ago. By now all conveyancers should be much more aware of the incidence of mortgage fraud and the ways in which it is perpetrated. Having said that, it is also clear that criminals constantly remain one step ahead and as one avenue closes they open a fresh one.

Year 2 training for CQS accredited firms has included a compulsory course on mortgage fraud and all conveyancers should be familiar with the terms of the Law Society Mortgage Fraud Practice Note of October 2011. Similarly, the SRA Fraud Alert Warnings webpage needs to be monitored on a regular basis by every firm and communicated to all those involved in conveyancing.

It is difficult to see, however, how RA Legal, with no advanced warning, might have avoided dealing with a firm of solicitors who were fraudsters and having done so why the Court of Appeal was not more sympathetic to their plight.

The High Court focused on the fact that none of the criticisms made of RA Legal were connected with the lender's loss, the implication being that a lender would need to show a connection between their loss and the conveyancer's failings. The Court of Appeal, however, emphasised that the onus was on the trustee to show that he had acted both honestly and reasonably.

Overall conduct

In reaching its conclusion, the Court of Appeal considered the overall conduct of the conveyancing transaction. It appears to have been particularly vexed that RA Legal submitted an unqualified Certificate of Title before it had fully completed its investigation of title. There was an outstanding copy transfer from 1986 which the register entries suggested contained provisions about boundary structures and some restrictive covenants. RA Legal sought to speed up the process by sending off the Certificate of Title, no doubt on the basis that if, as seemed unlikely, that transfer revealed a problem the transaction could be brought to a halt at that stage.

It is an old idiom that familiarity breeds contempt but sadly that appears to be the case with many conveyancers in the case of the approved Certificate of Title given to mortgage lenders under the CML Handbook. The problem, of course, is that the standard certificate issued by most lenders is in the short form. Conveyancers, at best, overlook the full extent of the certificate issued to the lender on which the lender is entitled to rely. The certificate confirms that: "We have investigated the title to the property…", there then follows many other items which the conveyancer is certifying including, among a fairly onerous list, "receipt of satisfactory evidence that the building insurance is in place for at least a sum required by the lender…"

Given the modern tendency for the period between exchange of contracts and completion to be cut to the absolute minimum, how often would the conveyancer have complied with this at the time the Certificate of Title is sent?

Following the criticism of this aspect of the way in which RA Legal dealt with the conveyancing by the Court of Appeal, does it mean that the time between exchange of contracts and completion must inevitably be extended to allow for this evidence to be obtained before the certificate is sent? Lord Justice Briggs was particularly critical of the premature submission of the certificate of title. He considered that "the pretence that the investigation of title has been completed when it had not … borders on dishonesty."

Some relief is perhaps found in paragraph 109 of the court's decision in the supporting judgment given by the Lord Chancellor of the High Court, who considered RA Legal's conduct to be "unreasonable" but "irrelevant" as the investigation of title had been completed before the funds were transmitted. Nevertheless, the message which seems to emerge from the judgment as a whole is that the court was unhappy with the way in which RA Legal had conducted the conveyancing and the premature submission of the Certificate of Title was a reflection of that and may perhaps have influenced the court's decision in determining whether or not relief should be granted under Section 61.

Fraud risk increased

The court identifies various failings on the part of RA Legal and in giving the main judgment Briggs LJ considered "it would not be appropriate to exclude as irrelevant conduct which consisted of a departure from best or reasonable practice which increased the risk of loss by fraud, even if the Court concludes that the fraudster would nonetheless have achieved his goal if the solicitor had acted reasonably."

The court analysed the replies given to requisitions on title. Against the question "where will the completion take place" the answer "formula B" had been written. This was clearly a nonsensical reply and it had not been challenged.

RA Legal appear to have considered that they had exchanged and completed on 29 July. No discharge of the existing registered charge was supplied. Following "completion" there was a "bizarre exchange of correspondence" between RA Legal and Sovereign including a letter from RA Legal simultaneously claiming that completion had taken place and threatening to serve a notice to complete.

RA Legal were dilatory in pursuing the matter in any effective way and did not inform Abbey of the problems until the end of October.

Peter Rodd is senior partner at Boys & Maughan Solicitors

www.boysandmaughan.co.uk