Rise in breach of trust claims against conveyancers

Alleging breach of trust is gaining popularity with mortgage lenders who have fallen victim of fraud and are looking to place the responsibility on law firms. This option can be an attractive alternative to claims in negligence or breach of contract, as there is no need to establish negligence or breach of contract on the part of the solicitor involved in the transaction. Damages are also likely to be higher where breach of trust is established.

The basic equitable principle applicable to breach of trust is that the beneficiary '“ the lender '“ is entitled to be compensated for any loss he would not have suffered but for the breach. Lenders can seek to recover their full loss, without any deduction for contributory negligence.

Practitioners need to be both vigilant against fraud and to perform their role with exemplary professional care and efficiency at all times.

The need for completion

Unless completion is achieved, a firm of solicitors which has released mortgage funds will be exposed to a finding of breach of trust. The Council of Mortgage Lenders' Handbook requires a mortgage advance to be held on trust for the lender until completion.

In Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65, the Court of Appeal considered that completion in this 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'. Completion had not taken place where loan monies were paid by the lender's solicitors to a bogus firm of solicitors, in respect of a property that was not for sale. A similar outcome arose in Mortgage Express v Iqbal Hafeez Solicitors [2011] EWHC 3037 (Ch), ?a case with similar facts.

In UCB Home Loans Ltd v Grace [2011] EWHC 851 (Ch), loan monies were to be advanced against a first legal charge in respect of several properties. No such charges were granted and therefore the transactions did not complete. The lenders' solicitors were held to be in breach of trust, and were ordered to repay the loan monies to the lenders.

Qualified breach

Earlier this year, the case of AIB Group (UK) plc v Mark Redler & Co [2012] EWHC 35 (Ch) showed that lenders will not always recover the entire monies advanced. The court held that a firm of solicitors acting on a remortgage, who had failed to redeem the whole of the existing mortgage, were in breach of trust but only to the value of the shortfall.

The breach of trust related solely to the fact the solicitors had failed to realise that there were two mortgage accounts. The solicitors were liable for the difference between what they actually paid out to redeem the first mortgage account, and what they should have paid to redeem the entire mortgage. The lender was only entitled to the sum required to discharge the second mortgage account and not the full amount lent.

The case confirms that, where a breach of trust has occurred, The courts will only consider compensation for losses that arise directly from that breach, which may not necessarily cover the whole of the loss

Exemplary professional care and efficiency

A solicitor facing liability for breach of trust can seek relief under section 61 of the Trustee Act 1925. Under section 61, if it appears to the court that a trustee is personally liable for any breach of trust but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, then the court may relieve him wholly or partly from that personal liability.

Courts are adopting a tough approach with solicitors who have failed to act in accordance with the terms of their retainer, the CML handbook and relevant guidance from the Law Society. In particular, the cases show that, even where the court accepts that a firm of solicitors had acted honestly in relation to a transaction, the firm will not be relieved of liability under section 61 where its conduct falls below the required standard. A court is more likely to grant section 61 relief where the firm of solicitors has performed its role with exemplary professional care and efficiency.