The facts in brief: Purrunsing v A'Court and another  EWHC 789 (Ch)
This case turns on the issue of breach of trust. It does not, as might at first seem the case, establish a duty of care on the part of the vendor's solicitor to the purchaser.
This was a straightforward case of identity fraud, by someone purporting to be the registered owner of the property. The purchase money was paid to A'Court & Co (the vendor's solicitor) by the purchaser to be held on trust pending completion of the purchase, and as that completion never took place there was a claim for breach of trust. House Owners Conveyancers (HOC), the purchaser's conveyancers, were sued not only in breach of trust but also in tort and contract.
A trustee (in this case the conveyancer) can seek relief under s.61 of the Trustee Act, and that was the basis of the defence of both A'Court & Co and HOC in this case. Section 61 states that a trustee who acts in breach of trust but who has acted honestly and fairly and ought reasonably to be excused from the breach, can seek relief from the court.
The court concluded that there were no grounds to interpret s.61 more leniently for a vendor's solicitor than for a purchaser's solicitor, and thus the test to be applied to A'Court & Co was the same as for HOC.
Risk Management Lessons
1. Identify High Risk Transactions
There were several 'pointers' in this case which might have made any conveyancer look at it with extra caution, whether they were acting for the vendor or purchaser.
- the property was high value, it was mortgage free and it was not occupied by the vendor.
- there were discrepancies between the information first given about the property and subsequent replies to enquiries
- the vendor was apparently living and working abroad, and was anxious to complete within a very tight timeframe.
All frauds are based on circumstances which could be plausible and any or all of the above facts could occur in a genuine transaction. It is for the conveyancer to make further enquiries if they have any doubts or concerns and to satisfy themselves before proceeding with the transaction.
2. Check your Client's Identity
A'Court & Co asked for, and obtained, utility bills and a passport for the fraudster 'Mr Dawson'. The passport was, in fact, a forgery but it is important to note that there was no suggestion that A'Court and Co should have detected this and this was not a material factor in the judgment.
However, where a transaction is high risk, it is good practice to carry out enhanced due diligence. This could include electronic AML checks, which would have been likely to identify the passport as a forgery.
3. Investigate disparities & obtain verification of important information
- The property was in Wimbledon, but Mr Dawson produced bills for an address in Maidenhead, informing A'Court & Co that he was not living at the property. The Office Copy Entries showed an alternative address for the registered owner, in Huntingdon.
A'Court & Co took no steps to verify that address, and in fact there was nothing to link 'Mr Dawson' living in Maidenhead with the registered owner of the property. Had they taken the simple step of writing to the Huntingdon address, the court found that the fraud would very probably have failed.
- A'Court & Co apparently made no enquiries at all about Mr Dawson's reasons for sale or the reason why he was not living at the address, simply accepting at face value his assertion that it had been a gift from his father, and that he needed the money.
- Mr Dawson had answered 'no' to a question about building work at the property, but the purchaser's solicitors asked for details of work revealed by the local search. This was a minor discrepancy but indicated a lack of knowledge of the property which, particularly in conjunction with other issues, might have alerted A'Court & Co to the situation.
- Mr Dawson was extremely keen to complete the sale, setting an initial deadline of 7 days which was unrealistic and which had to be amended. Again, there could be valid reasons for this but it is a factor which may have given rise for concern.
It is all too easy to get engrossed in the detail of a matter, and lose the bigger picture. Undertake a periodic risk review of the transaction (you can use Lockton's Transaction Vetting/AML checklist) to help flag potentially suspicious circumstances.
4. Be alert to unexpected changes in the transaction
Perhaps most importantly, having pushed for completion and agreed to various requirements including a Statutory Declaration regarding a right of way, Mr Dawson withdrew from the initial sale after the purchaser's solicitors asked for the name of his employer in Abu Dhabi. Not only was this something which the court thought should have caused A'Court & Co to be concerned, it was the first that they had heard of Mr Dawson working and living abroad.
A further sale was agreed, at a price £30,000 greater than the previous sale (a price increase of nearly 10% in two weeks).
Not acting dishonestly, but acting reasonably?
There was no suggestion at any point that A'Court & Co had acted dishonestly; rather they had been careless, some might say reckless, in their approach to managing the well known risk of identity fraud.
Although this was not a case of money laundering, the firm failed to apply due diligence as required by the Money Laundering Regulations and did not follow the guidance of the Mortgage Lenders Handbook. Accordingly, they had not acted 'reasonably' so as to afford them relief under s.61 of the Trustee Act.
Nothing in this case imposes any additional burden upon conveyancers acting for vendors, but it reinforces the case that a vendor receiving purchase money does so on trust for the purchaser until completion has taken place.
His Honour Judge Pelling commented that the Money Laundering Regulations require a risk-based approach. He said “the approach that should be adopted will depend upon the circumstances surrounding the particular transaction. What will be appropriate in relation to a sale by the owner-occupier of a modestly priced residential property that is subject to a building society charge may not be appropriate in relation to the apparent sale of a high value unencumbered property being offered for sale by a registered proprietor whose claimed address is not that of the property being sold or any other address for service on the Register.”
In any case where there is an unusual element to a transaction further enquiries should be pursued until the conveyance is satisfied with the answers.
Determined fraudsters will falsify documents, create fake identities and conceal facts but they will usually avoid too much detail. It is better to risk offending or even losing a client by asking questions than to find you have acted in breach of trust.