There have been some reports in the property press of the recent case in England of Nationwide Building Society v Davisons. On some summary versions, solicitors would have good reason to be alarmed. A solicitor is taken in by a mortgage fraud involving a fake firm of solicitors. He has done all that he can to confirm the identity of the firm with the Solicitors Regulation Authority (SRA), and indeed has clearance form SOCA for the transaction. Yet when the loan funds disappear after "completion" the solicitor is held to be in breach of his retainer, and in breach of trust as far as his client, the lender, is concerned.
Many lenders who have suffered losses on property loans are now carefully reviewing the performance of their advisers, including solicitors. Professional indemnity insurers indicate that claims in relation to such matters are becoming more common. Sometimes, the link between the alleged failing of the solicitor and the loss incurred is rather tenuous, but the solicitors (usually through insurers) must defend themselves in each case. Does this Nationwide case indicate that the risk of loss is with the solicitor in almost all circumstances?
We think the answer, for solicitors, is: "Don't Panic". A full review of the judgement shows that the ground has not materially shifted, if at all.
The facts are of course narrated in the judgement. Davisons dealt with what purported to be a branch office of a registered and blameless firm of solicitors. Loan funds were utilised in a supposed purchase of a house, and disappeared when released to the vendor's "solicitors".
The two aspects of the case, breach of retainer and breach of trust, turn on Davison's failure to get an undertaking from the vendor's solicitors about application of funds to redeem an existing charge. Under the English Law Society Code of Practice, a solicitor should have such undertakings before completion. The judgement does say, in terms, (paragraph 44) that Davisons were in breach of their contract of retainer, and acted in breach of trust in parting with the advance. Paragraph 42, however, notes that:-
- there is a clear mandatory requirement in the CML Lenders' Handbooks (incorporated in the retainer) that Nationwide were to have a fully enforceable first legal charge on completion and the pre-existing charge had to be redeemed;
- completion (by post) in the conventional sense takes place before registration of the lender's charge; and
- authorities show that Davisons would not be in breach of their contract of retainer if at the moment of completion they had had a duly executed legal charge from the purchaser and an appropriate undertaking from the vendor's solicitor (there is a Law Society recommended form for such an undertaking.)
Because of the lack of such an undertaking, Davisons were found to be in breach of their retainer – but, based on para 42, if they had had it there wouldn't have been a breach
There is a right of relief in England under Section 61 of the Trustee Act 1925 for a trustee who is in breach of trust, but acted reasonably. The lack of an undertaking was the only reason that relief was not given - the judge listed and dismissed various other arguments against relief.
The case therefore comes down only to the matter of the undertakings. The departure from appropriate process led Davisons into liability arising from a carefully constructed fraud. Davisons were meticulous at the start of the transaction in carrying out the requirements of the CML Handbook for checking the identity of the vendor's solicitors – which did them no good as the SRA had not updated its records having been told some months before by the real firm, of someone masquerading as a branch office! Davisons even reported the transaction to SOCA, and got authority to proceed. What let them down was a mis - step at the end. Obviously, solicitors are duty – bound to act by the book, but an experienced general practitioner would probably say that in nine cases out of ten, a "rough edge" like this, while not correct, will have no particular consequence. This, it appears, was that tenth case.
The lessons for risk management in difficult times are, no doubt, obvious.
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