A firm of solicitors were found liable to a lender for the mortgage advances after they had paid away the funds to a non-existent firm of solicitors purporting to act for the purchasers. It was found that they did so in breach of trust and in breach of their retainer.
Iqbal Hafeez Solicitors (“IH”) were approached by a mortgage broker acting for clients who had allegedly exchanged contracts and paid substantial deposits in respect of three properties directly to the vendors. Mortgage Express (“MEX”) were then approached in order to provide the finance for the transaction and, in turn, IH were instructed by MEX under the terms of the Council of Mortgage Lenders Handbook for England and Wales (“CML Handbook”).
The approval of the loan was by way of an automated process based upon the value of the properties being approved by MEX’s underwriting team. Once the loan was approved, MEX transferred the mortgage advances IH and, on the basis of an undertaking, the funds were transferred to the firm of solicitors purporting to act for the purchasers.
It transpired that the three transactions were fraudulent and that the genuine owners of the properties were not aware of the transactions even taking place. MEX took steps to recover the mortgage advances on the basis that IH had acted in breach of trust, breach of contract and was liable in tort. IH argued that MEX had contributed to its own loss and that they themselves were entitled to relief under s61 Trustee Act 1925 that is, they had acted both honestly and reasonably and should therefore be excused and granted relief.
Whilst the judgment is not currently available, Judge Randall QC found that IH had acted in breach of contract and in breach of trust and was liable to MEX for the monies.
Whilst IH’s actions were not dishonest in nature, they were found to have not acted in a reasonable manner throughout their conduct of the transactions. IH had acted in breach of the CML Handbook, under the terms of which they were instructed, by fundamentally failing to verify the identity of the purchaser’s solicitors. This was compounded by the numerous facts that should have raised the alarm bells, namely, the unusually large nature of the deposits allegedly paid and the fact that they had been paid directly to the sellers, that the same solicitors were purporting to act in all three transactions and perhaps most obviously, that exchange of contracts had allegedly already taken place.
It was held that IH had held the mortgage advances from MEX on trust and considering the strong evidence suggesting that further investigation of the transaction was required in order to protect the lender’s interest, the release of the funds was in breach of that trust. Furthermore, despite the automated nature of the underwriting, MEX where found not to have contributed to their loss.
This is one of the very few reported judgments from the recent recession based series of lender claims against solicitors. It is helpful to lenders to see that the Court is willing to uphold claims against solicitors and, more importantly, for breach of trust. It is often being said by defendants that the Courts will not support the lender’s position on cases which go to trial. This case can be used to show the contrary appears to be the case.
For further information please contact Georgina Squire or the Partner with whom you usually deal.