The Court of Appeal has recently overturned the High Court’s finding on this breach of trust claim.

Background

In December 2008, Nationwide agreed to lend Mr Patel £187,500 to fund the purchase of a property. The property, which was subject to a first charge in favour of G.E. Money Home Lending Limited (“G.E. Money”), was registered in the name of Shamsun Naher Begum.

Davisons (who acted for Nationwide and Mr Patel in this transaction) were instructed to hold the loan advance on trust until completion.

A firm of solicitors called Rothschilds sent correspondence to Davisons in January 2009 indicating that they had been instructed by the sellers. The Law Society’s website confirmed that Mr Gill of Rothschilds was a qualified solicitor working at the Small Heath Rothschild branch. Although they appeared to exist on both the Law Society and Solicitors Regulation Authority’s databases, the seller’s solicitors were fraudsters.

In March 2009, Nationwide released the loan advance to Davisons. The charge in favour of Nationwide was executed by Mr Patel and the advance monies were sent to Rothschilds. However, G.E Money’s charge was not discharged and Nationwide’s charge was not registered. Rothschilds had effectively disappeared with the loan advance.

The Court of First Instance

Nationwide commenced proceedings in March 2011 against Davisons for breach of retainer and breach of trust. In the High Court, the judge found in favour of Nationwide and awarded damages of £213,490 and costs. Davisons were held to have committed a breach of trust as they released the advance without complying with Nationwide’s instructions.

The High Court did not allow s.61 of the Trustee Act 1925 to relieve Davisons of liability, as the judge held that the solicitor responsible had failed to act reasonably by not obtaining a formal written undertaking to discharge G.E. Money’s first charge.

Davidsons appealed this decision.

The Appeal

The Court of Appeal considered the retainer between Nationwide and Davison. The retainer provided that Nationwide were to have a fully enforceable first legal charge on completion of the loan. In the High Court, the judge held that Davisons were in breach of the retainer as Nationwide “did not get what they bargained for”. The Court of Appeal, however, held that the obligation was to exercise reasonable care and skill in seeking to obtain a fully enforceable first legal charge. Nationwide’s claim for breach of retainer had been framed as an absolute obligation. There was no claim against Davisons for failure to exercise reasonable skill and care. The Court of Appeal therefore held that there was no breach of the retainer.

The Court of Appeal held that, although a breach of trust had been committed as the mortgage funds had been released without the appropriate undertaking, the solicitor did act reasonably and honestly. The solicitor was held to have obtained the benefit of an undertaking to redeem the prior charge from the person he reasonably believed to be the seller’s solicitor. Further, he had undertaken checks on the Law Society’s website. The lapse from best practice in not obtaining a written undertaking was not held to have caused Nationwide’s loss. On that basis, under s.61 Trustee Act 1925, Davisons were granted relief from liability.

Analysis:

Although at first glance, this judgement does not appear to be a particularly helpful decision for lenders in solicitor negligence cases, it must be borne in mind that this case turned on its own very specific facts. This decision may prove helpful in setting a benchmark for what is deemed to be reasonable behaviour by defendant solicitors, some of whom may struggle to establish a chain of reasonable conduct throughout the conveyancing transaction.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.