A topical debate is the extent to which solicitors acting for mortgage lenders (or more precisely, their professional indemnity insurers) should bear the consequences of mortgage fraud.
Early last year in Lloyds TSB Bank plc v Markandan and Uddin  EWCA Civ 65 the Court of Appeal reached a decision tipping the balance in favour of banks by holding that a solicitor who released the mortgage advance without "completion" taking place was in breach of trust. The only recourse was section 61 of the Trustee Act 1925, which gives courts a discretionary power to relieve a trustee of liability if he is found to have acted honestly and reasonably. However on the facts of Markandan, the Court of Appeal found that the solicitor had not acted reasonably, and refused relief.
Solicitors and their insurers will take comfort, therefore, in the recent decision of Nationwide Building Society v Davisons Solicitors  EWCA Civ 1626. Like the Markandan case, this involved a mortgage fraud where the purported sellers of property were in fact imposters, with the true owners knowing nothing about the transaction. They achieved the fraud by creating a fictitious office of an existing firm of solicitors, and pretending that those solicitors were acting for them.
The consequence of the fraud was that Nationwide’s advance was lost, and its mortgage not registered as a first legal charge. Davisons, whose retainer was governed by the CML Handbook, were required to hold any loan money released to them on trust until completion. The Judge at first instance (Catherine Newman QC) found, and the Court of Appeal agreed, that because completion did not take place, it necessarily followed that Davisons were in breach of trust.
The two main issues on appeal were:
i. Should Davisons be granted relief under section 61?
ii. Was Davisons in breach of retainer in failing, contrary to paragraph 5.8 of the CML Handbook, to obtain for Nationwide a fully enforceable first legal charge?
At first instance the Judge refused to grant relief under section 61 because Davisons had not, in her view, obtained the vendor’s solicitor’s undertaking to discharge the existing mortgage. Sir Andrew Morritt C, who gave the lead judgment in the Court of Appeal, disagreed with this finding. In his view, properly construed the relevant documentation did contain such an undertaking – or at least what purported to be one.
This meant that it fell to the Court of Appeal to exercise the discretion afresh. Despite accepting that Davisons could perhaps have done more, the Court of Appeal was satisfied that the solicitor acted reasonably overall. Importantly, it also held that there had to be a causal connection between the conduct complained of and the loss suffered. As said by Sir Andrew Morritt:
“The section only requires Mr Wilkes to have acted reasonably. That does not, in my view, predicate that he has necessarily complied with best practice in all respects. The relevant action must at least be connected with the loss for which relief is sought and the requisite standard is that of reasonableness not of perfection.”
Breach of retainer
Paragraph 5.8 of the CML Handbook provides as follows:
“On completion, we require a fully enforceable first charge by way of legal mortgage over the property executed by all owners of the legal estate. All existing charges must be redeemed on or before completion, unless we agree that an existing charge may be postponed…”
At first instance, the Judge held that, unlike other duties within the Handbook, this was one “expressed in mandatory terms”. The consequence was that in failing to secure a first charge, Davisons were in breach of retainer.
Although he was at first minded to agree with the Judge’s construction of the duty, Sir Andrew Morritt decided on balance that, properly construed, the clause did not impose an absolute obligation:
“A ‘fully enforceable first charge by way of legal mortgage’ over the Property was not comparable to a pre-packed commodity to be supplied to a customer's order. It involved issues of title and the exercise of professional skill. Similarly the requirement that all existing charges ‘must be redeemed’ necessarily involved reliance on the acts and omissions of the vendor's solicitors.”
This decision will be welcomed by solicitors and their insurers. Breach of trust is a powerful weapon in lenders’ armoury because, if proved, it means solicitors cannot raise a plea of contributory negligence. Section 61 is therefore of vital importance, and although each case will turn on its facts, the decision does suggest that the courts may be more reluctant than was thought to allow solicitors and their insurers to bear the brunt of mortgage fraud.
Equally, the Court’s construction of paragraph 5.8 of the CML Handbook means that if the solicitor acts with reasonable care and skill, lenders will not succeed in proving breach of retainer merely because the solicitor, through no fault of its own, failed to achieve the result the lender had bargained for.