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S 61 Trustee Act 1925

July 23, 2014

In the Appeal court case of Santander UK Plc v R.A. Legal Solicitors [2014] EWCA Civ 183 the court found against the Solicitors overturning the court belows decision and refused to grant relief under s.61 Trustee Act 1925.

When buyers Solicitors receive monies from a mortgagee they will be released to them on their undertaking that the monies will be held by them strictly to the order of the mortgagee pending the transaction being completed. This includes holding a completed and signed mortgage deed from the borrowers, the Solicitors clients, and prior to completion.

If the Solicitors are in breach of this trust i.e. releasing the mortgagees’ monies to another party in breach of the undertaking to hold the monies to their order, the Court can, in certain circumstances, grant relief to the Solicitors under s.61 Trustee Act 1925 relieving the Solicitors of their liability where they have proven to have acted both honestly and reasonably.

There have recently been numerous breaches of trust cases involving mortgagees suing Solicitors in transactions where they, the mortgagees, have been on the receiving end of fraudulent dealings. Mortgagees do not have to demonstrate that there has been a breach of the Solicitors duty of care, which is of benefit to them. Quite often there is no real indication to the Solicitors that a fraud has been precipitated. The remedy for breach of trust is that the Solicitors have to restore the monies to the mortgagees in whole without any deduction for contributory negligence.

During May 2009, Santander, at that time Abbey National, agreed a mortgage advance of £150,000 to a Mr Vadika in respect of his purchase of a property in London. The Solicitors acting for both Santander and Mr Vadika was a firm called RA Legal. They were sent the mortgage monies which were then transferred to the Vendors Solicitors, a firm called Sovereign Chambers LLP to complete the transaction.

However, it later transpired that the conveyancing transaction was fraudulent with the Vendors Solicitors, Sovereign Chambers LLP being a party to the fraud, leaving the mortgage monies irrecoverable. As a consequence, Santander had paid out £150,000 without being able to register their charge against the property as security.

Santander duly sued the buyers Solicitors, RA Legal, citing breach of trust, negligence and breach of contract.

Mr Justice Andrew did not accept RA Legal’s submission that they had not been in breach of trust but did accept their application for relief under s 61 trustee act 1925.

“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”

The Judge found that, although there had been shortcomings by RA Legal, which he believed were not the direct cause of the loss suffered by Santander, their mistakes could not be relied upon as to whether they had acted reasonably which is what the Judge said they had. RA Legal did not cause Santander to suffer the loss; this was mostly because of the fraud committed by the Vendor’s Solicitors, Sovereign Chambers LLP who were unconnected to RA Legal.

When the case went to the Court of Appeal, the Judges allowed Santanders’ appeal by examining in detail the effects of s 61 trustee act 1925. Even though the loss was caused by the actions of the third party, in this case their fraud, Lord Justice Briggs could not omit the fact that the buyers Solicitors increased the fraud risk by not acting in the best possible way in this transaction and thus were a contributory factor to the loss suffered by Santander.

The Court of Appeal found the original Judge had overlooked the failings of RA Legal. They did not follow standard conveyancing practices such as the Law Society Protocol which should have been utilised prior to completion.

  • The Certificate of Title contained a deliberate misrepresentation that investigation of title had been concluded.
  • A failure to adopt the completion Code or in any other way of the seller’s solicitor’s obligation to hold the completion money to the Defendant’s order.
  • Failing to consider the implications of the answer to Requisition 4(B), when no executed discharge of the mortgage arrived with the post-completion letter. The defendant failed to appreciate that this omission meant that completion had not taken place
  • The correspondence between the defendant and the vendor’s solicitors had been muddled.
  • The failure to give the bank any warning that its money was at risk until November was wholly unreasonable.

Recent cases gave the impression that if the loss is caused by a sophisticated fraud that does not depend for its success on negligence by the lender’s solicitor, then a claim for breach of trust will, by virtue of section 61, likely fail on grounds of causation. In the context of relief sought by solicitor trustees much will depend upon the consequences for the beneficiary

The Court of Appeal in this case have made it clear that for professional trustees to obtain relief under s 61 trustee act 1925 is a high standard to satisfy , and negligent solicitors will not escape.