Santander UK Plc v R.A. Legal Solicitors

A solicitor holding mortgage funds on trust pending completion commits a breach of trust by transferring them to a firm that is not in fact acting for the owner and intended vendor. For relief under Trustee Act 1925, section 61, the trustee must prove honest and reasonable conduct in matters sufficiently connected with the loss.

The connection is not confined to strict or but-for causation. Serious departures from conveyancing safeguards that materially increase the opportunity or risk of fraud are relevant, even if the fraud might still have succeeded. A solicitor who fails to obtain the seller’s commitment to the postal-completion safeguards, and fails to respond to clear signs that completion has failed, cannot establish reasonableness or obtain relief.

Santander advanced £150,000 to its borrower’s solicitors, R.A. Legal, to be held on trust pending the purchase and mortgage of a residential property. R.A. Legal transferred the purchase money to Sovereign Chambers LLP, which purported to act for the vendor but was perpetrating a fraud. No genuine sale completed and the money was later misappropriated.

Andrew Smith J held that R.A. Legal had breached trust when it released the money on apparent completion, but granted full relief under section 61 of the Trustee Act 1925. Santander appealed. R.A. Legal contended by respondent’s notice that there had been no breach of trust.

The central issues were whether the earlier transfer to Sovereign was itself a breach of trust, and whether R.A. Legal had shown that it acted honestly and reasonably in matters connected with Santander’s loss so as to qualify for relief.

1. Appeal allowed unanimously. R.A. Legal committed a breach of trust both by transferring the money on 28 July to Sovereign and by releasing it on the following day. A purchaser’s solicitor has implied authority to transfer funds before completion only to solicitors actually acting for the owner and intended vendor. Sovereign was not such a firm, notwithstanding its apparent status as a solicitors’ practice.

2. Section 61 of the Trustee Act 1925 has two stages. The trustee must first prove that it acted honestly and reasonably in matters connected with the beneficiary’s loss. Only then does the court consider whether it ought fairly to be excused and whether relief should be granted. The statutory inquiry is not a strict causation, effective-cause, or but-for test. Conduct which materially increased the risk or opportunity for fraud may prevent relief, although the fraud might probably have succeeded in any event. Conversely, conduct wholly immaterial to the loss is irrelevant.

3. R.A. Legal did not prove reasonable conduct. It transferred the funds without securing Sovereign’s written commitment to comply with the Law Society’s Code for Completion by Post or an equivalent written obligation to hold the money to R.A. Legal’s order. It also failed to obtain a clear enforceable undertaking concerning discharge of the existing mortgage. After apparent completion, it failed to act on the absence of a discharge document and the lack of possession, despite those matters showing that completion had not occurred as required.

4. The trial judge wrongly treated the conduct as inconsequential and applied an over-lenient standard derived from section 727(1) of the Companies Act 1985. Section 61 requires reasonableness, not perfection, but it does not permit relief where the trustee has not established reasonable conduct in the material respects. Even if discretion had arisen, fairness would not have justified relief. R.A. Legal was therefore liable to make good Santander’s advance.

• Court of Appeal (Civil Division) — allowed Santander’s appeal and set aside the grant of complete relief under section 61 of the Trustee Act 1925: [2014] EWCA Civ 183.
• High Court, Queen’s Bench Division — Andrew Smith J found R.A. Legal in breach of trust on release of the funds but wholly relieved it from liability under section 61. Santander’s claim consequently failed.