Allyson Colby warns property professionals to beware of fraudsters after a recent ruling illustrated the dangers
Key points
- The estate agents and solicitors who dealt with a sale were not liable to a buyer who was defrauded by an imposter
- Claims for breach of warranty of authority, in negligence, and for breach of trust were all dismissed
It is the stuff of nightmares. A landowner strolls past one of his properties and chances on builders stripping out the kitchen. Cue the discovery that a property developer had “bought” the house from a fraudster and the arrival of the police.
The tale that unravelled in P&P Property Ltd v Owen White & Caplin LLP [2016] EWHC 2276 (Ch); [2016] PLSCS 261 is sadly familiar. The fraudster had instructed estate agents and solicitors to act for him on the sale of a property that was neither mortgaged nor occupied. He was very plausible and no one suspected he was impersonating the owner. He said that the transaction was urgent because he was based in Dubai and needed funds to buy property there. The selling agents contacted a developer that was interested in properties in the area, and the sale and purchase was done and dusted in just over a week. The fraudster absconded with the cash, leaving the buyer to claim from the professionals who handled the sale.
Authority
Breach of warranty of authority claims arise when agents incorrectly represent that they have authority to act on behalf of another and induce a third party to do something that he would not otherwise have done. In Penn v Bristol & West Building Society [1997] 1 WLR 1356; [1997] PLSCS 100 a solicitor was liable for breach of warranty of authority, having held himself out as acting for a husband and his wife when the wife knew nothing about the transaction.
The judge was not referred to any authorities dealing with claims for breach of warranty of authority against estate agents, but considered that nothing in principle prevented such liability from arising. He regarded the steps that the selling agents had taken to identify their client and guard against money laundering as “wholly inadequate”. However, he did not consider that the agents had warranted that they were authorised to act for the registered proprietor simply because they had provided the buyer with the name of the seller. Questions of title were primarily a matter for solicitors instructed on sales and purchases – not estate agents.
Having reviewed the authorities, the judge dismissed the claim against the fraudster’s solicitors. He ruled that, absent special facts or clear words to the contrary, a warranty of authority operates only to confirm that an agent has a client for whom he is authorised to act. The agent does not thereby represent that his principal will perform the contract, or is solvent, or make any other representation about his principal’s attributes, characteristics or identity. If the fraudster’s solicitors were held to have warranted that their client was the true owner, they would, in effect, have been providing the buyer with a guarantee of title, which would be difficult to reconcile with the legal position as it is generally understood.
Negligence
The buyer’s negligence claims did not fare any better, thanks to Gran Gelato Ltd v Richcliff (Group) Ltd and others [1991] EGCS 136. The judge ruled that the defendants had acted for and were responsible to the seller, and that it was the solicitor who acted for the buyer, who owed it a duty of care. Furthermore, there were no special circumstances to indicate that the defendants had stepped outside their respective roles and assumed direct responsibility to the buyer (even though the buyer was registered with the selling agents and had dealt with them previously).
Trust
The buyer’s claim against the seller’s solicitors for breach of trust appeared promising, following Purrunsing v A’Court & Co and another [2016] EWHC 789 (Ch) [2016] EGLR 37. That case suggests that, if sellers’ solicitors hold money on trust pending completion of a transaction, then the trust on which they hold that money is discharged only by genuine completion of the purchase, or by return of the cash.
However, the judge ruled that the seller’s solicitors had not held the money on trust for the buyer in this case. Their obligations were governed by the Law Society’s Code for Completion by Post (2011 edition), which differs from the 1998 edition that was in force when Mr Purrunsing was defrauded of his money. The 2011 Code envisages that receipt of the purchase money and completion will be simultaneous, meaning that there will not be any period during which money is held on trust for the buyer. Indeed, the buyer’s solicitors had paid the balance of the purchase price to enable completion to take place immediately and had not made any special arrangements with the seller’s solicitors that required them to provide a genuine transfer.
What then of the fact that the Code states that the seller’s solicitor will act as agent for the buyer’s solicitor when completing by post? Paragraph 3 of the Code states that sellers’ solicitors will not be responsible for any breach of the seller’s contractual obligations and the judge ruled that it would fly in the face of that paragraph if sellers’ solicitors were to be liable for transfers that are not genuine.
What next?
The fraudster walked away with more than £1m. Might the buyer be able to recover its investment, and other sums lost, from its solicitor? The judge did not express a view.
In what circumstances should professionals be liable in such cases? Should losses be borne by those with the deepest pockets, and what might insurers and lenders say about that? It seems likely that the appellate courts will be called upon to address this question soon. Meanwhile, fraudsters will continue to target real property and professionals should remain alert.
Allyson Colby is a property law consultant
