Property fraud ruling good news for victims, bad news for conveyancers

The Court of Appeal has given judgment in two cases that raise important questions over who should be held liable to victims of conveyancing fraud, in a ruling that has been welcomed as “good news” for buyers who are innocent victims of identity fraud, but a potential nightmare for conveyancers. The court ruled on the much-discussed cases of Dreamvar (UK) Ltd v Mishcon de Reya [2016] EWHC 3316 (Ch) and P&P Property Ltd v Owen White & Catlin LLP [2016] EWHC 2276 (Ch); [2016] PLSCS 261 – each of which involves a fraudulent “seller” making off with a would-be purchaser’s funds. With identity fraud a growing problem, the decision has the effect of making conveyancing solicitors, particularly those who act for fraudulent “vendors”, bear the brunt of victims’ losses. Best position Jerome O’Sullivan, partner at law firm Healys, who acted for Dreamvar throughout, said that the ruling made it clear that the solicitors acting for a vendor are in the best position to carry out due diligence checks on the seller’s true identity and actual ownership of the property concerned. He said: “This case has significant implications for all solicitors dealing with property transactions, their insurers, and all matters where funds are held on client account in relation to any other transactions, such as company acquisitions. It is good news for buyers who are victims of identity fraud. “The Court of Appeal has confirmed that the vendor’s solicitor is in the best position to carry out reasonable due diligence in investigating to verify the vendor’s identity and ownership of the property for sale. For practical and regulatory reasons, the purchaser’s solicitor is not in a position to carry out such checks.” He said that the Court of Appeal had now made it clear that, if the vendor’s solicitor does not carry out such checks, or carries them out negligently, it will have potential liabilities to the purchaser as breaches of warranty of authority, trust or undertaking. He added: “If the original judgment had been upheld it would mean that, even if a seller’s solicitor was grossly negligent, they would still have no liability to the defrauded purchaser. In contrast, the purchaser’s solicitor was left likely to be held solely liable for breach of trust, even if they had not been negligent.” Breach of trust In one of the two cases, Mishcon de Reya (MDR) (which acted for would-be purchaser Dreamvar) succeeded in persuading the court that the solicitors of a fraudulent “vendor”, Mary Monson Solicitors (MMS), were in “breach of trust”. As a result, MDR, which was found liable for almost £1.1m by the High Court, can now seek to force MMS to make a contribution to that award. In the other case, P&P Property Ltd, partially overturned the earlier decision, Patten LJ ruling that Owen, White & Catlin LLP, which acted for a fraudulent “vendor”, was in breach of trust and in breach of an undertaking. Niall Innes, partner at Mills & Reeve, which acted for an estate agent invokved in the case, said that the ruling was “very significant for those involved in the property market and will undoubtedly be an issue for those who insure conveyancing practices”. He said: “It seems that the decision considers the legal issues without much regard to the very real implications for the conveyancing process. “It is hard to resist the conclusion that the Court of Appeal has effectively made the conveyancing profession guarantors of the genuineness of property transactions. One or other of the selling or buying conveyancer now faces a significant risk of being liable to the purchaser if there is an impostor involved and the measure of damages is very likely to be the value of the property. “Conveyancers and their insurers must think very carefully about how to proceed in each transaction and it will be vitally important to watch out for high-risk transactions such as empty or un-mortgaged properties and overseas owners. The need to undertake money laundering checks properly becomes more important than ever. “Pending any appeal, the Law Society and the Council for Licensed Conveyancers will need to provide urgent guidance.” Dreamvar v Mishcon de Reya: the facts The case involves an unoccupied mews house at 8 Old Manor Yard, Earl’s Court, London SW5, which was owned by David Haeems. On 17 September 2014 a fraudster impersonating Haeems purported to sell the property to Dreamvar (UK) for £1.1m. In exchange for the purchase price, the fraudster gave Dreamvar a forged transfer document. The fraud was discovered in November 2014, before Dreamvar had been registered as the owner of the property. But by that time the fraudster, and the money he received from Dreamvar, could no longer be found. Dreamvar sued the solicitors instructed by it on the purported purchase, Mischon de Reya (MDR), as well as claiming against the firm instructed by the fraudster, Mary Monson Solicitors (MMS), for breach of warranty of authority and breach of undertaking. High Court deputy judge David Railton QC rejected negligence claims against MDR, and all claims against MMS, but found MDR liable for breach of trust in paying away the purchase monies “in circumstances where there was not, nor could there be, a genuine completion of the contract of sale, which was in any event a nullity”. He ordered MDR to pay Dreamvar £1,080,200 plus interest. That sum reflects the purchase price paid, less the commission charged by the estate agent, D&G, which it returned when it became aware of the fraud. In doing so, he said that MDR is insured for events such as this, and is “far better able to meet or absorb” the loss than Dreamvar. Dreamvar v Mishcon de Reya: the result The Court of Appeal allowed appeals by MDR and Dreamvar against the decision that there was no breach of trust by MMS, but refused to grant relief to MDR under section 61 of the Trustee Act 1925. It dismissed Dreamvar’s application for permission to plead a case in negligence against MMS. MDR did not appeal against the decision that it had acted in breach of trust by releasing the purchase monies, but had hoped for relief from the consequences of that breach under section 61. Patten LJ said that MDR could now seek to distribute liability to MMS through contribution proceedings. P&P Property Ltd v Owen White & Catlin LLP: the facts In this case, a fraudster acting as a vendor targeted a high-value, unoccupied residential property at 52 Brackenbury Road, London, W6, and pushed a sale through, claiming that it was urgent. Nobody suspected that he was an impostor, and the fraud was not discovered until after the “sale”, when the registered proprietor walked past the property and discovered builders working there. The would-be purchaser, P&P Property, which agreed to pay just over £1m, sued OWC, which had acted as the solicitors for the “vendor”, for breach of warranty of authority, negligence, breach of trust and breach of undertaking, and also claimed that the estate agent, Winkworth, which marketed the property, was liable for breach of warranty of authority and negligence. However, deputy judge Robin Dicker QC dismissed P&P’s claim for breach of warranty of authority against both firms on the grounds that, absent special facts or clear words to the contrary, such a warranty operates only to confirm that an agent has authority to act on behalf of his client. An agent does not, simply by acting as such, represent that his principal will perform the contract, or is solvent, or make any other representation as to his principal’s attributes or characteristics. P&P Property Ltd v Owen White & Catlin LLP: the result The Court of Appeal allowed P&P’s appeal against the finding that there was no breach of trust by OWC, and refused to grant OWC relief under section 61. Patten LJ allowed P&P’s appeal against the dismissal of its claim against OWC based on an undertaking, but dismissed P&P’s appeal against dismissal of its claims in negligence and for breach of warranty of authority.