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 involved 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.
Guarantors of genuineness
“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.”
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