UK: Who Pays For Property Fraud?

Last Updated: 1 October 2018
Article by Keith Conway

Most Read Contributor in UK, November 2018

The Court of Appeal has ruled on two important high profile cases involving fraudsters (imposters) selling residential property.

The outcome is a success for the buyers, both of whom will receive substantial compensation for their losses.

The defendant lawyers concerned (or their insurers) will no doubt see it differently because they are left to pick up the tab although also innocent victims of fraud.

The combined appeal decision is reported in P&P Property Limited v Owen White & Catlin LLP and another; Dreamvar (UK) Limited v Mischon de Reya and another [2018] EWCA Civ 1082.

Our reports on the first instance decisions appear in the Summer 2016 and Autumn 2017 editions of our Real Estate Bulletin.

The headline points are:

  • If a sale is not genuine the solicitors acting for both vendor and purchaser are likely to be in breach of trust
  • Even if a solicitor acts honestly and reasonably it may not be exonerated from liability for breach under section 61 of the Trustee Act 1925
  • Depending on the circumstances, a vendor's solicitors may also be warranting to the purchaser (and any lender) that their clients are the true owners of the property, even if in reality they are not because they are fraudulent imposters
  • There is no in principle change to the law on liability in negligence to a third party

Background

In both cases a person (imposter) masquerading as the owner of the property instructed solicitors to deal with the sale. The fraud did not come to light until after completion and, in the P&P case, after the purchaser had started to make substantial alterations to the property.

In the Dreamvar proceedings, the purchaser sued their own solicitors (Mischcon de Reya – "MdR") and the vendor's lawyers (Mary Monson Solicitors Limited – "MMS"), claiming damages in excess of £1 million. MdR, in turn, claimed against MMS.

At first instance, the court held that MdR were in breach of trust but dismissed all claims against MMS leaving MdR to pay substantial compensation to the disappointed purchaser.

The buyer in the P&P proceedings sued the vendor's solicitors (Owen White & Catlin LLP – "Owen White") and estate agents (Winkworth) but not, apparently, their own solicitors. All of the claims were dismissed by the High Court, leaving P&P with a potential loss exceeding £1 million.

Not surprisingly, both cases were appealed and they were heard by the Court of Appeal together.

Court of Appeal

The Court of Appeal was asked to consider questions relating to negligence, breach of warranty of authority, breach of undertaking and breach of trust.

Negligence

P&P had claimed for negligence against Owen White. Both courts rejected the claim because there were no special circumstances indicating that the solicitors had assumed direct responsibility to P&P to take reasonable care. It was P&P's own lawyers who owed them a duty of care.

Similarly, P&P's claim for negligence against Winkworth was rejected. There was no assumption of a duty of care.

The Court of Appeal also held that MdR were not negligent in relation to the undertakings obtained from MMS. They were not under an obligation to seek a non-standard undertaking from MMS over and above the usual undertakings included in the Law Society's Code for Completion by Post (the "Code").

Breach of warranty of authority

P&P's claim for breach of warranty of authority was rejected at first instance. Owen White's warranty did not, and should not, include an implied promise that they had the authority of the true owner of the property, as well as the authority of their fraudulent imposter client. If such a requirement were implied, solicitors involved in conveyancing transactions would effectively be guaranteeing that their client was the registered title holder, and would be strictly liable if that were not the case. The claim for breach of warranty against Winkworth was also rejected on similar grounds.

The Court of Appeal disagreed in relation to Owen White. On the facts they did give a warranty that they were authorised to act on behalf of the true owner. It was right that the claim had been dismissed, however, because P&P had not materially relied on the warranty as such. Rather, the buyer's representative had been induced to allow his client to exchange contracts because he believed that the necessary due diligence had been carried out.

Winkworth had done no more than provide a memorandum of sale to P&P. It pre-dated the contract and said nothing to indicate in terms that they had received the instructions summarised in the memorandum. It was not, therefore a statement of warranty by Winkworth that they had been given those instructions by the true owner of the property.

Breach of undertaking

P&P alleged that Owen White had breached the undertaking contained in paragraph 7(i) of the Code. This provides that the seller's solicitor undertakes to have the seller's authority to receive the purchase money on completion. The High Court disagreed, stating that the reference to the "seller" is to the person agreeing to sell the property, not a reference to the registered title holder, if different.

In Dreamvar similar claims against MMS were also dismissed at first instance.

These decisions were reversed on appeal. Lord Justice Patten considered that this undertaking amounts to an undertaking that a seller's solicitors have the authority of a person who would be genuinely entitled to complete the sale and not merely the authority of the person (imposter) who happens to be their client.

Breach of trust

At first instance MdR had defended the claim for breach of trust contending, amongst other things, that they were authorised to pay the purchase monies to the seller's solicitors on receipt of latter's undertaking to provide title documents. This argument was advanced on the basis that Dreamvar implicitly agreed to MdR dealing with the monies in accordance with ordinary conveyancing practice.

MdR had conceded liability for breach of trust by the time the appeal was heard. They accepted that, as the purchaser's solicitors, they held the purchase monies on bare trust for their client pending completion. They were only authorised to release the monies on completion of a genuine sale.

Similarly, the Court of Appeal held that the solicitors for both vendors should have retained the purchase monies in their accounts, to await either a genuine completion, or further instructions from the purchasers' solicitors. They acted in breach of trust when they released the purchase monies to or at the direction of their (imposter) clients.

Relief from liability for breach of trust

A defence to a claim for breach of trust is potentially available under section 61 of the Trustee Act 1925 where a trustee has acted honestly and reasonably and ought fairly to be excused for breach of trust.

The judge at first instance found that MdR had been honest and reasonable but did not exercise his discretion. MdR was far better able to meet or absorb the consequences of the breach of trust than Dreamvar. It was also not irrelevant that MdR was much better placed to consider and as far as possible achieve greater protection for Dreamvar as against the risk which actually occurred. Dreamvar did not have recourse against MMS and little or no prospect of tracing or making a recovery against the fraudster.

The Court of Appeal agreed that the first instance judge was entitled to take these factors into account. It went on to say, however, that the question of MMS's liability to Dreamvar was irrelevant. It made no difference to the assessment of the reasonableness of MdR's conduct and the inequality of its position and that of Dreamvar. It was always open to MdR to seek a contribution from MMS.

Interestingly, Lady Justice Gloster disagreed that MdR should not be relieved under section 61. They had not been dishonest and had obtained the required undertaking from MMS under the Code. They had acted reasonably. She considered that primary responsibility should rest with MMS who were responsible for checking the identity of the seller. Lady Justice Gloster went on to say, amongst other things, that the court's sympathy should not be with one commercial party rather than another just because one has insurance and the other has not.

Owen White were not held liable for breach of trust at first instance. The court said, however, that had it been asked to consider the section 61 point, it would have found that Owen White did not act reasonably. The solicitors had failed to carry out several fairly basic identity checks on their client. Other factors were that P&P was not insured against the fraud and had incurred a liability to a lender for the purchase price. P&P was also liable to (and had paid) the true owner because of the significant work done to the property.

The Court of Appeal did not seek to interfere with these findings.

Comment

Where does the court's decision leave us?

Purchasers are offered some protection against fraudsters because the release of completion monies other than in a genuine transaction amounts to breach of trust. It is therefore open to purchasers to seek damages against their own solicitors and/or the vendor's solicitors.

Despite Lady Justice Gloster's dissenting view, it also seems likely that the courts will for public policy reasons decline in many cases to give solicitors statutory relief for breach of trust. Having said that, such decisions are fact specific and it cannot be ruled out that relief will be granted in another case.

Conveyancers are faced with the challenge of identifying further methods by which they can minimise the risk of claims.

Should buyer's solicitors, for example, now ask their counterparts to give an express warranty as to the identity of the seller? Alternatively — and probably without much prospect of success — should they or their client conduct their own identity checks.

The Law Society has published an "interim informative" for solicitors and is assessing whether and how the Code and other Law Society documents might be amended and is also reviewing other elements of practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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