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Appeal Court disappoints conveyancers with property fraud test cases ruling

By Paul Norman - Tuesday, May 15, 2018 12:57

The Court of Appeal has issued its judgement on the Dreamvar v Mishcon de Reya and P&P Property v Owen White and Catlin LLP trials, advocating shared responsibility between lawyers of both parties for financial loss suffered from property fraud regardless of negligence in a move experts have described as "disappointing" for real estate legal advisers who will face significantly greater risk of liability.

The real estate conveyancing industry has been looking to the decision for clarity over which party should bear liability where fraud is present in a transaction, in particular where fraudsters contract to sell land they do not own and successfully make off with buyer’s cash.

Bryan Cave Leighton Paisner explained: "The Court of Appeal has heard two appeals relating to who should bear the financial burden of property fraud, where an imposter contracts to sell land he does not own and makes off with the buyer’s money. In the case of P&P Property the victim sued the solicitors for the fraudster and the estate agent for damages, and lost. Neither party had been part of the fraud, and did not owe the purchaser any duties of which they were in breach.

"However, a few months later in the case of Dreamvar in almost identical circumstances, the purchaser not only sued the fraudster’s solicitors, but his own solicitors, and they were found to be liable to pay the purchaser compensation for the lost purchase monies, even though it was admitted and agreed that the fraudsters solicitors had been negligent in how they went about identifying their “client” for money laundering purposes."

One of the cases then centred on lawyer Mishcon de Reya after it was found liable for breach of trust when its client was tricked into purchasing a London property from a fraudster pretending to be the owner.

Whilst the involved firms were found to have acted honestly and innocently today, the judge found that Mishcon de Reya was in a better position than the client to face the consequences as it had the necessary insurance to cover the suffered loss in full. The ‘only practical remedy’ open to the client, according to the judge, was for Mishcon to bear the cost.

The ruling suggests solicitors of the buyer, even where they had not been negligent, would be liable for losses.

Jeremy Stephen, an  Associate Director at Bryan Cave Leighton Paisner who has acted in a number of property fraud cases, said: “The original decision in the Dreamvar case was very hard on the buyer’s lawyers who weren’t a party to the fraud and had not done anything negligent.  This decision probably balances the responsibility more fairly, but, ultimately, the professionals are still carrying the can for the fraudster.

“Property based fraud is, sadly, too common, too easy to attempt and too easy to get away with.

“The legal profession has probably been too slow to adapt to the rapid pace of technological change and the avenues it opens to fraudsters, and no doubt further changes will ensue following this decision.

“It is a mixed blessing for clients.  On the one hand, they have comfort in knowing that solicitors’ insurance is, ultimately, going to provide a financial cushion in the event of fraud, but on the other hand, it will almost certainly mean higher fees and costs to meet the increased burden of insurance costs that will, no doubt, follow.

“Before the advent of email, property transactions used to be completed in person at lawyers offices. Old fashioned? Yes, but it would have prevented this fraud. These cases show that, as a profession, we need to do better.”

In the P&P Property case, Irwin Mitchell explains: "Owen White and Caitlin the seller’s solicitors were originally approached by the fraudster to refinance the property, but he changed his mind half way through the process and instructed OWC to arrange a sale. The fraudster claimed to live in Dubai, and the documents all came from Dubai, even though the property was in the UK. OWC conducted the standard Anti-Money-Laundering checks and they came back as ‘referred’ but OWC accounted for this by the fact that the client lived in Dubai.

"The claimants therefore sued the seller’s solicitors in breach of trust for their failure to spot and avoid the fraud despite the red flags. However, because the transaction was completed under the Law Society’s Code for Completion by Post, which specified that the completion monies are transferred to the seller’s solicitors as agent rather than as trustee, the claim failed at first instance as there was not the requisite trustee relationship. On the issue of breach of warranty, the High Court considered whether by providing the warranty of authority the seller’s solicitors had also provided a warranty that the seller was a legitimate seller of authentic identity. The judge held that the warranty of authority only represents that the solicitor is authorised to act for the person they are receiving instructions from, and makes no representations not to their characteristics or attributes. To do so would be to impose on the solicitors a guarantee that the seller was the registered title holder. Thusly, the seller’s solicitors were not liable."

Irwin Mitchell said the Court had handed down a "truly surprising decision to the disappointment of legal advisors".

It added: "In Dreamvar, the Court of Appeal found that Mishcon de Reya remains liable for a breach of trust despite the absence of negligence on their part. No Section 61 relief was granted. The Court of Appeal found similarly in P&P, that Owen White & Catlin being the solicitors for the fraudulent seller were liable.

"The two law firms attained some partial success at the appeal. In P&P, it was found that they were not liable for breach of warranty of authority as there was no material reliance by the purchasers on that warranty. In Dreamvar, it was found that the seller’s solicitor Mary Monson Solicitors Limited were also liable for breach of trust, and therefore liability is shared between Mishcon de Reya and Mary Monson.

"The Court of Appeal commented that the vendor’s solicitors are best placed to do the appropriate checks and prevent fraud by verifying the identity of the seller, whereas the buyer’s solicitor may be reliant on the vendor’s solicitor to complete those checks adequately."

Jonathan Sachs, Litigation Partner at Irwin Mitchell said: “This judgment will provide greater protection to buyers, but will shake up the conveyancing industry with much greater risk of liability. Properties at risk of fraud can be worth millions of pounds. Professional negligence insurance premiums will likely rise in response.”

“The Court has thusly chosen to allocate the costly risk of identity fraud on the professional advisers in a property transaction. Whilst it is true in the cases above that the advisors are in a better position to afford that loss, that is not necessarily always the case in conveyancing deals. We will need to see how this judgment will be followed in subsequent litigation where the legal advisers might be placed in significant financial hardship if found liable for the losses in property fraud.”

“For now, property buyers can rejoice, and professional advisers should start penning new policies and put in place rigorous systems to prevent fraud in property transactions.”

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