What happens when the buyer’s and the seller’s solicitors complete a sale of a property organised by fraudsters.

Following the recent Court of Appeal decision in P&P Property Ltd v Owen White & Catlin LLP and another and Dreamvar (UK) Ltd v Mishcon de Reya and another, the Law Society has prepared an interim information note and case summary.

In both cases, the Court of Appeal held that both the buyer’s and the seller’s solicitors were liable for breach of trust for completing on sales organised by fraudsters.

The Law Society is considering the implications of the judgment for property transactions in addition to reviewing its Code for Completion and other documents.

A case summary has been prepared together with an interim informative on steps that can be taken now. It suggests that solicitors review their policy for risk assessing transactions and have procedures in place to deal with high risk matters. Solicitors should also review their policies on when they might ask the seller’s solicitors or conveyancers questions (for example, about whether they have carried out their anti-money laundering investigations), when they will decline to act if they are not confident that the seller is the registered proprietor, and how they will answer questions from buyer’s solicitors.

The informative states that solicitors should consider raising questions where there are indicators of potential fraud of the type highlighted in the Property and title fraud note but states that, if solicitors raise such questions and then fail to pursue the responses properly, they may be exposed to additional risk.

A summary of the Dreamvar case is set out below (Author credited to The Law Society):

1. On 15 May 2018, the Court of Appeal handed down its decision in (1) P&P Property Ltd v Owen White & Catlin LLP and Crownvent Ltd and (2) Dreamvar (UK) Ltd v Mishcon De Reya and Mary Monson Solicitors [2018] EWCA Civ 1082. There were some similar facts in both cases, so the appeals were heard together. It is not yet known whether there will be an appeal to the Supreme Court.

2. Both cases involved the liability of solicitors in cases of identity fraud. Fraudulent people posed as sellers of properties in London both worth about £1m. They instructed estate agents and genuine buyers were found. The fraudulent sellers and the genuine buyers each instructed their own solicitors.

3. The sales went ahead – contracts were exchanged, and completion of the sales and purchases took place on the basis of the provisions of the Law Society Code for Completion 2011 (the Code). After completion, but before registration at HM Land Registry, the frauds were discovered.

4. As completion had not in fact been effected the buyers were entitled to recover the purchase monies paid over on completion, however the fraudsters and the purchase monies had disappeared.  The buyers took action to recover the purchase monies by claiming against the seller’s solicitors for breach of warranty of authority, breach of trust and breach of undertaking. They also took action against their own solicitors for breach of trust (Dreamvar case).

5. In the Dreamvar case the solicitors instructed by the fraudster seller had not carried out all the identity checks that the circumstances required.

Decision in the High Court

6. In the High Court the buyer’s claims against the seller’s solicitors were dismissed. In the Dreamvar case, the High Court ruled that Mishcon de Reya had not been negligent and so was not liable in contract or tort but had received money from its buyer client on trust to use it for a genuine completion and so had to bear the losses of the buyer client on a strict liability basis. Even though the firm had not been negligent it was refused relief under the Trustee Act 1925. It was held liable mainly on the basis that it held insurance whereas its clients did not.  The result in the High Court was that Mishcon de Reya (as the buyer’s solicitors) were held liable even though it was the seller’s solicitors who had failed to carry out their obligations under the Money Laundering Regulations 2007.

7. Mishcon de Reya appealed to the Court of Appeal contesting the refusal of relief under the Trustee Act 1925 and contesting the ruling that the fraudulent seller’s solicitors had no liability either to Mishcon de Reya or to its buyer client.

The Court of Appeal judgment

8. The Court of Appeal decision in Dreamvar can be summarised as:

a. Mishcon de Reya had not been negligent and were not liable to their buyer client in contract or tort.

b. Mishcon de Reya were however liable for breach of trust in parting with the completion money at a non-genuine completion.

c. The Court of Appeal should not interfere with the first instance judge's decision to refuse relief to Mishcon de Reya under the Trustee Act 1925 and his main reason (that Mishcon de Reya had indemnity insurance) was not plainly wrong (Gloster LJ dissenting).

d. The fraudster seller’s solicitor had no general duty of care to the buyer or the buyer's solicitor and was not liable to the buyer in tort.

e. The fraudster seller's solicitor was however in breach of the undertaking to the buyer's solicitor implied by the Code for Completion by Post, which as properly interpreted required the seller's solicitor to use the completion money for a genuine completion.

f. The fraudster seller's solicitor had received the buyer's completion money, via the buyer's solicitor, on trust to use it for a genuine completion and were liable to the buyer for breach of trust. (The fact that the Code requires completion to take place as soon as the seller's solicitor hears that the funds have reached its bank account did not mean that there was no time at which the funds were held on trust for the buyer).

g. Because of the findings in e. and f. above, Mishcon de Reya were entitled to claim contribution from the fraudster seller's solicitor towards the buyer's claim against Mishcon de Reya.

Our dedicated team of Property lawyers at ELS can help advise and support you with such situations and guide you through these many pitfalls when dealing with property matters.

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