The Dreamvar nightmare

The courts have been busy in relation to solicitors’ liability when property purchase monies have been stolen following identity fraud. A number of recent cases share similar facts but the outcomes have varied, causing real concern to conveyancers.

In each case buyers attempted to purchase properties from sellers who were not genuine. When they lost their purchase monies, receiving no Land Registry title in return, they claimed against their own professional advisers and also the seller’s solicitors.

This note reviews the most recent case, Dreamvar (UK) Limited v Mishcon de Reya and another [2016] EWHC 3316 (Ch).

Facts

The property in the case, 8 Old Manor Yard, Earl’s Court, London SW5, was unoccupied, unmortgaged, and in a hurry to be sold. A fraudster impersonating the real owner purported to sell the property to Dreamvar in September 2014 for £1.1m. However, in exchange for the purchase price, the fraudster gave Dreamvar a forged transfer document. The fraud was discovered in November but by then neither the fraudster nor the money could be found.

Claims against the seller’s solicitors

The first claim against the seller’s solicitors was that they had undertaken and/or warranted that the seller was genuine. The court decided that no warranty was given to that effect, following many previous cases, but also noted how unlikely it would be to extract a sufficiently watertight warranty from solicitors acting for the ‘seller’.

As to breach of trust by the seller’s solicitors, the judge found that once the purchase monies were unconditionally released to the seller’s solicitors they were no longer held on trust. The transaction was under the 2011 Law Society Code for Completion by Post, which states that completion monies are held by the seller’s solicitor as agent, not on trust. Therefore the seller’s solicitors were not holding completion monies on trust for the purchaser and the claim against them failed.

Claims against the buyer’s solicitors

The more conventional negligence claim against the buyer’s own solicitors, Mishcon de Reya, perhaps held more promise, but there was an unexpected outcome.

There were well-known risk factors in the transaction: a high-value, unoccupied, unencumbered property and the fact that the seller’s correspondence address did not tally with the property. All of this was known to the buyer’s solicitors, but the transaction was explained on the basis that seller was separating from his wife; hence also the need for speed. Nor did the seller know the management charges for his property, but this was considered not to be unusual, or at least not something that should hold up a sale. Nor were the seller’s solicitors local to the property, but they were a reputable firm. Overall the judge was satisfied that the buyer’s solicitors had taken care and it was reasonable of them not to consider there was a risk of identity fraud.

Mishcons had received some assurances that the seller’s solicitors had verified the seller’s identity, although after the fraud it became apparent that the solicitors had not actually met their client. The court nonetheless decided that there had been no need to ask the seller’s solicitors for an undertaking that they had taken reasonable steps to verify their client’s identity. This was not standard practice and it was reasonable not to have asked for one. Again the court considered it unlikely that any watertight warranty would be given, whatever request the buyer’s solicitors made.

The judge then considered breach of trust. The position appears to be that if buyers provide funds to their solicitors, but those monies are released in return for invalid title documents, that would be unauthorised and in breach of trust. This sounds close to strict liability for a buyer’s solicitor, but a solicitor can be exonerated if they acted ‘honestly and reasonably’ and ‘ought fairly to be excused’ for breach of trust (section 61 of the Trustee Act 1925).

In considering that relief the judge noted the disastrous effect of the transaction on Dreamvar and the fact that solicitors have insurance, whereas Dreamvar did not. Therefore he did not excuse Mishcons under section 61, even though they were not negligent. He acknowledged that he reached this outcome because he could not find the seller’s solicitors liable. The whole loss of £1m was carried by the buyer’s solicitors.

Conclusion

Standard residential conveyancing has to be commoditised to make it cost effective. The Conveyancing Quality Scheme’s default position is that the seller acts as agent and that is likely to limit seller solicitors’ liability for breach of trust in most cases, even though they are arguably better placed to spot fraud ( see P&P Property v Owen White and Catlin LLP [2016] EWHC 2276 (Ch)).

Commercial property transactions might vary those standard terms so that purchase monies are held by the seller’s solicitors as trustee (see also Purrunsing v A’Court & Co [2016] EWHC 789 (Ch), in which the seller’s solicitors admitted they were in breach of trust and due to failings in their anti-money laundering due diligence liability was shared 50:50 between buyer and seller solicitors).

Nonetheless, buyer solicitors will generally be more at risk and, even if not negligent, there could be a costly finding, as Mishcons and their insurers found. The case is going to appeal and it will be interesting to see how it develops there.

There is an apparent mismatch between the anti-money laundering legislation, by which a solicitor who fails properly to know their client could be imprisoned, and the acceptance in these cases that a seller’s solicitor does not need to provide any particular form of undertaking concerning their AML duties. Of course they cannot ever guarantee they are acting for the true owner of a property, but there ought to be some stronger form of undertaking that can be given to offer the buyer better protection where a seller’s solicitor fails in their AML duties.

There could be much time and money spent and wasted debating the terms of undertakings on client verification by solicitors in fear of the consequences in light of these recent cases, but the appeal court may assist, particularly now the Law Society intends to intervene in the appeal. More Law Society guidance on an appropriate CQS standard seller solicitor’s undertaking on AML obligations would be sensible. Buyer solicitors could be better protected and more responsibility passed to the seller’s solicitors.

In the meantime, it is vital that warning flags are not ignored. If a property is high value and unencumbered and unoccupied, and time pressure is extreme, then you must be hyper vigilant. A loss of purchase monies will cost far more than one unhappy client whose transaction is delayed.

Susan Hopcraft is a partner at Wright Hassall specialising in dispute resolution

@SusanHopcraft

www.wrighthassall.co.uk