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'Property hijacks' pose a significant risk to lenders

A recent 'property hijack' case has eroded a lender's right to pursue a seller's solicitor for failing to uncover their client's true identity.

In P & P Property Ltd v Owen White & Catlin LLP the claimant unsuccessfully pursued a claim for breach of warranty of authority against the fraudulent seller's solicitor.

Before this decision, lenders would have redress against the seller's solicitors for breach of warranty of authority, breach of trust and/or breach of undertaking.

Lenders may find themselves in situations in which they release a mortgage advance to a bona fide borrower who, due to the seller having no right to sell the property, obtains no rights to the property the borrower contracts to purchase.  The result is that the lender will have no security over which to enforce its charge if a borrower defaults on its mortgage payments. They may only be left with a Land Registry Indemnity claim to pursue a recovery.

Breach of warranty of authority

The seller's solicitor (OWC) was instructed by the purported owner of a vacant residential property in London to represent him in a sale transaction.  Unbeknown to the purchaser (P&P), the seller was a fraudster who had no right to sell the property.  The fraud was not discovered until the true owner realised building work was being carried out on the Property by P&P.

As OWC did not have the authority to act on behalf of the true owner of the property, P&P took action against the firm for breach of warranty of authority.  The court held that OWC only warranted that it had the authority of an individual who purported to be the owner of the property – not the true owner of the property.  P&P's claim for breach of warranty of authority failed.

This is a significant decision which is difficult to reconcile with the key cases on breach of warranty of authority (including Penn v Bristol & West Building Society v Ors [1997] 1 WLR 1356).  In the case of Penn, solicitors were held liable for warranting that they had authority to act on behalf of a husband and wife in a property transaction, even though the wife's signature was forged by her husband and she had no knowledge of the transaction.

The Court's change of approach to sellers' solicitors' breach of warranty claims will impact on a lender's ability to mitigate its loss in the event that it is the victim of a property hijack.

Breach of trust and undertaking

Two recent cases have examined a seller's solicitors' liability for breach of trust in property hijack cases – Purrunsing v A'Court & Co. and Dreamvar (UK) Ltd v Mischon De Reya.

In the case of Purrunsing, the court held that there was an actionable breach of trust against both the purchaser's solicitors and the seller's solicitors, which enabled the claimant to recover the purchase monies paid for the property.  The outcome differed to the judgment in the P&P case, in which the court held that OWC were not liable to P&P in breach of trust.

The judgment in P&P distinguished Purrunsing on the basis that the parties in Purrunsing adopted the Law Society's 1998 version of the Code for Completion whereas the less stringent 2011 version was used in the case of P&P. 

In the case of P&P, the judge also held that the seller's solicitor had not given an undertaking that he had the true seller's authority for completion to occur – merely the undertaking of an individual agreeing to sell the property.

The judgment in Dreamvar upheld the decision in P&P insofar as the seller's solicitors were held not to be liable to the purchaser for breach of undertaking or breach of warranty of authority.  However, the court in Dreamvar held that the purchaser's solicitor was liable to the purchaser in breach of trust.

Despite acknowledging that the purchaser's solicitors had acted honestly and reasonably, a finding of breach of trust was upheld on the basis that the purchaser's solicitors were insured against such risks and were better placed to absorb the loss than the purchaser.

What could the impact of these decisions be?

The rulings in P&P and Dreamvar have both eroded lenders' and purchasers' rights to seek recovery from sellers' solicitors in 'property hijack' scenarios.  These cases are likely to result in lenders experiencing an increase in unsecured recoveries and a greater number of Land Registry Indemnity claims.

Due to the inconsistencies between the ruling in P&P and previous case law, the case has been appealed and is expected to be heard in autumn 2017.  The ruling in Dreamvar is also subject to appeal, with the Law Society considering whether to intervene due to concern raised by various members of the legal profession.

The outcome of these appeals may well impact on a lenders' rights to recovery.  We will continue to keep you updated on developments.

If you would like to discuss this issue further, please contact Neil Franklin or Charlotte Houston.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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