Property hijack fraud: Dreamvar succeeds in Court of Appeal
Property fraud remains an important consideration for banks and other financial institutions.
The value of fraudulent property sale applications stopped by the Land Registry has more than tripled since 2013. Last month Cifas also revealed that reported incidents of identity fraud last year hit a record high.
Yesterday, the Court of Appeal ruled on which professionals should be liable when property is fraudulently transferred without the property owner's knowledge or consent. This judgment has important implications for financiers who find themselves without security in such circumstances. Specifically, it provides them with another professional whom they may have a valuable claim against when they are the victim of these frauds.
This article analyses the Court of Appeal judgment in P&P Property Ltd v Owen White and Catlin LLP and Crownvent Ltd t/a Winkworth (P&P) and Dreamvar (UK) Ltd v Mischcon de Reya and Mary Monson Solicitors Ltd (Dreamvar)  EWCA Civ 1082 and looks at its impact on financiers.
Both cases share certain similarities in terms of the factual background, namely:
- Fraudsters impersonated the true registered owners of two properties. They deceived innocent third parties into purchasing the properties and parting with significant sums of money.
- Upon 'completion' of the transactions, the solicitors who (unknowingly) acted for the fraudsters transferred the completion monies to their clients, who quickly moved the funds overseas.
- The frauds were uncovered shortly after completion but before registration:
- In P&P, the purchasers commenced renovation work at the property they (thought they) had purchased. 10 days later, the real property owner appeared and the parties realised what had happened.
- In Dreamvar, the fraud was uncovered as a result of checks undertaken by the Land Registry.
- The innocent purchasers were therefore left without the properties they had bargained for and without the monies they had paid.
- With the purchase monies having long gone, the purchasers sued the professionals involved in the transactions:
- P&P brought a claim against the solicitors who acted for the fraudsters, Owen White & Catlin. They alleged breach of trust, breach of undertaking, breach of warranty of authority and negligence. They also claimed that the estate agents, Winkworth, acted negligently and in breach of warranty of authority. No claim was brought against their own solicitors.
- Dreamvar also sued the solicitors who acted for the fraudster, Mary Monson Solicitors, making similar allegations. In addition, they issued a claim against their own solicitors, Mischcon de Reya, alleging breach of trust and negligence.
In P&P, the High Court found that the estate agents' money laundering checks were 'wholly inadequate'. It also found that the solicitors fell short of the high standard expected and so would not have been granted relief under section 61 of the Trustee Act 1925 (section 61 relief), had it found they had acted in breach of trust. The court held though that neither professional was liable to the purchaser on the facts.
In Dreamvar, the judge followed the decision in P&P in relation to the claim against the fraudster's solicitors. This was despite the fraudster's solicitors admitting that they had not undertaken the necessary identity checks. The solicitors who acted for the purchaser were held liable for breach of trust. Their application for section 61 relief was denied, though, despite the court finding that they had acted honestly and not negligently.
In both cases (amongst other things), the court held that the extent of a solicitor's warranty of authority was limited: a solicitor warrants that he acts for a person who claims to own a particular property; he does not warrant that his client is in fact the person who does own that property.
The appeals were heard together, with the Law Society intervening.
The Court of Appeal judgment
The Court of Appeal has overturned the High Court decisions on most issues. In particular:
Liability of the fraudsters'/sellers' solicitors
- The fraudsters' solicitors did act in breach of trust in paying away the purchase monies to their clients. This was on the basis that there was no genuine completion in the conveyancing transactions.
- No section 61 relief was available either, bearing in mind the inadequacy of the identity checks carried out on their clients.
- The solicitors were also liable for breach of undertaking under the Law Society’s Code for Completion by Post 2011 (the Code). This was on the basis that the reference to "seller" in the undertakings provided under the Code meant the true legal owner of the property.
- A solicitor potentially does warrant that he acts for the true legal owner of a property rather than just the person who purports to own the property. However, a purchaser (or lender) will still need to establish that they in fact relied upon that warranty (which P&P could not show).
- The court rejected the purchasers' appeal concerning the claim in negligence. There was no assumption of responsibility by the solicitors.
Liability of the purchaser's solicitors
- The court rejected Dreamvar's solicitors' appeal seeking to overturn the finding that no section 61 relief was available to them. Lady Justice Gloster did dissent on this point.
- Accordingly, in Dreamvar, it is for the two sets of solicitors to deal with contribution between themselves (or have it determined at a future hearing).
Liability of the estate agents
- The estate agents were not liable for breach of warranty of authority because the extent of their warranty was more limited than the solicitors'.
- Similarly, the court upheld the finding that no duty of care arose to the purchasers.
- This is a big decision with potentially wide ramifications in the conveyancing and lending world.
- It is also good news for banks and other financial institutions who can now look to the seller's solicitors who acted for a fraudster impersonating the true owner of property.
- In property hijack cases, we recommend that you now look to preserve claims against the seller's solicitors and the purchaser's/your own solicitors as, following this ruling, there may well be a claim against both. You should also put the Land Registry on notice of a claim (if registration takes place).
- We anticipate that the legal profession will take steps to mitigate this decision. For example, they might seek to vary the terms of the conveyancing process and request an express confirmation from the lender/their solicitors that they will not rely on any warranties or representations. Lenders may wish to consider asking their own solicitors to make it clear to sellers' solicitors that warranties and undertakings as to the seller's identity will be relied upon.
- The debate about who shares the liability for property frauds, where all the parties are innocent will no doubt continue. The solicitor profession will say this decision has gone too far, and means solicitors are guaranteeing the transaction for purchasers. Part of this debate will centre on whether the court will be prepared to exercise its discretion under section 61 and relieve a solicitor from liability in circumstances where they have faultlessly carried out their AML checks.
- There was wide spread sympathy for Dreamvar's solicitors, Mischcon de Reya, following the High Court decision not to grant section 61 relief. This issue divided the Court of Appeal and will be subject to contribution proceedings. Interestingly, as Dreamvar was insolvent, the beneficiaries of the decision were financiers, which was one of the factors identified in the dissenting judgment.
- Finally, this may not be the last word. It would be no surprise to see these cases heading to the Supreme Court.
If you would like to discuss these cases in further detail, please contact Sam McCollum or Neil Franklin on the details above.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.