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Property hijack fraud: new duty for conveyancers?

The Law Commission recommends introducing a new statutory duty on solicitors in property transactions

If the proposals are implemented, solicitors will owe a duty to HM Land Registry in respect of identity checks.

In the last 10 years, the Land Registry has paid out £58 million in indemnity claims as a result of fraud. This proposal aims to reduce the risk of property title fraud.

Lenders will be pleased that their right to claim an indemnity is unlikely to change and that no additional duties are likely to be imposed on them.

Background

Property title fraud occurs when a property is transferred to another party without the true owner's knowledge. Typically, this is a result of an imposter pretending to own the property and deceiving the other parties involved in the transaction.

These frauds are sometimes identified by the Land Registry prior to registration. However, when they are not, the title might be rectified, leaving purchasers and lenders without their property and security. In those circumstances, the innocent purchaser and lender may have an indemnity claim against the Land Registry (as well as a claim against the solicitors involved in the transaction).

When indemnities are paid out, HM Land Registry sometimes has a right of recourse against the negligent conveyancer(s). However, over the last 10 years, the percentage it has recovered from third parties is low: it has varied between 1% and 20% each year.

The reason for this low rate of return has been attributed to the lack of any recognised duty of care owed to HM Land Registry by conveyancers. The cost of these pay outs ultimately lies with users of HM Land Registry through the fees it charges.

As part of a wider review, the Law Commission has considered what changes might be appropriate to reduce the risk of this type of fraud and to limit the exposure faced by the Land Registry.

Proposals

The Law Commission has concluded that the Land Registry is not best placed to detect and prevent individual cases of fraud. It has considered a number of alternative solutions including capping the indemnity available, introducing a new statutory duty on lenders and limiting a lender's entitlement to an indemnity.

Having weighed up these options, the Law Commission has recommended:

  1. A statutory duty of care should be introduced for conveyancers to take reasonable care to verify the identity of their client;
  2. HM Land Registry should be empowered to issue directions that outline what steps must be taken to comply with that duty;
  3. When a fraud succeeds, if the conveyancer fails to comply with those steps they will be liable to the Land Registry for the indemnity paid;
  4. If a conveyancer complies with the directions, they will not be liable to the Land Registry, even if a fraud has succeeded; and
  5. The duty of care will supplement HM Land Registry's existing rights of recourse and will not affect parties' rights to claim an indemnity.

Comment

These proposals fit with the direction taken by the Court of Appeal earlier this year in P&P Property Ltd v Owen White & Catlin LLP and another, and Dreamvar (UK) Ltd v Mischcon de Reya and another [2018] EWCA Civ 1082. In these cases, the court held (amongst other things) that the solicitors who unwittingly acted for the imposter should be liable to the innocent purchaser. This is on the basis that the seller's solicitors are best placed to verify the identity of their client.

This proposal is a sensible step in seeking to reduce property fraud cases. It will provide the Land Registry with a clear right to make recoveries from conveyancers who do not undertake the appropriate due diligence.

Finally, it’s good news for lenders that the option for them to seek an indemnity from the Land Registry remains open (at least for now).

If you would like to discuss these cases in further detail, please contact Sam McCollum or Paul Barry on the details above. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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