This month saw judgment given on two outstanding appeals dealing with identity fraud in conveyancing transactions; Dreamvar v Mischon de Reya and P & P Property v Owen White and Catlin.
Both appeals were heard together, and the judgment amounted to the most comprehensive analysis of claims available to buyers who become the victims of identity fraud and failed purchases. The judgment is of equal significance to lenders.
In simple terms, both cases involved innocent purchasers instructing honest solicitors in the acquisition of property from sellers who turned out to be imposters, not the genuine owners of the properties. Both sets of buyers’ solicitors were honest and acting reasonably. Although deficiencies in the sellers’ solicitor’s processes were identified, both sets of sellers’ solicitors were also honest. Neither purchaser received title, and their purchase monies were lost. Neither acquisition completed registration, so indemnity was not available from HM Land Registry.
In essence the Court identified four principal areas of claim;
1. Breach of Trust
2. Breach of Undertaking
3. Breach of Warrant of Authority
4. Breach of Duty of Care/Negligence
Breach of Trust
In Dreamvar, the seller’s solicitors never met the client. They relied on an email address, a mobile phone number, and two unsatisfactory documents in respect of ID. In P & P the solicitor did meet his client. Prior to Dreamvar, it had always been the case that the buyer’s lawyers held the buyer’s money (or lender’s funds) on trust to use for the sole purpose of completing the purchase. And so when the purchase did not complete by reason of the fraud a breach of trust by solicitor to buyer client had taken place. Dreamvar extended the law, placing the seller’s solicitor with an equivalent responsibility in respect of the buyer’s money. When a breach of trust arises, a trustee can claim total relief on grounds of acting honestly and reasonably. In other words, even though there has been a breach, no damages are payable. This latest judgment analyses the circumstances when such a relief is available, and when it should be granted. What the Court of Appeal has now made clear, is that the decision to grant relief to a solicitor in these circumstances, where they have been acting honestly and reasonably, is in fact discretionary, and such discretion is to be exercised with fairness to all the parties in mind, not just the solicitor involved. So in Dreamvar, fairness to the buyer meant that no relief would be granted on these particular facts, and the buyer’s could recover losses from their own solicitors, even though they had done nothing wrong. The decision is fact sensitive and unlikely to be the same for funders with healthy balance sheets, and insurance backing.
Breach of Undertaking
The judgment provided a detailed analysis of the Law Society Code for completions in conveyancing. The Code speaks of seller’s solicitor’s undertaking to buyer’s solicitors to have the seller’s authority to receive the purchase money. What the Court of Appeal has now determined is that where the term “seller” is used in the Code this is meant to be the true owner of the property. So in the instant cases solicitors breached undertakings.
Funders should undertake a careful analysis of the conveyancing documents and the precise wording of undertakings between solicitors.
Breach of Warrant of Authority
A solicitor is an agent of its principal, the client. Generally speaking, solicitors provide only a basic warranty. They say that they act for the persons instructing them – which is not necessarily the same as warranting that their client is who they say they are. The particular facts in these cases were quite interesting, and should alert solicitors in the finance industry. It now seems clear that where a solicitor signs a contract for sale on behalf of a client or a contract identifies the client to a property, then a warrant of authority may arise but for that claim to be actionable, reliance is essential. So funders need to carefully consider the precise details of sale, and sellers, as disclosed in pre-completion due diligence.
Duty of Care / Negligence
Does a solicitor acting for an imposter seller owe a duty of care to the buyer (or its lender) to carry out its AML competently? We see that in Dreamvar, the seller’s solicitor’s due diligence was sadly lacking. But the Court of Appeal has answered in the negative. A third-party solicitor does not owe a duty of care to the buyer (or its funder). Part of their reasoning is that the Anti-Money Laundering legislation does not create a liability to third parties where there is default. In other reasoning, the Court of Appeal, stated that none of the solicitors had assumed responsibility in this area.
Funders should consider how feasible or practical it is to seek and obtain seller AML information, or assurances from a seller’s solicitor as to their AML process on their client, or create an environment of reliance.
When the higher courts look at such a sensitive and important issue in detail, this can only be positive. It clarifies the position, and it offers opportunity for all stakeholders involved to fine tune their process, and advances understanding.
Identity and mortgage fraud remains a significant risk. The challenge now for buyers and their funders is to ensure that in each and every case, every potential route to recovery should be open to the funder. Using an external, independent solicitor for property work is a first step. That creates a first line of comfort for a funder acting responsibly. But what about the other lawyers. Legal culpability can lie elsewhere. Funders can learn much from Dreamvar in terms of identifying in what circumstances a solicitor will be held to warrant the identity of their client, how to establish reliance on such warranties, and how to create the right nexus in relation to undertakings, given by seller to buyer within the conveyancing process.