2020-02-17
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Identity fraud and theft in property transactions

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Posted by Susan Hopcraft on 01 March 2017

Susan Hopcraft Partner

The Appeal Court is due to review two judgements from 2016 in relation to solicitors’ liability when property purchase monies have been stolen following identity fraud.

Not only is the number of cases being reported cause for  concern, but so is the uncertainty of the law in the area.  Below we explain three cases in 2016 that highlight the confusion.

In each case the seller was not genuine and stole the buyer’s purchase monies.  The buyers made various claims against the solicitors acting for them and those representing the fake seller.  In case 1 both solicitors were found liable.  In case 2 only the seller’s solicitors were sued (for now) but they were not liable.  In case 3 both sets of solicitors were defendants but only the buyer’s solicitor was liable.  The facts of each are not remarkably different but the outcomes varied.

Case 1 - Purrunsing v A’Court & Co – April 2016

In the first case a fraudster posed as the owner of 35 Merton Hall Gardens in Wimbledon.  The fraudster ‘sold’ the house to Mr Purrunsing for £470,000 and spirited those monies to Dubai before anyone realised the ‘seller’ did not own the house to sell.

A claim was made against the buyer’s own solicitors for their alleged breaches of trust and wider duty in failing to ensure that the seller’s solicitors had done the necessary to ensure the seller was entitled to sell the property.

The buyer also claimed against the seller’s solicitors because they had received completion monies on trust and were in breach of trust when paying the funds to a fraudster.  The solicitors accepted their breach of trust but sought relief under section 61 of the Trustees Act by arguing that they had taken reasonable care.  They needed to show that they had acted ‘honestly and reasonably’ and that they ‘ought fairly to be excused’ for the breach of trust. 

The imposter retained his solicitors by supplying the essential documents to confirm his identity (two recent utility bills and a passport which, it was agreed, seemed genuine).  He gave a rental address and explained that the property being sold was vacant because he had inherited it.  The registered proprietor at Land Registry matched his name, but the addresses for notifications at Land Registry were the property itself and another address in Cambridge which had no connection to the seller.

The judge decided that the seller’s solicitors were not entitled to relief from sanction for paying away trust monies to a fraudster.  They did not exercise reasonable care in that they failed to respond to a number of things that ought to have made them question the true identity of their client and whether he really was the person who owned the property.  The things that should have caused them concern were:

  1. The property was unoccupied, not mortgaged and comparatively high value;
  2. They were being pressed for a speedy completion;
  3. Land Registry had an alternative address for service in Cambridge (but they made no attempt to verify a link between that address and their client);
  4. The client had not supplied any documentation that showed a link between him and the property (nor had he been asked for any);
  5. The client had not at any stage told them that he was employed abroad yet he quickly withdrew from a previously agreed sale when that buyer’s solicitors asked for (simple) verification of that; and
  6. There was an unexplained inconsistency between the information supplied in relation to building works at the property and information from a local authority search.

All in all, a catalogue of warning flags that should, even one or two, have been enough to stop the transaction.

The buyer’s solicitors were found to be negligent because they failed to advise the claimant of the unsatisfactory response to the Additional Enquires.  The seller’s solicitor had been asked “Please confirm you are familiar with the sellers and will verify they are the sellers and check ID to support same”.  The reply was ambiguous: they had met him to take instructions and had completed the standard identity checks. Yet, unknown to the buyer, those checks showed that the seller’s address was not the same as the address in Cambridge given in the Land Registry title. In accepting this reply the buyer’s solicitor was said to have been negligent; he should have satisfied himself by asking more questions to verify that the seller had the capacity to sell the property.  In failing to report the ambiguity of the answer to the buyer he had failed to provide information that his client needed in order to make an informed decision whether to proceed.  The effect was to expose the buyer to a risk that he was unaware that he was running.

Liability was shared equally between the two sets of solicitors acting on the conveyance.

Case 2 - P&P Property v Owen White and Catlin LLP - October 2016

In the second similar case claims were made against the seller’s solicitor and the agent who marketed the property. A property developer had tried to buy 52 Brackenbury Road, London W6, but the seller was an imposter and just over £1m went missing.

Again this was a sale of an unmortgaged property, for someone who lived abroad and for whom the transaction was urgent.  Initially instructed to refinance, the transaction changed to a sale part way through.

The solicitor met the client and received a utility bill for the property and passport. Bank statements addressed to the property were also later sent from Dubai, but they showed transactions in London, which may have been inconsistent with someone living in Dubai.  A standard ‘anti money laundering’ search came back as “referred” but the solicitor accounted for this by the fact that the client lived abroad was not on the electoral roll.  No further enquiries were made.

The judge said of the solicitor that “[she] was undoubtedly aware of her obligations in respect of client due diligence and was careful to ensure that she was provided with the necessary documents, she was less prepared to insist on her client answering any further questions that she had. Although I am conscious that [the fraudster] was not [the solicitor’s] only client and that the demands of a conveyancing solicitor's practice are likely to be such as to make complying with a solicitor's obligations in this respect more difficult, such obligations are important and, in my view, on this occasion [she] would have fallen short of the high standard equity expects of a trustee.”

However, this transaction was carried out under the 2011 edition of the Law Society's Code for Completion by Post, which expressly 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 and the claim against them failed.  Had they been trustees the judge decided they would have been liable for breach of trust, without relief under section 61.

It is uncertain why the buyer’s solicitors were not included in this claim but it may be that a claim is now being made against them.  A claim of that sort is likely to be bolstered by the findings in case number three.

Case 3 - Dreamvar (UK) Limited v Mishcon de Reya– December 2016

The most recent case is also similar.

8 Old Manor Yard, Earl’s Court, London SW5 was (yet again) 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 £1.1 million. 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 he received could be found.

The claim against the seller’s solicitors was that they had undertaken and/or warranted that the seller was genuine,but the court decided that no warranty was given to that effect. As to breach of trust by the seller’s solicitors the judge followed the analysis of the P&P case above which found that once the monies were unconditionally released to the seller’s solicitors the seller’s solicitor no longer held them on trust.  They were therefore entitled to pay them to their client even if the transaction did not turn out to be genuine, so the claim for breach of trust failed.

As to the negligence claim against the buyer’s solicitors, they had received some assurances that the seller’s solicitor had verified the seller’s identity. There were well known risk factors such as a high value, unoccupied, unencumbered property and the fact that the seller’s address did not tally with it.  However the seller (it was said) was separating from his wife hence the need for speed. The seller did not know about the management charges but this was considered not unusual. Nor were the seller’s solicitors local to the property, but they were a reputable firm.  In all the circumstances the judge was satisfied that the buyer’s solicitors had taken care and it was reasonable of them not to think this was an identity fraud.  The court also decided that there has been no need to ask the seller’s solicitor for an undertaking from the seller’s solicitors 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.

The judge considered breach of trust by the buyer’s solicitors and reviewed standard conveyancing practice in this context.  Until the early 1980s completion meetings were usual, but the face to face exchange of a banker’s draft in exchange for title documents has fallen out of favour.  Today most residential properties are sold by undertakings exchanged between solicitors that monies will be sent and title documents provided. This increases significantly the scope for fraud but there are numerous guides to best practice, although they do not replace the solicitor’s need to be ever vigilant.

The position is that if a buyer provides funds to his solicitor to buy a property but those monies are released in return for invalid title documents then that would be unauthorised and in breach of trust.  In this case the buyer’s solicitors said that they released the monies in return for a solicitor’s undertaking to provide valid documents.  The court decided that this was not enough: only release of funds for a genuine transaction is enough.  The judge implied a term into the buyer’s solicitors’ retainer that they would only release funds in exchange for genuine completion. 

Finally he considered whether section 61 exonerated them because they acted honestly and reasonably.  At this stage the judge noted the disastrous effect of the transaction on Dreamvar and the fact that solicitors have insurance for these situations, whereas Dreamvar did not.  Given the practical remedy available to the solicitors (or rather their insurers) he did not excuse them from liability under section 61, even though he did not find them negligent.  He acknowledges that he reached this outcome because he could not find the seller’s solicitors liable.  He appears to have been seeking a remedy for the defrauded party and by failing to exonerate under section 61 he could achieve that. The whole loss of £1m was carried by the buyer’s solicitors.

Conclusion

To make a solicitor liable to someone who is not their client is unusual.  Yet that is possible in conveyancing, depending on the terms of the completion.   The seller’s solicitors were closer in all of these cases to the fraudster and it is perhaps right that they, best placed to spot the fraud, carry liability.  Yet in cases 2 and 3 the seller’s solicitors escaped liability because they were not trustees. 

The solicitors acting for the buyer who has lost a very significant sum is the more usual place for blame to lie.  They, very broadly, owe duties to keep the buyer safe and it is they, even though they are more removed from the fraudster, who seem more likely to be found liable.  The decision in case 3 has really alarmed conveyancers because those solicitors were not negligent but nonetheless, due to their having insurance, they were required to remedy the loss.  The seller’s solicitors should also have had insurance cover but they were let off the hook.

Or should liability be split 50:50, which was the outcome in case 1?  The appeal court will be reviewing cases 2 and 3 in 2017 which should enable a thorough review of the position with, hopefully, more clarity on what is expected of solicitors acting for buyers and sellers. 

What is obvious though is that all conveyancers need to be very careful when mortgage-free, high value, unoccupied properties are being sold in a hurry.  If they do not check the seller very carefully indeed - whoever they are acting for – then they may be in the firing line if monies disappear.

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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