Buying and selling houses can be stressful enough, but what happens if you discover that the seller was a fraudster after your solicitor has already handed over the purchase monies? The recent decision of the Court of Appeal in Dreamvar (UK) Limited v Mischcon de Reya; P&P Property Ltd v Owen White & Catlin LLP  EWCA Civ 1082 has come as good news to the two unsuspecting purchasers, who lost £1.03 and £1.1 million, and successfully recovered it from the acting solicitors.
P&P Property Ltd
In 2013, an individual, posing as the owner of a property, ‘Mr Harper’ placed the property on the market with Winkworth Estate Agents and instructed solicitors Owen White and Catlin LLP (‘OWC’) to act on his behalf. The individual had no legal title to sell the property. P&P, a property investment company, purchased the property for £1.03 million. It was only when the true owner of the property walked past the building and saw the kitchen being removed that the deception came to light, long after the fraudster had absconded with the purchase monies.
In 2014, Dreamvar, a residential development company, found itself in a very similar situation, handing over £1.1 million for a property which turned out not to be owned by the individual posing as the seller. Dreamvar sued its solicitors, Mischcon de Reya (‘MdR’), and the seller’s solicitors, Mary Monson Solicitors ('MMS').
The decisions at first instance
In both cases, despite inadequate checks being carried out on the seller’s identity, the seller solicitors escaped liability for negligence, breach of trust and breach of warranty. This was on the basis that they owed no duty of care to the purchasers who were not their clients, and there was no obligation to ensure or warrant that the transaction was genuine.
In the Dreamvar case, while the purchaser’s solicitors were not found to be negligent, the court held that they were responsible for the losses suffered because they had released the purchase monies in a transaction that was not genuine. Dreamvar’s solicitors stated in their retainer that they would only release the purchase monies to the seller’s solicitors on genuine completion. As there was no genuine completion, they were found to be in breach of trust.
The decisions seemed somewhat unfair, allowing seller solicitors, who had not carried out the appropriate checks, to escape liability with the losses falling to the unsuspecting purchaser, or the purchaser’s solicitor, through no real fault of their own. Ultimately it seemed that the trial judge placed liability with MdR because it was the only practical means of compensating the innocent purchaser, with MdR being considered as better placed to absorb the loss, through insurance or otherwise.
P&P and MdR appealed the decisions.
The Court of Appeal determined both the P&P case and Dreamvar on 15 May 2018. The Court of Appeal agreed that the seller’s solicitors were not negligent because they had not assumed responsibility to the purchasers for ensuring their own client’s identity was correct. The Court of Appeal did, however, impose liability for the losses suffered on the seller solicitors for breach of trust and breach of undertaking.
Breach of Trust
The seller solicitors (OWC and MMS) in both cases, denied liability for breach of trust on the basis that the Law Society Code for Completion by Post (2011) provided them with the necessary authority to hold and release the purchase monies to their clients, free of any liability to the purchaser. They argued that once ‘completion’ had taken place, the point at which the purchase monies were received by them, the seller automatically and instantly became entitled to the money as if paid directly to the seller. The Court of Appeal rejected this argument on the basis that there was no ‘completion’. The Court of Appeal stated:
The vendors had no title and the transfers were forgeries. Since completion did not take place, the vendor's solicitors had no authority to release the money to their clients or otherwise to dispose of it in accordance with their instructions.
The Court of Appeal found that the seller solicitors were therefore liable for the total purchase price. Lord Justice Patten said:
Since there never was any genuine completion of the sale, they are liable in my view to account for the entirety of the monies paid to them by the claimant.
Breach of undertaking
The Court of Appeal found that solicitors, acting on behalf of the seller of a property, warrant that they are instructed by the genuine owner of the property and not an imposter. Where a purchaser can demonstrate that they have relied on that warranty, the seller’s solicitor will be liable for the losses suffered by that purchaser where the transaction ends up being fraudulent. At paragraph 119 Lord Justice Patten said:
In my view both OWC and MMS gave undertakings that they had the authority of the real Clifford Harper and David Haeems to receive the purchase monies on completion.
The Court of Appeal did not grant relief to MdR on the basis that it had acted honestly and reasonably but noted that any distribution of liability could be achieved through contribution proceedings brought by MdR against MMS.
The decision comes as a hard blow for conveyancing solicitors who will need to be even more vigilant going forward. The decision is good news, however, for claimant purchasers who are the victims of fraud as it provides an avenue for redress against the acting solicitors, in circumstances where the money would otherwise be lost.
We may well see an appeal to the Supreme Court, however, in the meantime, the practical consequences of placing the burden of 'guaranteeing' the legitimacy of the transaction on solicitors, and ultimately their insurers, may mean that we start to see an increase in conveyancing costs, the introduction of specific clauses in solicitor retainer letters and bespoke contractual terms to deal with indemnities in the event of fraud.
Funding a claim against your solicitor
These cases are examples of circumstances where an individual or a business needs to bring a claim, but is concerned about the costs of doing so. Our funding and insurance package, FISCUS, can help claimants to pursue a good claim where they are otherwise unable to afford to do so, or do not wish to divert valuable resources from their business. For more information, take a look at our FISCUS page and the video below.