Court of Appeal ruling: Solicitors for fraudulent sellers ordered to compensate duped property buyers

Two cases where genuine purchasers bought properties through estate agents from fraudulent vendors have now had judgment handed down by the Court of Appeal.

The court has essentially ruled that solicitors representing fraudulent property sellers should share the responsibility for any losses with solicitors acting for the defrauded buyers. In one of the cases, the legal firm acting for the fraudulent seller was the only set of solicitors sued by by the buyer, and will have to reimburse the full cost of the purchase.

The ruling not only overturns a previous court ruling but also turns on its head the idea that a solicitor acting for a seller-client has a duty of care towards someone who isn’t a client, the buyer.

In both cases, the Court of Appeal has ordered the vendors’ legal firms to make financial contributions, to recompense the innocent purchasers.

The Court of Appeal has also agreed with an earlier High Court decision that an estate agent being sued is in the clear, but has allowed the agent full instead of partial costs saying that the earlier judge had been under a misapprehension over the agent’s anti-money laundering checks.

In both cases, a fraudster posed as the owner of homes in London and instructed solicitors and agents to act for him. Genuine purchasers were found, who instructed their own solicitors and proceeded to exchange and completion.

The frauds were discovered at the point of registration with the Land Registry, with both fraudster and money by then having vanished.

Both cases raise issues about the liability of solicitors and also estate agents in cases of identity fraud, and also anti money laundering.

Both cases involved well known firms of agents – one, a Winkworth franchisee, and the second, Douglas & Gordon. Both cases also involved vendors wanting quick sales.

In P & P Property Ltd v (1) Owen White & Catlin LLP and (2) Crownvent Limited the purchaser, P & P Property Ltd, brought a case not against his own solicitor but against the vendor’s conveyancers, and also sued the estate agents, Crowvent Limited who trade as Winkworth.

In the second case, Dreamvar (UK) Ltd v Mishcon de Reya, the purchaser brought proceedings against his own solicitors, Mischon de Reya and also against the vendor’s solicitors, Mary Monson Solicitors.

In the P & P case, the trial judge dismissed all the claims brought by the purchaser, who then appealed against the judgment on all the issues.

In the Dreamvar case, the trial judge dismissed the claim against Mishcon de Reya for negligence, but found that the firm was in breach of trust in releasing the purchase monies in relation to a fraudulent sale.

The judge dismissed all the claims against Mary Monson Solicitors, and both Dreamvar and Mishcon de Reya appealed against this.

However, what really marked the Dreamvar case out was that although the judge concluded that the firm had acted honestly, the judge ruled that Mishcon de Reya was in a better position than the purchaser to face the loss, because as a law firm it had insurance.

The Court of Appeal yesterday handed down its judgment, ordering both sets of vendors’ solicitors to make payments.

In the case of the defrauded P & P – a small father-and-son building company specialising in buying up homes to renovate and sell on  – this would mean the repayment of around £1m paid for the property, plus damages and cost.

In this case, the Court allowed P& P’s appeal against the original finding that there was no breach of trust by Owen White & Caitlin . However, the Court dismissed P & P’s appeal against both Owen White & Caiplin, and Winkworth for negligence. Winkworth, who had cross-appealed, were also allowed full costs.

In the previous judgment, the judge had said Winkworth could only claim a proportion of costs, taking account of what he said were Winkworth’s “wholly inadequate” identity checks.

The Court of Appeal said this was not the case, as it had been made clear that the firm had relied on checks made by Owen White & Catlin, and had made no further AML checks of its own.

In the Dreamvar case, the Court of Appeal has allowed the appeals of Mishcon de Reya and Dreamvar that there was no breach of trust by Mary Monson Solicitors. However, it dismissed Dreamvar’s application to plead a negligence claim against the firm.

Niall Inness, partner at the law firm, Mills & Reeve, which represented Winkworth, said that the Court of Appeal’s decision could effectively make solicitors the  guarantors of a sale being genuine.

Commenting, Jonathan Sachs, litigation partner at Irwin Mitchell, said: “This judgment will provide greater protection to buyers, but will shake up the conveyancing industry with much greater risk of liability.  Properties at risk of fraud can be worth millions of pounds.  Professional negligence insurance premiums will likely rise in response.”

Simon Blandy, director of regulatory standards at the Council for Licensed Conveyancers, said: “This is an extremely important ruling that raises a lot of questions without answering them all.

“As a regulator we will have to scrutinise it closely before deciding what action, if any, we need to take. But the case emphasises the importance of taking a risk-based approach when accepting instructions and managing transactions.”

This is a very abbreviated account of a long and complex judgment, and it is likely that particular issues in it of relevance to estate agents will be examined in further EYE articles.

http://www.bailii.org/ew/cases/EWCA/Civ/2018/1082.html

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13 Comments

  1. Rob Hailstone

    This ruling partially answers Peter’s question: Why does conveyancing take so long! As usual the devil is in the detail as to exactly what ID checks etc did the sellers solicitors carry out and how thoroughly. Were their any warning signs?

    Earlier this year the Bold Legal Group put together a ‘Red Flag’ warning list of over 20 situations when the potential ‘fraud alert’ alarm bells should begin ringing. Although the list has been compiled for property lawyers it will, I am sure, also be of use to estate agents.

    The list is not meant to be 100% exhaustive but merely a guidance as to what issues or circumstances, taken alone or together, could point towards a fraudulent transaction taking place.

    If you would like a copy, please email:rh@boldgroup.co.uk

     

     

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  2. Tim Higham

    1. a law firm’s PII cover – i.e ability to absorb a ruling against them – is a disgusting justification for any court decision, in my view, as it undermines the legal profession

    2. the role of the estate agent at the first point of sale needs to be closely looked at as something is failing

    3. solicitors have always had the implied ‘warranty of authority’ (i.e that they act for the person they say they do) that is nothing new

    4. it has always been understood that – like the public if they were doing their own conveyancing – they are not expected to be Columbo in their ID checks, and yes, a ruling which concludes ‘it is just one of those things, it could and would have happened to you had you done your own conveyancing’ is a perfectly acceptable ruling’ – as that would then focus us all on point 6 below! Instead blame the lawyers as they have insurance, and nothing changes for the public’s protection

    5. ID fraud is at its worst level, and we need to see new Government and legal regulator rules to provide lawyers with a test they can pass – no different than if the public were doing their own work – absolved of blame, as everyone is acting honestly, apart from the fraudsters

    6. No one seems to be talking about how to tackle the elephant in the room – the ones who actually committed the fraud. Why is that!?

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    1. Bless You

      Good points apart from number 2.

      Maybe the purchasers solicitor should pay half as well.

      6. Criminals to clever for the law..

      Gdpr another example. Billions in red tape and the real criminals won’t stop harvesting data anyway.

      World’s gone mad

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      1. P-Daddy

        Dear solicitors/conveyancers

        Have you been the victim of a no fault PI claim? If so contact #outrageousjudgements on 0800stressmeout for a no win no fee consultation (all said in your most sincere Michael Parkinson on TV voice) The no fault culture rages on…!

        Interesting on this one is how long the process took to get through the courts. The original case stems back to 2013. The starting point is that the seller was put forward as a serious seller wanting to sell quickly!! The buyer is a property company, so no doubt spotted a ‘deal’. As with all things in life, if it looks too good to be true, it normally isn’t.

        The agent was held to task over their money laundering procedure. We need to all remind ourselves of this, just because you have followed a process and ticked boxes, use experience and common sense as well. It appears the judgement took this into account, ‘but there for the grace of god go I’ Rob Hailstone makes the point above.

        The banks need to be held to account, so does the fraudster and of course, the solicitors processes need to be kept very tight bearing in mind they are part of the supply chain for transferring money. There are checks needed and of course the same common sense applied. There are no winners in this one except the people running off with the money!

         

         

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  3. Will

    Surely the Banks must have some liability?  Without the banking system such frauds would not be possible as such large transactions do not usually involve cash.

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    1. Hillofwad71

      Yes,I agree -follow the money .Surely the culprit can be easily traced ?Presumably the account which received the money,. the usual identification requirements would have been undertaken by the bank on opening the account .If  fraudulent they have  a case to answer too?

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  4. Woodentop

    I’ve lost count over the years of the number of conveyancing cases where the conveyancers went through the motions on both sides to get the sale through. The focus was just that, not should it go through or really make sure they have crossed all the t’s “as best advice” because that would have been extra work. They have a duty of care to both buyer and seller, not the minimum requirement? It is no wonder that there are cases of fraud, if they are not looking. Today we are compiling a report for a buyer on a property that they received no advice on liabilities on purchase for investigation regarding an absent freeholder. The buyers liabilities are running into excess of £20,000 which has come at a complete shock, so its not just fraud where some conveyancers just go through the motions.

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  5. El Burro

    This makes a good argument for agents retaining buyer and seller ID on their CMS so that they can review it when a property is resold in the future.

    If it was a 75 year old that bought the property a few years ago and the current ‘owner’ you are dealing with has the same name but appears to be 40, there is clearly something wrong.

    Yes I know it relies on them using the same agent but at least if they do, there’s no reason why we as agents couldn’t show due diligence by checking. If not a Court could well consider the agent having some liability if they should have reasonably known the seller wasn’t who they purported to be.

    And yes I know there are the GDPR implications but I would hope the ICO would take a sensible view on that data retention under ‘legitimate interest’ for the prevention of fraud, money laundering etc  bearing in mind the primary targets of property fraud are vulnerable consumers ie the elderly.

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    1. CountryLass

      Couldn’t the information mentioned be held by the Land Registry? I know I have been able to sign up for alerts to let me know if there are any changes made to the deeds of my property, so surely there is a ‘file’ with my deeds and contact information on it as the owner? Surely a copy of a passport or driving license (certified by the solicitor who dealt with the transaction) could be held with it. Then when an Agent takes an instruction to market a property they can request an ID check from the Land Registry? It can literally be an online form where you attach a copy of the ID you have just taken, give the full name (and previous name in the case of marriage/divorce) and upload to the LR. They then compare the information, birthdate, age, address etc, and issue a formal confirmation that the information matches and they are the owners.

       

      It would also serve the purpose of letting them know that the property is being marketed so that they can make sure all of the information is up to date and ready to be sent to the solicitor when they request it.

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    2. Typhoon

      THE CLEVER CROOK WOULD USE A DIFFERENT AGENT

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      1. El Burro

        A very clever crook Typhoon as I can’t see how they’d know which agent originally sold it years before.

        My point is if it does go back to original agent and they failed to carry out reasonable due diligence to ensure the seller was the owner, and reasonable would surely be checking against previous information you hold,  there’s a chance that you’ll be held responsible.

        And in a business where reputation is key who’d want to be accused of allowing a crook to sell an elderly owner’s property and pocket the money.

         

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  6. Anonymous Coward

    I must say that I now see this as a “money for old rope” opportunity for some enterprising insurance company to leap to the rescue of everyone involved so that the overall costs of EVERY sale rise by the introduction of a “fraud insurance” policy that protects the client in such cases – I guess that both solicitors will push it on their clients.

    A bit like indemnity policies for stuff that just does not need them…!

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  7. htsnom79

    We have one of the tightest gun law regimes in the world, criminals can still get them, do we introduce additional burdens across the whole industry ( whilst being compliant with the law and best efforts to exceed mere compliance ) when this is still a fairly rare occurrence?

    Or are general expectations that this type of crime will accelerate/attempt to accelerate in the digital age?

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