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.