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Tuesday, 15 May 2018

Property Fraud – Dreamvar Appeal



The Court of Appeal has handed down its eagerly awaited judgment in Dreamvar v Mischon de Reya and, in the same appeal, P&P Property Limited v Owen White & Carlin LLP.

The headline is that solicitors representing fraudulent property sellers should share responsibility for any resulting losses along with solicitors acting for the duped buyers.

I mentioned the High Court Dreamvar judgment in a blogpost last year, so I won’t go over the facts of the case again.  The facts of P&P are summarised in the judgment.

Last year's ruling caused much concern as the High Court found the buyer’s solicitors, MdR, liable for the loss suffered by their client on grounds of breach of trust. MMS, acting for the seller, were not held liable notwithstanding inadequate client identity checks. This was on the basis that MdR’s insurers were best able to bear the loss.

On appeal, MdR did not contest the breach of trust finding, although sought relief under Section 61 of the Trustee Act 1925.

The Court of Appeal ruling means that if sellers’ solicitors fail to carry out sufficient checks on their clients, they must share in the responsibility for the loss – it cannot fall solely on the buyer’s solicitors.

This seems fair, as the solicitor acting for the seller is after all in the best position to carry out these checks.

There will be some however who argue the liability should fall entirely on the seller’s solicitors, rather than be shared between those acting for the seller and those acting for the buyer, and the dissenting judgment of Lady Justice Gloster in the Court of Appeal is interesting in supporting this view.

Lady Justice Gloster considered that the Court should grant relief to MdR under Section 61 of the Trustee Act 1925 because MdR did not act dishonestly; had acted reasonably; and “on the facts, primary responsibility for checking the true identity of the fraudster lay with the latter’s solicitors, namely MMS”.

Lady Gloster further comments:

“I do not consider that the fact that MdR is insured should in the circumstances of this case lead to the conclusion that MdR should bear financial responsibility for Dreamvar's loss. Dreamvar was entering into what was for it a relatively substantial property development as a business transaction. I do not consider that the Court's sympathy should be with one commercial party (in reality with its loan creditors, given its insolvency) rather than another, simply because one, and not the other, has insurance. It is irrelevant, in my view, that Dreamvar was a newly formed company or that its beneficial owner was a young man… There was no suggestion that MMS' insurance would not be adequate to cover the loss”.

This was not however the majority view of the Court of Appeal (2-1).

The fact that solicitors acting for both sides in a transaction could be held liable in the case of fraud could have significant impact on the cost of indemnity insurance for those firms carrying out conveyancing.

Simply following established “Know Your Client” and money laundering procedures won’t be enough to escape liability if the fraudsters succeed.

It remains unclear as to what firms should do to avoid this risk.

As far as the detailed issues under consideration in Dreamvar, they can be briefly summarised as follows:

·       Failure to Warn – at first instance it was held there was no duty to warn a client of the potential risk of identity fraud, and this was not discussed further on appeal. Firms will nevertheless want to develop a risk assessment framework in the light of the latest judgment (eg if the property is vacant with no mortgage and the transaction must be done double quick, alarm bells should start ringing).

·       Identity Undertaking – there is no such undertaking under the Code for Completion by Post (the Code) or the Conveyancing Protocol.

·       Breach of Trust by Buyer’s solicitors (MdR) – this was conceded on appeal based on MdR’s release of the purchase monies to MMS. The Court of Appeal would not grant relief under Section 61 of the Trustee Act 1925.

·       Negligent client verification by seller’s solicitors – this was admitted at first instance but did not affect where the Court found the liability should fall.

·       Breach of Trust by Seller’s solicitors (MMS) – the High Court rejected this allegation, but this was overturned on appeal, with the Court of Appeal ruling there had been breach of trust by MMS.

·       Breach of undertaking by Seller’s Solicitors (MMS) – the Court of Appeal ruled there had been a breach of the undertaking by MMS (under paragraph 7 of the Code) that it had the seller’s authority to receive the purchase money on completion. This overturned the High Court’s decision. In the circumstances, Dreamvar’s alternative argument that MdR were negligent by failing to obtain such an undertaking from MMS was dismissed.

·       Warranty of Authority – this was held at first instance as being limited to having the authority of the client – ie the fraudster – rather than the authority of the true registered proprietor. The claim for breach of warranty of authority in P&P failed on appeal due to lack of reliance being found to have been placed on the warranty.

It will be interesting to read the many commentaries that will emerge on this case over the coming days once the terms of the judgment have been digested.

I’ll continue to tweet links to any that catch my eye– do follow me on twitter if you don’t already.

UPDATE 16 May 2018

The more I think about it the more I am persuaded by and agree with the argument of Lady Justice Gloster in her dissenting judgment - basically that the seller's solicitors (or in practice their insurers) should bear financial responsibility for the buyer's loss in cases such as this as they are the ones who have primary responsibility for verifying the identity of the purported seller. I wonder, in view of her concise and well-argued dissenting judgment, whether the Court of Appeal's ruling will be appealed to the Supreme Court?

In the meantime, it would be prudent when acting for a buyer to ask for a specific signed statement or warranty from the seller's solicitors that they have carried out all appropriate identification and verification of their client, and to confirm that the buyers are relying on that statement or warranty.

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