Property Fraud Cases – Dreamvar

We feature this month the familiar topic of who should bear the liability for property fraud when a vendor firm has been induced to sell a property by a client who turns out to be an imposter. The problem is of course that the purchaser’s representatives will have forwarded the completion monies in good faith to the supposed vendor’s representatives, but they will then have been transferred to the fraudster and are highly unlikely ever to be recovered. Depending on the actual facts of each case the unlucky party or parties could be any of those involved in the transaction, and so either set of solicitors, the estate agent and/or their respective insurers, or the purchaser and any lender that has provided them with finance.

The Court of Appeal has now handed down its judgment on the run of cases along these lines which have received a good deal of attention in recent years. In Davisons v Nationwide [2012] EWCA Civ 1626 the building society bore the losses but only after a successful appeal by the purchaser’s solicitors against an initial finding against them, whereas in Purrunsing v A’Court [2016] EWHC 789 (Ch) the losses were shared between the two law firms concerned and their insurers. In the later case of P&P Properties v Owen White & Catlin &  Another [2016] EWHC 2276 (Ch)  the unfortunate purchaser bore the losses since no blame could be attached to any of the professionals concerned.

In  all such cases much will depend upon the application of section 61 of the Trustee Act 1925 to each set of facts. Money that is received for a particular purpose will be received in trust and for the lawyer trustee to apply those funds for any other purpose will attract strict liability. There is, however, a discretion for the court based on the historical operation of the courts of equity to grant relief from breach of trust if the trustee has acted “reasonably and honestly” in all of the circumstances of that case.

Dreamvar v Mishcon de Reya [2016] EWHC 3316 (Ch) was another such case which was reported last year. Here the trial judge confirmed that in acting for the purchaser Mishcon de Reya would  have qualified for relief under these grounds through their actions, but since the impact of this would have been to have left the innocent purchaser with a loss of over £1m it would be withheld. This in turn resulted in the purchaser’s firm and its insurers bearing a substantial loss despite having done all that could have been reasonably expected of them in the view of the trial judge.

The Court of Appeal’s ruling in this case, which was joined with an appeal in the P&P Properties decision, analysed the possible liability of all of the reluctant parties to such cases as well as the actual conduct of those concerned in these two present cases. If conveyancers are to be required to meet the losses the blame will lie with either set of advisers or, as in the case of Purrunsing v A’Court, both of them. Here HHJ Pelling ruled that the failure of the vendor’s solicitors to conduct CDD to an adequate standard,  coupled to the purchaser’s representatives asking questions about the evidence that had been collected but not insisting on answers, meant that they shared the blame for the losses.

Whereas the Purrunsing case depended mainly on the breach of trust committed by both firms in parting with money in breach of their instructions the P&P Properties  case was decided more so on the grounds of breach of warranty: when stating that the vendor’s firm acts in the transaction on behalf of the owner do they warrant to act for the actual owner or merely the person who has instructed them who claims to be the owner? In that case the vendor’s representatives were found not liable as it was considered that a change to the Law Society contract then in force meant that they had not received the completion monies in trust: furthermore they had warranted to be acting for their client only and were not necessarily giving any assurance that they were acting for the rightful owner.

So how has the Court of Appeal suggested that these unfortunate cases should be decided? The main findings were:

  • If there is any failure of the CDD process this may amount to a regulatory breach or perhaps even a criminal offence but it does not create an entitlement to compensation under civil law (para 31).
  • Knowing the degree of reliance that the purchaser’s solicitors will place on the CDD process that they have undertaken on their client increases the burden on the vendor’s representatives to undertake the process more carefully than is often the case (para 40).
  • The extent of the warranty of authority depends on the facts of each case and although it was correct to say that the estate agents in the P&P case had not provided any such assurance that they were acting for the rightful owners the vendor’s solicitors had done so. There was, however, no evidence of “material reliance” on the warranty in this case and so this element of the appeal was dismissed (para 61).
  • On further detailed analysis it was held that the vendor’s solicitor will receive the monies in trust and will be in breach of trust if remitting them to anyone other than the rightful owner. Whether they, or the purchaser’s representatives, will be entitled to relief from breach of trust under s.61 Trustee Act 1925 will depend on the facts of each case and the degree of care taken by either set of lawyers.
  • On the question of negligence, and whether a duty of care is owed by the vendor’s advisers or the estate agents to the purchaser, Lord Justice Patten thought that “these are not cases in which it would be fair and reasonable to treat the solicitors and agents as having assumed responsibility for the adequacy of due diligence in relation to their client’s identity” (para 82). In other words, there is no duty of care by the vendors advisers to the purchaser.
  • As to the issue of breaches of undertakings arising from the 2011 Law Society Code for Completion by Post the same approach was taken as to breach of trust and the undertaking at para 7(i) of the contract “to have the seller’s authority to receive the purchase money on completion” should be taken to refer to the actual owner rather than the fraudster claiming to be so.
  • Finally, and significantly to the Dreamvar case, it was fair to consider the context of the case and the implications of granting relief from breach of trust under s.61 Trustee Act 1925. Accordingly this part of the appeal by Mishcon de Reya was dismissed. There was, however, a minority dissenting view on this point .

As to the ramifications of the case it would seem that the responsibilities of both sets of lawyers have been made greater by the judgment. The vendor’s lawyers are potentially liable to the purchaser for any failure to identity their client correctly on grounds of breaches of trust, undertakings or warranty of authority, even if they are not under a duty of care to the purchaser in negligence. It has also been confirmed the purchaser’s conveyancers are at risk in negligence for any such failure by the vendor’s firm and so will need to assess carefully the CDD process undertaken by their counterparts at the other firm.

The case will also require a review of conveyancing etiquette: purchasers’ solicitor will seek specific assurances from the vendors’ as to the reliability of the CDD checks that they have undertaken but the vendor firm will not want to grant them. Those certifying identity documents for use elsewhere might also need to proceed with more caution. It is to be hoped that vendor firms will be as open with purchaser firms as they would expect firms elsewhere to be when acting for purchasers, but it will probably need amended guidance from the Law Society in order for fairness to be enforced.

All in all , this long-running saga perhaps has some way still to go.

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