The High Court sent shockwaves through the legal profession (and the insurance industry) with a recent decision.
It announced that in a case where a property purchaser had been defrauded by a criminal imposter pretending to be the owner of a property, the solicitor acting for the innocent purchaser should bear the liability for the fraud, and be denied relief from a finding of breach of trust, simply because it was insured and had deeper pockets that the purchaser.
This was in circumstances where the solicitors themselves had not done anything wrong, and had not been negligent (contrary to previous fraud cases, where it had been shown there had been deficiencies in the solicitors' due diligence and in dealing with enquiries of the fraudulent seller’s solicitor).
The Background: What Happened, And Who's To Blame?
By way of background to the case, Dreamvar sought to purchase a property in Central London for £1.1m, and having “completed” in November 2014 it came to light upon enquiry from Land Registry when dealing with registration that a fraud had been perpetrated. Dreamvar sued their solicitors (Mischcon de Reya) for negligence and breach of trust, as well as the seller’s solicitors for negligence, breach of warranty of authority and breach of trust. The High Court held that the seller’s solicitor owed no duty to the buyer, even though they were negligent. It also refused to uphold a finding of breach of trust for paying away the money in circumstances where there was no genuine completion.
The ruling therefore seemed also to suggest that the solicitor perhaps best placed to prevent the fraud, the solicitor acting for the purported seller, was not liable. This seemed counter-intuitive on a number of levels, not least as there seemed to have been no breach of the well-established warranty of authority.
In the appeal heard last week, the court decided that in this case, the seller’s solicitor was indeed at least partially liable, both due to their breach of warranty of authority, and importantly for breach of trust as they had not paid away the money to effect a genuine completion.
A second, related case was heard at the same time and it was found the “seller’s” solicitor was indeed liable due to inadequate due diligence.
So far, so good. This gives innocent parties in a transaction some ability to seek recompense, and shares that liability among both solicitors acting.
What Does This Mean For Property Solicitors and Conveyancers?
However the effect of the decisions is to make property solicitors the guarantors of a transaction, without any real guidance on how they mitigate the risk, and without the tools to be able to do so.
Furthermore the majority decision confirmed that the High Court was correct not to give the solicitor acting for the buyer relief from breach of trust even though they had acted honestly and reasonably, simply because they had insurance. It is unclear how this can be a just outcome for the solicitors. It suggests the only way they can be granted relief is if the defrauded buyer has insurance as well (which is unlikely). There was one dissenting judge, and this could be grounds for appeal to the Supreme Court.
So what now for conveyancers? There is likely to be some attempt to limit liability by both buyer and seller solicitors.
Can solicitors acting for buyers amend their Terms and Conditions to exclude liability? Probably only with informed consent at the outset of any transaction, such consent being unlikely to be given. Can they seek assurances and further warranty from the sellers solicitor? Such moves are likely to be resisted, although if there is too much resistance, should this lead to an adverse inference anyway?
Will conveyancers acting for sellers seek to alter the code for completion to avoid breach of trust claims? Again such moves will be vehemently resisted by conveyancers acting for buyers.
Is Robust Identity Checking The Way To Deal With Fraud?
So, what is the answer? It is difficult to see any short-term solutions here. One long term solution would certainly be updating the Land Registry so it can hold biometric data on all registered proprietors. This would clearly eliminate any doubt.
It will involve investment by the Land Registry, and perhaps now is the time. All the stakeholders in property transactions need certainty, and this would seem to be the most sensible solution.
What Can You Do Now?
Is there anything a buyer can do to protect themselves? Good question.There are some sensible steps a buyer can take:
- Most importantly they can appoint a local solicitor who has been perhaps recommended to them, who is CQS accredited, to give themselves the best chance of employing a solicitor who can spot any signs of a possible fraud.
- Secondly, all parties to a transaction may have to show some patience. One thing is for sure, these rulings will mean solicitors have to take much greater care in checking sellers and their title, and ask more questions if they feel anything is amiss.
- And finally, be vigilant! Read the warnings your solicitor gives about paying money to bank details provided by email only without verifying them, try and meet the seller to see if any alarm bells ring, ask the estate agent what steps they have taken to verify the seller, don’t be fobbed off!