Property fraud: stop press!

Property fraud is a hot topic as it is very much on the increase. But who pays the price when the seller of a property turns out to be a fraudster?

This was the crux of the issues considered in Dreamvar (UK) Limited v Mischon de Reya and Another [2018] EWCA Civ1082. The Court of Appeal’s judgment was handed down on 15 May 2018.

In a nutshell, a fraudster posed as the owner of an unoccupied residential property in London. He instructed solicitors to act for him on the sale of the property and a genuine purchaser was found at a price of £1.1 million. The purchaser also instructed solicitors and the transaction proceeded very quickly at the insistence of the seller. The fraud was discovered following completion but before registration of title at the Land Registry, by which time the fraudster had disappeared with the sale proceeds.

The purchaser brought proceedings against its own solicitors for negligence and breach of trust and also against the seller’s solicitors for breach of warranty of authority, breach of undertaking and breach of trust.

At first instance, the court dismissed all claims against the seller’s solicitors even though they had not acted competently when conducting identity checks on their client, as required by money laundering regulations. However, the purchaser’s solicitors were found to have acted in breach of trust for releasing the purchase moneys when the sale was not a genuine one and thus liable to pay over £1 million in damages to their client. This was despite the fact that the firm was held not to be negligent and to have acted honestly and reasonably throughout.

The Court of Appeal took a slightly different approach by holding not only that the purchaser’s solicitors were liable to the purchaser for breach of trust, but also that the seller’s solicitors were liable for breach of trust and breach of undertaking for releasing the purchase monies to their fraudulent client. The next step will be to establish the extent of the contribution of each firm towards the financial loss of the purchaser.

The case was heard jointly with another – P & P Property Limited v Owen White & Catlin LLP and Another – in which the solicitors acting for a fraudulent seller were held liable for the losses of the purchaser, again as a result of breach of trust and breach of undertaking.

These long awaited decisions will be welcomed by defrauded buyers for establishing that they potentially have a claim against the fraudster’s solicitors. They will also come as a relief to purchasers’ solicitors who will, at least, be able to share liability for loss to their clients in such circumstances with sellers’ solicitors - who are, after all, best placed to conduct checks to verify the identity of the seller.

It remains to be seen what impact the decisions will have on conveyancing procedures - and solicitors’ insurance premiums and terms.