An important judgment handed down by the High Court considered the liability of both solicitors and estate agents in circumstances where the seller of a property turned out to be an imposter.

In the case of P&P Property Ltd v Owen White & Catlin LLP [2016], the judge held that it is for solicitors, not estate agents, to establish the title to a property. Further, although solicitors’ identity checks are necessary to reduce the risk of fraud, these checks do not provide a guarantee of their client’s identity, nor are they a guarantee that their client is the ‘true’ owner of a property.

Facts

The facts happened over a short period of time, but are fairly remarkable. A man claiming to be Mr Clifford Harper posed as the owner of a residential property at 52 Brackenbury Road in Hammersmith. On 2 December 2013, he instructed Crownvent Ltd t/a Winkworth (Winkworth) to act as his estate agent, and Owen White & Catlin LLP (Owen White) to act as his solicitors in respect of the sale of the property. Mr Harper informed Winkworth and Owen White that the sale of the property needed to complete by 11 December 2013 so as to enable him to complete on an alleged purchase of a property in Dubai on 15 December 2013.

Ms Lim, a solicitor from Owen White, met with Mr Harper and took copies of his supposed proof of identity and address. Although the firm’s anti-money-laundering search identified certain warnings, Ms Lim continued to act. She thought that the warnings had arisen because Mr Harper was mainly working in Dubai, and therefore assumed there was limited data on his identity in England. It is interesting to note from the judgment that the judge found her a conscientious solicitor.

Winkworth also had anti-money-laundering obligations, requiring checks on Mr Harper’s identity. But while the judge accepted that the witness from Winkworth was honest, he concluded that these checks were ‘wholly inadequate’. Just two days after he had instructed the estate agents and solicitors, on 4 December 2013, Mr Harper accepted an offer from P&P Property Ltd (P&P) to buy the property for £1.03m. The next day, P&P entered into a loan agreement with City and Western (London) Ltd to fund the purchase. The parties exchanged contracts on 6 December 2013 with completion for 11 December 2013. Pursuant to the terms of the contract, P&P’s solicitors held the deposit of £103,000 to the order of Owen White.

On the contractual day for completion, 11 December 2013, P&P’s solicitors paid the £103,000 deposit to Owen White, but failed to pay the outstanding balance of £927,000. Consequently, Owen White served a notice to complete on P&P’s solicitors. The purchase money was eventually paid, but it was done so in separate tranches a day later. In the morning, City & Western’s solicitors paid Owen White £327,000. P&P’s solicitors told Owen White it would pay the remaining £600,000 after 14:00. Mr Harper asked Ms Lim to send him the £430,000 (being the total of £103,000 and £327,000 paid so far) so that he could complete on his purchase in Dubai. Having obtained P&P’s instructions, P&P’s solicitor agreed to a variation of the contract of sale of the property allowing Owen White to treat the £430,000 as a deposit, as agents for the seller. Owen White then transferred £430,000 to Mr Harper. Finally, at 12:49 on 12 December 2013, Owen White received the remaining £600,000. It was P&P’s solicitors’ evidence that completion had taken place shortly before 15:40. By 15:37, Owen White had transferred the net sum of £581,410 to Mr Harper.

Approximately six weeks later, the true Mr Harper walked past his property and noticed building works being carried out on it. It subsequently became apparent that a sophisticated fraud carried out with expertise had been committed. Unfortunately for P&P, as the imposter never held title to the property, it meant that they could never acquire title on completion. In the meantime, the fraudster disappeared with the money.

Claims

In an attempt to recover its loss, P&P issued proceedings against:

  • Owen White for breach of warranty of authority, negligence, breach of trust and breach of undertaking; and
  • Winkworth for breach of warranty of authority and negligence.

Mr Robin Dicker QC, sitting as a deputy High Court judge, decided that all these claims should fail, leaving P&P with a loss in excess of £1.03m and no property.

In contrast, in the recent case of Purrunsing v A’Court & Co [2016] (discussed by Mary Young and Ben Hillman in ‘Who is on the hook?’, PLJ346, November 2016, p8), where a similar fraud took place, the buyer claimant was successful in its claims against its solicitor and the imposter seller’s solicitor for breach of trust. The buyer claimant was also successful in its claim against its solicitor for breach of contractual and tortious duties. Elements of this case are considered below.

Breach of warranty of authority

P&P claimed that both the estate agents and the solicitors had warranted to P&P that they had authority to act for the true Mr Harper, and P&P had bought the property in reliance on these representations. The court had to consider what warranties the defendants had given and the extent of those warranties. If the warranties had been given then the defendants would be strictly liable.

In deciding the claim in respect of Owen White, the judge distinguished this case from Penn v Bristol & West Building Society [1997]. In Penn it had been decided that the sellers’ solicitor had warranted to the buyer’s solicitor that he had authority to act for the husband and wife, the joint owners of the property. However, in reality the solicitor had no authority to act for the wife, who was unaware of the transaction. The distinction in that case was that the solicitor did not have a client going by the name of Mrs Penn (not that she was not who she said she was). There was, in the judge’s view, a material difference between a solicitor providing a warranty that they had authority to act for a client and extending the warranty to cover the attributes of that client to include their identity.The judge held that Owen White had warranted it had the authority of Mr Harper. The question was whether that warrant of authority was more extensive (ie to warrant specific attributes such as being the true owner of the property).

The judge also considered Excel Securities plc v Masood [2009], where a lender had agreed to loan moneys to an imposter claiming to be Mr Goulding. In that case, HHJ Hegarty QC concluded that Mr Goulding’s solicitor had merely warranted that he had authority to act for someone who identified himself as Mr Goulding and who claimed to be the owner of the property. The lender’s solicitor could have asked Mr Goulding’s solicitor to warrant the identity of its client and to guarantee its client was the person on the register. However, HHJ Hegarty QC said it was almost inconceivable that a solicitor would give such a warranty. Having considered both these cases, the judge concluded at para 121 that:

The basic representation is only that the agent has authority to act for another [...] An agent does not, simply by acting as agent... make any other representation as to the principal’s attributes or characteristics. The court should not imply a warranty of authority which has an effect going beyond the basic representation, save where it is clear that the necessary promise is properly to be implied. It was difficult to accept that the parties believed that Ms Lim had warranted anything other than she had authority to act for Mr Harper. Further, Mr Robinson, P&P’s solicitor, did not believe Ms Lim provided such representations. The judge stated at para 123:

he checks that solicitors are required to undertake are designed to reduce the risk of fraud and cannot reasonably be thought to eliminate it, and Mr Robinson did not suggest that he understood that Owen White were effectively promising that they did…

In signing the contract, Ms Lim had only warranted that she had the authority to act for someone identifying himself as Mr Harper and not that her client was the registered title holder of the property. With respect to the claim against Winkworth, the judge was of the view that the estate agents had not warranted that it had authority to act for the true Mr Harper merely by telling P&P that the name of the person selling the property was Mr Harper and/or by preparing a memorandum of sale. Finally, the judge concluded that the question of title to a property is primarily a matter dealt with by solicitors, and not by estate agents. Despite the fact that estate agents have anti-money-laundering obligations, these are not to be treated as impliedly representing that their client is who they say they are, or that they are the true owner.

Negligence

P&P claimed that both the solicitors and the estate agents owed P&P a duty of care to act with the skill, care and diligence of a reasonably competent solicitor and estate agent.

Owen White denied it owed P&P a duty of care. It relied on Gran Gelato Ltd v Richcliff (Group) Ltd [1992], where Sir Donald Nicholls V-C held:

... in normal conveyancing transactions solicitors who are acting for a seller do not in general owe to the would-be buyer a duty of care when answering inquiries.

Owen White asserted this was not a special case where the general rule does not apply. The judge accepted the decision in Gran Gelato.

In the alternative, P&P pleaded this was a special case because Owen White had accepted a direct responsibility to P&P. As above, the judge dismissed the claim that Owen White warranted it acted for the true Mr Harper or the true owner of the property. P&P also claimed that Owen White accepted a direct responsibility to P&P because:

  • Winkworth contacted P&P directly about the sale; and
  • exchange of contracts needed to take place within days.

The judge held there were no special circumstances. In particular, there was no correspondence between the solicitors establishing that they had accepted a direct responsibility to P&P to take reasonable care to ascertain Mr Harper’s identity.

In Purrunsing, the buyer claimant did not claim that the seller’s solicitor owed it a duty of care, but it did successfully claim that its own solicitor had breached its contractual and tortious duty of care. The buyer’s solicitor had raised an additional enquiry before contract, requiring the seller’s solicitor to confirm he was ‘familiar with the sellers’ and seeking him to ‘verify they are the sellers and check ID to support same’. The seller’s solicitor had been cautious not to confirm a link between his client and the property. The seller’s solicitor merely confirmed that he had no ‘personal knowledge’ of the seller prior to his transaction, and that he had met with the client in person and obtained copies of his documents to check his identity. Judge Pelling QC concluded that the buyer’s solicitor did not need to raise this enquiry, but having done so he should have informed his client of the response and the risk of continuing with the transaction. Had the seller’s solicitor provided a similar confirmation to P&P’s solicitor, P&P may have been able to argue that a duty of care had been established between the seller’s solicitor and the buyer. With regard to the claim against Winkworth, P&P needed to establish that Winkworth owed P&P a duty of care. Following the threefold test set out in Caparo Industries plc v Dickman [1990], the judge held that although there was sufficient foreseeability and proximity (the first two stages), it was not fair, just and reasonable (the final stage) to hold that Winkworth owed P&P a duty of care when complying with its anti-money-laundering obligations to ascertain whether Mr Harper was the true Mr Harper.

Winkworth was, after all, contractually acting for the seller, and not the buyer. The judge added that had Winkworth owed P&P a duty of care, he would have found Winkworth negligent in failing to comply with its anti-money-laundering obligations.

Breach of trust

In addition, P&P claimed that Owen White had held the completion moneys on trust and, as no valid completion had taken place, it had paid the moneys to Mr Harper in breach of trust. The judge stated that whether Owen White was in breach of trust depended on:

... the terms on which the vendor’s [seller’s] solicitors received and held the money and was entitled to release it.

The Law Society Code for Completion by Post (2011) states:

3. ... the seller’s solicitor acts on completion as the buyer’s solicitor’s agent... but this obligation does not require the seller’s solicitor to investigate or take responsibility for any breach of the seller’s contractual obligations and is expressly limited to completion pursuant to paragraphs 10 and 12.

10. The seller’s solicitor will complete upon becoming aware of the receipt of the sum specified in paragraph 9, or a lesser sum should the buyer’s and seller’s solicitors so agree, unless –

  1. the buyer’s solicitor has notified the seller’s solicitor that the funds are to be held to the buyer’s solicitor’s order;
  2. it has previously been agreed that completion takes place at a later time.

The judge held that from the moment the seller’s solicitor is aware that they are in receipt of the money required to complete the sale, the seller’s solicitor no longer holds the money on trust to the order of the buyer’s solicitor. The seller’s solicitor can, therefore, use the money for completion in accordance with the rights and obligations set out in the Code. The judge was of the view that it would be inconsistent with para 3 to hold the seller’s solicitor liable for breach of trust if the seller failed to provide a genuine transfer to enable a valid completion to take place.

The judge considered this issue by breaking down the payments. The effect of the amendment of the contract by which Owen White held the deposit sum of £430,000 as agents for the seller meant that it was inconsistent with any obligation to continue to hold it on trust to the order of the buyer’s solicitors pending completion. Owen White could, therefore, transfer the moneys to Mr Harper and if they had done so this would not have constituted a breach of trust. If, of course, there had been no valid completion, Mr Harper would have been liable to P&P to return the deposit. With regard to the last payment of £600,000, the judge’s view was that it had not been received on trust to the order of P&P pending the anticipated completion. This was for two reasons. First, P&P’s solicitors had not expressly told Owen White to hold the sum to their order and, secondly, the parties had not agreed to completion taking place a day late. In contrast, in Purrunsing the buyer’s and seller’s solicitors both admitted that they had been in breach of trust having released the purchase money to the imposter seller before a genuine completion had taken place. Both defendants applied for relief under s61 of the Trustees Act 1925 (1925 Act), but were unsuccessful. Under the 1925 Act, the court has discretion to grant relief from liability for breach of trust if the trustee acted honestly and reasonably. Both solicitors were honest. Judge Pelling QC concluded that the standard of reasonableness for buyers’ solicitors and sellers’ solicitors seeking relief is the same. The Law Society’s Property and Registration Fraud Practice Note warns solicitors of the increased number of frauds. The following factors were of importance to the question of reasonableness:

  • the property was unoccupied,
  • it was unencumbered and of high value; and as it omitted the word ‘undertakes’ which the Code emphasises.

Commentary

If P&P’s claims for breach of warranty had been successful, then the effect of this would have meant that sellers’ solicitors would be guaranteeing their client’s identity and warranting that their client was the true owner. Unlike with breach of trust claims, the court has no discretion to grant defendants that sellers’ solicitors only owe their client a duty of care, and not the buyer. It also confirms that the question of title to a property is a matter to be dealt with by solicitors. Unless a buyer is able to establish that an estate agent owes a duty of care, then the agent, despite their own anti-money-laundering obligations, will not be liable to the buyer in respect of the seller’s identity. Both P&P and Purrunsing demonstrate that solicitors need to fast completion was required.

Judge Pelling QC held that a reasonable solicitor adopting a risk-based approach should have considered whether the client was the owner of the property.

The judge in this case concluded that had he found Owen White was in breach of trust he would not have granted Owen White relief under the 1925 Act. Despite the level of sophistication of the fraud, there were various factors which Ms Lim should have considered. Two relevant factors included the quick completion and Mr Harper’s age. Given the date of birth on Mr Harper’s false passport, he would have purchased the property at 23 years old which, although not impossible, was unlikely. Also, the judge believed that Mr Harper’s true position would have been revealed had Ms Lim asked for more information about his identity, residence and supposed purchase in Dubai.

Breach of undertaking

P&P also claimed that Owen White was in breach of the undertakings provided in paras 7(i) and 10 of the Code. Paragraph 7(i) states:

The seller’s solicitor undertakes:

  1. to have the seller’s authority to receive the purchase money on completion...

The judge decided that Owen White was not in breach of para 7(i) because reference to ‘the seller’s’ was reference to the person agreeing to sell the property. It was not a reference to the true owner of the property.

With regard to para 10, quoted above, the judge held that this statement was not an undertaking relief for breach of warranty and, therefore, solicitors would be strictly liable for their client’s fraud even if they had acted in good faith and reasonably.

Although not obliged to do so, due to the risks highlighted in these judgments, going forward buyers’ solicitors may wish to raise an enquiry with the seller’s solicitor seeking confirmation that their client is the true owner of the property. If the seller’s solicitor provides such a confirmation, a claim for breach of warranty is more likely to succeed. However, Purrunsing is a clear example of a solicitor acting cautiously in response to a similar enquiry in order to avoid confirming a link between their client and the property. If buyers’ solicitors do raise these enquiries, the onus will be on them to inform their client of the seller’s response and the risk of proceeding if the seller’s solicitor does not confirm their client’s identity.

In order to provide protection for a buyer, a buyer’s solicitor may wish to seek an undertaking from a seller’s solicitor that it will only release completion moneys upon receiving confirmation that it acts for the true seller. Whether any selling solicitor would be willing to give such an undertaking, given its potential liability, remains unknown.

Perhaps unsurprisingly, absent special circumstances such as express representations to the buyer’s solicitor, this case also confirms the general rule take a risk-based approach to their anti-money-laundering obligations. Certain factors, such as a speedy transaction, should alert a reasonable solicitor to the risks and that simply obtaining documentary evidence of a client’s identity and address may not suffice. If a seller’s solicitor is found to be in breach of trust, the two cases demonstrate that the solicitor will find it difficult to obtain relief under the 1925 Act if it can only show that it complied with the basic anti-money-laundering obligations. These basic obligations are obtaining proof of identity and address. Solicitors need to consider whether any other facts justify making further enquiries. It is understood that the trial judge has given permission to P&P to appeal and so this important debate is likely to be reconsidered in the future.

References

Excel Securities plc v Masood & ors [2009] EWHC 3912 (QB)

Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560

P&P Property Ltd v Owen White & Catlin LLP & anor [2016] EWHC 2276 (Ch)

Penn v Bristol & West Building Society & ors [1997] EWCA Civ 1416

Purrunsing v A’Court & Co & anor [2016] EWHC 789 (Ch)

This article was first published in Property Law Journal (December2016/January 2017).