For Sale – No strings attached

P&P Property Limited v (1) Owen White & Catlin LLP and (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch) (“P&P”)

Summary

In this case a legitimate and unfortunate purchaser was unable to recover its losses resulting from a fraudulent transaction where the fraudster had disappeared with the money.

The Court found that neither the seller’s solicitors nor the estate agents were liable as they had not given an express warranty as to the identity of the seller. It also refused to impose a duty of care on estate agents in respect of purchasers.

The case gives a useful insight on warranties of authority and their application to solicitors and estate agents. It also considers the extent to which solicitors and estate agents are liable to ascertain the true identities of their clients. It should sound a warning note for anyone who is considering purchasing property to ensure that these checks are carried out and to consider whether warranties should be sought.

It should be noted that various legal issues were considered by the Court. This article focusses on P&P’s claim for breach of warranty of authority and negligence.

The facts

An imposter posing as the legitimate owner of a property in Hammersmith (the “Property”) instructed Winkworth estate agents and solicitors Owen White & Catlin (“OWC”) to sell the Property. Both OWC and Winkworth believed they were acting for the legitimate owner.

Winkworth contacted P&P to ask if P&P would be interested in purchasing the Property. A sale was agreed and OWC duly met with an individual whom they believed to be the legitimate owner. In fact, it was a fraudster.

OWC carried out anti-money laundering and Know Your Client enquiries and took a copy of what they believed to be the true owner’s passport, utility bill and bank statement. Winkworth did not carry out any anti-money laundering enquiries.

P&P transferred £1,030,000 to OWC towards the purchase price and eventually the net sale proceeds were transferred to the fraudster’s account in Dubai.

P&P began to start carrying out renovation works to the Property. Only at this point did the true owner become aware of the situation, and the fraud was discovered. Unfortunately for P&P, by this stage, both the fraudster and the funds had disappeared.

Breach of Warranty of Authority

One of the key areas of law relevant to fraud which was considered by the Court was breach of warranty of authority. The Court considered whether OWC and Winkworth were liable on the basis that they represented that they had authority to act for the true owner of the Property, when they did not. P&P argued that it had agreed to purchase the Property and arranged funding in reliance on such warranties of authority.

Breach of warranty of authority claims arise where a person represents, by word or conduct, that he has authority to act on behalf of another, and a third party is consequently induced to act in a way in which he would not otherwise have acted. In such a situation, the representor is deemed to warrant that the representation is true and is liable for any loss caused to the third party by a breach of that warranty. Liability is strict which means that the representor is in effect a guarantor of his authority and is liable even if he acted in good faith and with reasonable care.

Breach of warranty of authority is particularly relevant to fraud claims because treating the representor as having impliedly warranted his authority gives the third party a claim against the representor. Without this avenue, the third party may be left without recourse if the fraudster has disappeared. This was the case for P&P.

The decision

The Court held that neither OWC nor Winkworth were liable for breach of warranty of authority.

If a client appoints a solicitor, the only warranty that a third party dealing with that solicitor can rely on is that the solicitor has authority to act on behalf of the client. This does not go so far as to give an implied warranty that the client is the true owner of the property. Therefore, OWC was held not to be liable for breach of warranty of authority.

In relation to the potential liability of the estate agent, although the Court in P&P did agree that, as a general principle, any agent who claims to have authority beyond what in fact exists may be liable to a third party for breach of warranty of authority, Winkworth was not liable in this case. Winkworth had merely informed P&P of the name of the person selling the Property and had not warranted that it had any authority to act for the true owner. The fact that estate agents are required to carry out anti-money laundering checks does not go so far as to mean they are to be treated as having impliedly represented that their client is the true owner.

Negligence

Another key legal issue which was considered was whether an estate agent owes a duty of care to a purchaser.

P&P argued that Winkworth had been negligent as it had not carried out due diligence as to the identity of “the seller” and did not carry out any anti-money laundering checks.

In considering the potential liability of Winkworth, the Court assessed whether it is fair, just, and reasonable that the law should impose a duty of care on estate agents for the benefit of potential purchasers. It held, although Winkworth provided ‘advice’ to P&P, in that it suggested that P&P might have wanted to purchase the Property, this advice did not amount to an objective assumption of responsibility. As Winkworth had not assumed responsibility to P&P, to impose liability upon it would have created an onerous obligation with which all estate agents would have to comply. Accordingly, the Court held that Winkworth was not negligent and did not owe a duty of care to P&P.

Consequently, P&P was not entitled to recover its losses from OWC or Winkworth as the Court found that there was no breach of warranty of authority or negligence by either party. This left P&P with no other option to recover the substantial sums that it had paid.

Our comments

The decision demonstrates that solicitors and estate agents are not liable for losses arising from fraudulent transactions, as long as they did not provide express warranties as to the true identity of their client.

The legal position following P&P means that estate agents do not owe a duty of care to purchasers and may not be accountable to purchasers if they do not carry out due diligence or anti-money laundering checks.

Accordingly, the current law does not offer much protection for victims of property fraud where the fraudster has disappeared. Purchasers should ask their solicitors and estate agents to reduce the risk of property fraud by carrying out the necessary due diligence and anti-money laundering checks early on in a transaction. The more layers of checks required, the more likely it is that red flags will be raised and a fraudster will be caught.

On a practical note, it is also advisable for both solicitors and estate agents to keep a clear record of all the due diligence carried out throughout a transaction, as should the transaction turn out to be fraudulent, such evidence will be essential in determining liability.