On 1 May 2019, a new Code will be implemented which, following Dreamvar, underlines the fact that the burden of detecting fraudulent sellers falls squarely on the sellers' solicitors.
The new Code for Completion by Post 2019 has been updated to reflect last year's Court of Appeal judgment in Dreamvar (UK) Ltd v Mishcon de Reya and P&P Property Ltd v Owen Catlin LLP. The new Code clarifies the meaning of the undertakings in the Code, in particular the meaning of the term "seller".
The risk of fraudulent property sales (where imposters pose as the true owners of a property and then purport to sell it) has been a concern for many years. Often the fraud is only discovered after the fake "completion" has taken place. The innocent buyer finds they have parted with their money but acquired nothing. A buyer who finds themselves in this unfortunate situation will have potential claims against their own conveyancers in breach of trust and (probably) in negligence too. They will also have potential claims against the solicitors who acted for the imposter seller. Typically, those claims would be for breach of trust, breach of warranty of authority and breach of undertaking.
A breach of undertaking claim will normally arise from the language of the Code (assuming the Code applies to the transaction). If the Code applies then the seller's solicitor will be deemed to have provided an undertaking before completion that they had the seller's authority to receive the purchase money. However, does the term "seller" in the Code mean the true legal owner of the property or just the imposter(s) purporting to sell it?
Last year, the Court of Appeal gave a clear answer to that question in the joined cases of Dreamvar (UK) Ltd v Mishcon de Reya and P&P Property Ltd v Owen Catlin LLP. In short, the court found that the term "seller" in the Code means the true legal owner (not the fraudsters). Consequently, in cases of this kind, where the Code applies, the solicitors who acted for the fraudulent "sellers" are bound to be found in breach of the undertaking in the Code.
Following the Court of Appeal's judgment, the Law Society has acted to update the Code. The new version of the Code states that references to "Seller" in the Code means "the person or persons who will be at the point of completion entitled to convey the legal and/or equitable title to the property" – in other words the true legal owners, not the imposters.
The new version of the Code finally implements the position following Dreamvar, providing welcome clarity to solicitors practising in this area. Conveyancers who act for sellers on transactions where the Code applies can now be in little doubt as to the nature and scope of the undertakings they will be required to provide and the risks they will be exposed to if their clients turn out to be fraudsters. It goes without saying that practitioners in this area must do everything they can to make sure their customer due diligence and "know your client" procedures are as rigorous as possible. It will be interesting to see whether there will be a rise in the number of companies offering new bespoke services or software to assist firms manage risk in this area.
Meanwhile, whilst many of the legal questions that arose in fraudulent transaction cases have now been answered by Dreamvar, there are still a few areas where there remains scope for potential argument. In each case, it will be important to identify whether the Code applied (and if so, which version). The solicitors on either side of the conveyancing transaction can expressly agree to adopt the Code and the Seller's solicitor will normally be asked to confirm this on the standard Completion and information and undertakings form (TA13). Additionally, adoption by the parties of the Law Society's Conveyancing Protocol will entail an implied agreement that the Code applies. Adoption of the Conveyancing Protocol is mandatory for firms that wish to benefit from the Law Society's Conveyancing Quality Scheme accreditation.
More difficult questions concern the attribution of liability between the buyer and seller's solicitors, assuming both are found liable to the Claimant. The Court of Appeal's comments in Dreamvar, suggested that (if need be) these issues could be determined by way of proceedings under the Contribution Act 1978. In such proceedings, the court would have a wide discretion to apportion liability between the solicitors for damage caused to the purchaser, according to what is "just and equitable, having regard to the extent of that person’s responsibility for the damage in question." However, the buyer's solicitors are likely to assert their own breach of undertaking claims against the seller's solicitors (based on the undertakings in the Code). The interplay between such claims and possible Contribution Act proceedings should keep professional negligence lawyers busy for the foreseeable future. There has not yet been a test case giving clear guidance on how the courts will approach these questions. In practice, these cases tend to settle before trial and we would expect that trend to continue.