Sweet dreams – or nasty nightmares?

Dreamvar (UK) Ltd v Mishcon de Reya and others [2016] EWHC 3316 (Ch)

Summary

The High Court has considered the liability of solicitors where a fraudulent property transaction left the buyer substantially out of pocket.

The Court held that, even though the fraudulent seller’s solicitors admitted that they had not carried out the required identity checks on their client, they were not liable for breach of trust, warranty or undertaking.

However, even though the buyer’s solicitors had not been negligent in not advising their client about the risk of fraud, they were in breach of trust. This was because they had only been authorised to release their client’s purchase monies for a genuine completion of a genuine purchase. Consequently they were liable to refund the buyer.

Whilst this case will cause concern for conveyancing solicitors and their insurers, it offers some comfort to the victims of property fraud, who otherwise have no recourse if the fraudster has disappeared with the funds.

The facts

The subject property was a substantial mews house in Earls Court that was actually owned by an individual named Mr David Haeems. The house was unoccupied and not subject to a charge.

On 1 September 2014, estate agents informed Dreamvar that the Property was for sale and that a quick sale was required because the owner was getting divorced. Dreamvar made an offer of £1.1 million which was accepted.

Dreamvar instructed solicitors, Mishcon de Reya (“MdR”), to act for Dreamvar on the purchase. Mary Monson Solicitors (“MMS”) were instructed to act for the purported seller. The sale documents named Mr Haeems as the owner/seller, and gave an address for him in Catford.

MdR was instructed to proceed with the sale as quickly as possible. It prepared a Report on Title for Dreamvar, but did not highlight the risk of identity fraud or the consequences.

Meanwhile the seller had instructed MMS to transfer the completion money to the client account of another firm of solicitors. MMS agreed to do so after receiving apparent confirmation on headed notepaper from the second firm. On 17 September 2014, simultaneous exchange and completion took place. The money was duly transferred and Dreamvar began to refurbish the property.

When MdR came to register the title, it became apparent that the transaction had been fraudulent as the Land Registry could not link the true owner to the address given on the identity documents provided by MMS. By this time neither the fraudster nor the money, could not be located.

Dreamvar sued:

  1. MdR for negligence and breach of trust; and
  2. MMS for breach of trust, breach of undertaking and breach of warranty of authority. This article focuses primarily on the case against MdR, as that is where the Court’s decision is potentially contentious.

The law

In a property transaction, the buyer’s solicitor holds the purchase money on trust for the buyer pending completion. When the money is transferred to the seller’s solicitor, it is then held on trust by the seller’s solicitor for the buyer pending completion. Therefore, solicitors act as trustees in such transactions.

All trustees are subject to a duty of care. A trustee could be in breach of trust for failing to comply with either the terms of the trust or its fiduciary duties. If a trustee is in breach, he has a personal liability to the beneficiary to reconstitute the trust fund or pay compensation for all losses that would not have occurred “but for” the breach of trust.

There is an exemption at the discretion of the Court under Section 61 Trustee Act 1925. If the Court finds that the trustee has acted honestly and reasonably, then it can award relief from the personal liability. As part of this process, the Court will consider the effect of granting relief on both the beneficiary and the trustee. Consequently, the financial position of the parties, and their access to insurace, are important factors for the Court when deciding whether to grant relief.

The issues

In this case, Dreamvar argued that MdR were in breach of trust as they only had authority to release the purchase funds in connection with a ‘genuine’ completion, ie as opposed to a fraudulent completion.

In response, MdR argued that the money was released in exchange for undertakings given in accordance with standard conveyancing practice and, therefore, there was no breach of trust. MdR also sought relief under Section 61 on the basis that they acted honestly and reasonably.

The decision

The Court held that:

  • MdR were not negligent in not advising Dreamvar of the risk of fraud;
  • MdR were in breach of trust as they were only authorised to release the purchase monies for a genuine completion of a genuine purchase; and
  • Although MdR had acted reasonably and honestly, the Court did not grant relief under section 61 of the TA 1925

Consequently MdR was ordered to pay Dreamvar over £1 million.

A key factor in this decision was the fact that MdR were better able to absorb the loss than Dreamvar. The Court considered the loss to be disastrous for Dreamvar, which had lost the purchase price and received nothing in return. Dreamvar was also uninsured, whereas MdR had an insurance policy.

Our comments

This case follows closely behind the recent decision in P&P Property Limited v (1) Owen White & Catlin LLP and (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch). However, in that case, the seller’s solicitor and estate agents were found not liable and the innocent purchaser was left with no avenue to recover its loss. Added to the fact that MdR had been found not to be negligent, this makes Dreamvar even more of a surprising decision. It is less surprising that MdR is appealing, and so the position may change.

As matters currently stand, there is an urgent need for clarity in the law and guidance as to what steps a buyer’s solicitor should take to reduce its risk of liability for property fraud.

The crux of the issue in these property fraud cases is that the main cause of the loss is the fraudster who has disappeared and, therefore, the Court is required to assess liability between the innocent parties to the transaction. In this regard, the current decision offers some comfort to buyers. It will be interesting to see how the law relating to property fraud develops over the coming months as both the Dreamvar case and the P&P case are due to be appealed this year.

In the interim, until the law in this area is clarified, it is advisable for property owners to sign up to the Land Registry Property Alert Service which sends out free notifications if certain activity occurs on a registered property. Furthermore, both solicitors and property purchasers should seek to obtain insurance to cover any potential fraudulent transactions.