Considers the Law Commission's proposal to reform the Land Registry indemnity scheme for victims of fraud

As many solicitors undertaking conveyancing work will be painfully aware, the exposure faced by conveyancers inadvertently involved in a fraudulent property transaction has been elevated by the Court of Appeal's decision earlier this year, in Dreamvar (UK) Limited v Mishcon de Reya [2018] EWCA Civ 1082.

In this article, we look at the Law Commission's proposal in July 2018 to reform HM Land Registry's indemnity scheme for victims of fraud, and how that differs from solicitors' liability in the Dreamvar scenario.

"Dreamvar" Liability for breach of trust

The Court of Appeal in Dreamvar were asked to decide which innocent party should bear the liability in circumstances where the purchaser, Dreamvar, had contracted to purchase a property in London. Dreamvar's solicitors paid over the purchase price to the vendor's solicitors, and an imposter posing as the vendor promptly scarpered with the completion money. The transaction was never registered because it quickly became apparent that the transaction was bogus.

The court held that (i) solicitors who pay away their client's money to a fraudster do so in breach of trust and; (ii) the solicitors may not be entitled to the court's discretionary relief from liability under s.61 of the Trustee Act 1925, even if the solicitors' conduct was wholly exemplary and in no way caused or contributed to the fraud. In most cases, the solicitors, by their insurance, will be better able to absorb the loss than their client.

The Court of Appeal's decision is a policy based decision, addressing the difficult question of which innocent party should bear the loss arising from the fraud of another.

The current indemnity scheme

The effect of section 58 of the Land Registration Act 2002 is to provide cover for those who suffer loss when the title register needs to be rectified to correct an error caused by fraud or forgery.

Section 58 provides that when a person becomes registered as proprietor of a legal estate, he or she becomes the owner of that estate. The title guarantee applies even in cases of fraud. In their report on the operation of the indemnity scheme, the Law Commission give the following example:

"A is the registered proprietor of land. A fraudster, impersonating A, sells the land to B. B becomes the registered proprietor in place of A. The fraudster disappears with the purchase money.

If it were not for the title guarantee, A would still be the owner of the land. The fraudster had no right to sell the land to B. But because of the title guarantee, when B becomes registered, B becomes the owner of the land."

The Land Registry stands in the position of an insurer of first resort for fraud that makes it into the register. The costs of indemnity paid by HM Land Registry to victims of fraud are ultimately borne by all users of the land registration system through the fees they pay for registration. This scheme reportedly cost the Land Registry £58 million in the last decade. Although the Land Registry has some rights of recourse to attempt to recover these costs from those at fault, these rights are limited. They do not generally enable the Land Registry to recover from the conveyancer acting for the fraudster, even if the conveyancer has been negligent.

Proposed reform

The Law Commission takes the view that the Land Registry is not best placed to detect fraud and that it is largely dependent on the checks undertaken by the parties' conveyancers.

The Law Commission has therefore suggested that because the risk lies primarily with the Land Registry, conveyancers may not be incentivised to develop and follow best practice for identity checks.

The Law Commission has therefore made two recommendations:

  1. For conveyancers to owe a statutory duty of care, when handling a transaction that will involve an application to the registrar, to take reasonable care to verify the identity of their client.
  2. The steps taken to verify identity should be specified by HM Land Registry in directions (to be the subject of further consultation).

The effect of a new statutory duty of care is that, should a conveyancer fail to comply with the directions for verifying identity, the Land Registry indemnity scheme will still compensate the affected party, but the Land Registry will then be entitled to pursue a recovery from the conveyancer.

Commentary

The principal effect of the proposed reform is to extend the circumstances in which the Land Registry will be able to recover its outlay from solicitors who fail to undertake adequate checks on their vendor client's identity. At present, the Land Registry can pursue a vendor's solicitor if the solicitor was fraudulent. Otherwise, the Land Registry can only enforce the right of action that the compensated party had. So, in circumstances where an innocent purchaser is defrauded, the Land Registry may currently lack a right of redress against an honest, but negligent, solicitor acting for the vendor.

Nevertheless, the recommended reform is to be broadly welcomed; there is presently a great deal of uncertainty about the steps to be taken by conveyancers to verify identity. Anti-money laundering regulations and lenders' requirements already differ and there is no clear standard of what amounts to reasonable conduct. A clear set of directions will enable conveyancers to be confident that, if followed, they will not be liable to the Land Registry.

HM Land Registry's directions will, of course, need to be carefully considered and be both practicable and realistic. Assuming a sensible approach is taken, however, this would seem to be a step in the right direction in the fight against identity fraud.