In a recent case of property fraud involving an imposter posing as a seller of a property, the High Court found the purchaser’s solicitor liable for breach of trust and refused the solicitor’s application for relief under s.61 of the Trustee Act 1925 despite the fact that the solicitor had acted both honestly and reasonably. This is the latest in a number of cases against solicitors arising out of the purported sale by a fraudster of a property to an unsuspecting buyer, see our comments on Purrunsing v A’Court & Co and P&P Property Limited v (1) Owen White & Catlin; and (2) Crownvent.

Background Facts

Mr David Haeems was the registered owner of an unoccupied and unencumbered property in London (the “Property”). In September 2014, a fraudster impersonating Mr Haeems purported to sell the Property to a small development company called Dreamvar (UK) Limited (“Dreamvar”), owned by Mr Vardar, for the sum of £1.1 million. Mr Vardar started planning refurbishing the Property with the intention of selling it on. In November 2014, following a periodic check made by the Land Registry, the nature of the fraud was discovered. This discovery was made before Dreamvar was registered as the owner of the Property and since the fraudster and the money paid by Dreamvar had disappeared, Dreamvar was unable to recover the sum paid of £1.1 million.

The judgment

Dreamvar sought to recover the losses it had suffered as a result of the fraud. It brought claims against Mishcon de Reya (“MdR”), the solicitors instructed by Dreamvar on the purported sale, and Mary Monson Solicitors Limited (“MMS”), the solicitors instructed by the fraudster.

Claims against MMS

  1. Breach of trust

    This element of the claim was based on the argument that MMS held the purchase monies on trust for Dreamvar, and was only authorised to release them on a genuine completion of a genuine transaction, which did not occur.

    The key question in relation to this allegation was whether MMS was only authorised to release the completion monies in the event that there was a genuine completion, or whether it was permitted to use them for a “pretend” completion (as was the case here). After a detailed consideration of the decision in P&P Properties, Mr Justice Railton concluded that in this case MMS was entitled to release the purchase monies even if the transfer documentation received was not genuine, and there was consequently not a genuine completion. He therefore rejected the allegations of breach of trust against MMS.

  2. Breach of undertaking

    Dreamvar brought this claim on the basis that in accordance with the undertakings required under paragraph 7(i) of the Law Society Code for Completion by Post (2011 edition) (“the Code”,) given at completion of the transaction, MMS had given an undertaking that it had the authority of the real Mr Haeems, the real owner of the Property, to receive the purchase monies on completion.

    The court held that MMS was not in breach of the undertaking required under paragraph 7(i) of the Code because the wording of this section in the Code did not impose an obligation on MMS to have the authority of the registered owner to receive the purchase monies on completion.

  3. Breach of warranty of authority

    Dreamvar argued that, in acting for the person who was purporting to sell the Property, MMS had warranted that it had the authority of the registered owner of the Property. Alternatively, Dreamvar claimed that MMS had warranted that it acted for the person claiming to be Mr Haeems, the registered owner of the Property and that it had not exercised reasonable care and skill in establishing his identity.

    Whilst MMS accepted that it had warranted that it had a client, it denied that it had given any wider warranty in respect of him.

    Mr Justice Railton agreed with the judge in P&P that

    The basic representation is only that an agent has authority to act for another…an agent does not, simply by acting as agent, represent that his principal will perform the contract or is solvent or 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.

    He pointed to the fact that references to “seller” in paragraph 7(i) of the Code are not references to the registered owner of the property, but only to the person purporting to sell it. In addition, he considered that an important element of this claim was that the recipient of the warranty understood it as such, and he did not believe the solicitor from MdR understood MMS to be warranting that its client was the registered owner of the Property.

    In relation to the second element of the claim, the judge pointed to the evidence given by the solicitor from MdR that whilst she regarded the responsibility for verifying the seller’s identity to lie with MMS, she did not consider that this amounted to an obligation owed by the seller’s solicitor to the purchaser. As a result he did not accept that MMS had promised to exercise reasonable care to establish its client’s identity.

    He therefore rejected Dreamvar’s claim that MMS was in breach of warranty of authority.

Claims against MdR

  1. Negligence

Dreamvar alleged that MdR had been negligent in failing to identify a number of features in the transaction that should have alerted it of the possibility of fraud and then failing to advise Dreamvar of this fact; and for failing to seek an undertaking from MMS that it had taken reasonable steps to establish its client’s identity.

Mr Justice Railton held that the view reached by MdR on the basis of the facts known to it at the time of the transaction: that there was not a real risk of identity fraud, was one which a competent solicitor, acting with reasonable skill and care would have reached. Accordingly, he concluded that MdR was not negligent in failing to inform Dreamvar about the risk of fraud, or in failing to advise them either to withdraw from the transaction or to investigate the seller further. In relation to the second allegation, after considering the conditions set out in the Code he concluded that MdR had not acted unreasonably by failing to obtain an undertaking from MMS that it had taken reasonable steps to establish its client’s identity.

  1. Breach of trust

This claim was brought on the basis that MdR was only authorised to release the purchase monies (which were held on trust) on completion of a genuine purchase transaction but it had paid the sum to the fraudster so there had not been a genuine transaction and MdR was therefore in breach of trust.

Mr Justice Railton agreed that the completion monies paid into MdR’s client account were held on trust by MdR for Dreamvar. Accordingly, MdR’s ability to pay away the purchase monies depended on the terms of the authority and instructions provided by Dreamvar. He considered that it was an implied term of the retainer that MdR would only release the purchase monies on completion of the purchase of the Property. He also agreed that in this situation completion meant a “genuine” completion. Since a genuine completion did not occur in this instance, he held that MdR was in breach of trust by transferring the purchase price to MMS.

Application for relief from liability by MdR

The judge then considered an application by MdR for relief from personal liability under s.61 Trustee Act 1925, which states:

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust…but has acted honestly and reasonably and ought fairly to be excused for the breach of trust…then the court may relieve him either wholly or partly from personal liability for the same.

Whilst Mr Justice Railton acknowledged that MdR had acted honestly, and that its conduct was reasonable, he decided that MdR should not be excused for the breach of trust. He therefore declined the relief sought. In reaching this conclusion, he took into consideration a number of competing factors, including the disastrous consequences of the fraud on Dreamvar, which resulted in the company losing the purchase price of £1.1 million and receiving nothing in return. He also pointed out that Dreamvar was a reasonably small company which did not have insurance or the ability to insure against the risk of such a fraud. In comparison, MdR was a large firm with insurance cover that was sufficient the full loss suffered. The judge was conscious that in the event that he granted MdR relief from liability then Dreamvar would be left without a remedy: there was no prospect of recovering the purchase price from the fraudster, and Dreamvar had no claim against MMS.

Accordingly, Dreamvar succeeded in its claim for breach of trust against MdR, and the judge awarded it damages in the sum of £1,080,200.

On an initial reading of this judgment the outcome seems severe on the purchaser’s solicitor, particularly in light of the fact that the judge accepted that they had acted honestly and reasonably, and did not find that they had been negligent. However, it is clear that in reaching his decision Mr Justice Railton was attempting to allocate the liability arising out of the fraudulent transaction, taking into consideration which party was best placed to absorb the loss. He was strongly influenced by the fact that MdR had insurance to cover this type of claim, whereas, if Dreamvar’s claim was unsuccessful they had no other form of remedy which could have had catastrophic consequences for the company.

An important point noted by Mr Justice Railton in this case was that MMS did not meet with the fraudster in person and accepted a driving licence and a TV licence as forms of client ID. It was commented that there were some oddities on the face of the driving licence, which were not followed up, and a TV licence is not a source which the Law Society’s Anti-Money Laundering guidelines list as being an acceptable form of verification for clients. While MMS accepted that these documents were not adequate proof of identity and it should have insisted on meeting the client face to face with proof of identity and proof of address, MMS did not owe a duty to Dreamvar.

This decision highlights the very real risk that fraudulent transactions pose to society in general, and serves as a reminder of the need for all parties to exercise constant vigilance in light of the increasingly sophisticated methods fraudsters are adopting.

Permission has been granted for an appeal to the Court of Appeal (and there are rumours that the Law Society may seek to intervene) and this, together with the outstanding appeal that is due to be heard in P&P Property, may provide additional guidance for all parties to a transaction on these worrying developments in relation to fraudulent property transactions.