The Court of Appeal last week handed down its ruling in the case of Dreamvar v Mishcon de Reya. The impact for the industry and profession is potentially huge – will it lead to a complete overhaul of the way property lawyers deal with purchase money?

What happened?

Mishcon de Reya (MdR) acted for Dreamvar in the purchase of a London property. The “seller”, represented by Mary Monson Solicitors (MMS), turned out to be a fraudster who posed as the legal owner of the property. Dreamvar was thus conned out of £1.1million (the funds having been dissipated to accounts in China after completion) and sued both MMS and MdR.

This case was linked to that of P&P Property Ltd v Owen White & Catlin LLP, in which money was lost by P&P in a similar case of identity fraud. In that case the purchaser brought a claim against the vendor’s solicitors (OWC) rather than its own solicitors.

At first instance, MdR was found to be in breach of trust in releasing the purchase monies in the fraudulent sale, but the claims against MMS were dismissed. MdR and Dreamvar appealed the finding that there was no breach of trust or undertaking by MMS.

The Court of Appeal ruled that MdR, as solicitors for the buyer, were liable for the losses suffered by their client, and that MMS, as solicitors for the fraudster, were also liable, meaning that MdR can sue them for a contribution. In the linked case, the vendor’s solicitors were also held liable for their fraudulent client and ordered to repay the money buyers had paid. Critically, it was held that “…both OWC and MMS acted in breach of trust when they released the purchase monies to or at the direction of their clients(Lord Justice Patten). This introduces a huge risk to seller’s solicitors at the stage of every standard property transaction when they transfer money from the buyer to the seller via their client account. The reason for this is that, because the money passed through the Solicitors’ client account they took on a duty as trustee rather than a simple duty to act with reasonable care and skill.

What’s the likely impact?

It’s hard to overstate the potential impact for seller’s solicitors – the ruling means that they effectively become guarantors of the legitimacy of property transactions. Solicitors who are hoodwinked by increasingly sophisticated fraudsters and transfer purchase monies to them out of their client account may be in the frame for the entire cost of a property transaction. This of course will have a knock on impact on relevant insurance premiums.

Few solicitors are likely to have an appetite for this kind of risk and smaller firms may even be put out of business by it. But, as they say, necessity is the mother of invention. The savvy seller’s solicitor will look to adapt their practice in light of this new risk. Given that the breach of trust occurred when the funds were transferred to the fraudster, one option may be to move away from the traditional model of using the client account, which by its very nature involves holding money on trust.

The new draft Solicitors Accounts Rules, likely to come into force next year, provide an alternative to holding client money by allowing firms to use Third Party Managed Accounts (TPMA). While using a TPMA doesn’t exempt a solicitor from complying with regulatory requirements, it does mean that the money is never held or received by the solicitor. The use of TPMAs may therefore mean that, as seller’s solicitors never hold purchase monies on trust, they cannot be held liable to a breach of trust if they and their client fall foul of a property scam.

In the longer term, there may be more creative means of avoiding liability, such as the use of block chain for transferring purchase money. What is clear, in yet another step away from the traditional model for law firms, is that conveyancing lawyers will need to adapt and innovate in order to survive.