Alarm Bells are Ringing – Identity Fraud in Property Transactions

On 15 May 2018 the Court of Appeal (“CAPP”) delivered its hotly anticipated findings in the joint appeals of Dreamvar (UK) Limited v Mischon De Reya and Mary Monson Solicitors and P&P Property Limited v Owen White & Caitlin LLP and Crownvent Limited.  The first instance decisions in both cases caused considerable alarm in the legal world concerning the scope of a solicitor’s liability in cases involving identify theft and fraud.

So what was the fraud?

Each case involved a person posing fraudulently as the owner of mortgage free homes in London in which the real owners did not reside at the properties, the purported seller had connections abroad and a quick sale at reduced market price was sought.  In both cases, quite importantly, inadequate Anti-Money Laundering and identity checks (“AML checks”) were carried out by the seller’s solicitors resulting in the fraudster’s impersonation of the true owners going undiscovered until after the sale, at which point the fraudster and money had disappeared.  

A high level summary of the facts and findings of the court in each case is as follows:

P & P Property Limited v Owen White & Caitlin LLP 

• The seller’s solicitor obtained a passport ID of the seller (which we now know was a false document). They did not fully establish proof of address, they did not pick up on inconsistent information regarding ID provided at various stages of the transaction and they did not carry out further checks required as a result of queries raised by their electronic AML identity checks.  
• The buyer’s solicitor made a claim against the seller’s solicitors for breach of trust, breach of warranty of authority, breach of undertaking and negligence, stating respectively that the solicitor had held themselves out as acting for the real property owner, that they were negligent in not checking identity and for sending the purchase funds over to the fraudster.  
• No claims succeeded against the solicitors at first instance, the full reasons for which are set out in that judgement.  As a result the buyer was left essentially with no relief for the fraud that had been committed against them.          

Dreamvar (UK) Limited (“Dreamvar”) v Mischon De Reya (“Mischon”) and Mary Monson Solicitors 

• Mischon who acted for the buyer were informed at early stages of the transaction by the seller’s solicitor that they had not yet carried out their AML checks on the seller.  It later transpired that the only proof of ID obtained was a certified copy drivers licence (the document’s reliability being questionable in itself) and a TV licence which is not an acceptable form of proof of address.  The seller’s solicitor had never actually met the seller and again, the sales pack and draft sales contract revealed some inconsistencies relating to ID which were not acted on.   

• The buyer made a claim against the seller’s solicitor for breach of warranty of authority, breach of trust and breach of undertaking.  Unlike in the former case, the buyer also made a claim against their own solicitor for negligence and breach of trust.

• The court at first instance dismissed all claims against the seller’s solicitor but did find that Mischon had breached its duty of trust to their client when they transferred the purchase funds to the seller’s solicitors.  This was held even though Mischon had not breached any obligation under statute or contract and had behaved reasonably in every practical sense.

• It is worth noting that the court felt that as Mischon was insured against such events, it was the only “practical remedy” available to the buyer to cover their losses.   

The findings in both cases caused understandable unease in the conveyancing world, particularly for solicitors acting for buyers where it is not usual practice to carry out identity checks on the seller with whom they have no access and where the seller’s solicitor should be carrying out their own identity checks.   

So what happened at appeal?

The CAPP found that in both cases the seller’s solicitors were liable for breach of trust, therefore making both sets of solicitors jointly liable. In short, the reason relied on by the CAPP was the fact that the solicitors parted with the purchase monies in transactions where the true owner was not selling the property. 

In both instances the CAPP followed the Law Society’s Code for Completion by Post (2011 edition), which provides that: 

• a buyer’s solicitor is entitled to part with completion monies on their client’s instructions to do so on the ‘completion’ of a purchase; and 

• a seller’s solicitor only has authority to release funds to their client at ‘completion’, with completion meaning a genuine sale by a genuine seller.  

As this was not the position in either case, both solicitors had therefore breached their duty of trust.  No liability was found in relation to any of the other grounds of liability examined by the CAPP.

This means that Mischon, who acted for the buyer in the Dreamvar case, remained liable albeit they were held to share liability with the seller’s solicitors for their own failings.  It is not clear how this liability will be divided between each solicitor, but given that it was the seller’s solicitor who failed to check the identity of their client it is possible that this will be reflected in the respective firms’ contributions. 

So what now?

What is interesting from the appeal is that there may now be a court based insurance policy in place to protect innocent buyers who fall victim to fraud.  At the point of registration of a sale, HM Land Registry’s statutory insurance bites but until then, and in the absence of a buyer taking out independent insurance during the conveyancing process, it could be the solicitors’ insurance paying out to cover these types of losses. That is not really an ideal solution going forward.  

With fraudsters becoming ever more sophisticated in their dealings, it has never been more important to ensure that adequate measures are in place to navigate around the risks associated with such frauds. Undertaking proper due diligence and obtaining appropriate legal advice is a ‘must’.

This article has not examined in detail all findings of the courts at both stages and has not commented on the actions of the estate agents in these cases.

Article by Maran Dean