Is English law on property fraud fit for purpose?

Introduction

From a client’s perspective, it is not unreasonable that a client engaging a solicitor to acquire legal title to a property should expect, on completion, to hold an undisputed title to the property.

The process of buying and selling a property is, in essence a simple one. The buyer pays the purchase price and, in return, the seller transfers title to the property. Where an imposter manages to defraud innocent buyers of property by successfully impersonating the actual owner of the property, absconding with the sale proceeds then:

• who, as between the ‘seller’s’ solicitors (and estate agent) and the buyer’s own solicitors, if any of them, should be liable for the lost purchase monies; and
• if the fraud is not detected until after the buyer is registered with title, how does the title registration system deal with reconciling the claims of the defrauded buyer and the innocent (but true) owner.

Over the last two years, the courts in England and Wales have had to answer these two issues. In doing answers so the courts have made a strong case for the proposition that English law on fraud is fit for purpose.

Dreamvar

The Court of Appeal decision in P&P Property v (1) Owen, White & Cattlin LLP and (2) Crownvent Limited and Dreamvar (UK) Limited v (1) Mishcon De Reya and (2) Mary Monson Limited (known as ‘Dreamvar’) covered claims by the defrauded buyers in two sales. In both cases the fraud had been discovered after the sale had been completed but both buyers were prevented from registering their respective titles to the properties concerned.

Four principal claims were made by the two buyers:

• Breach of warranty of authority (against the seller’s solicitors in both cases and the seller’s estate agent in P&P), that those parties had given warranties that they acted for the true owners of the properties);
• Breach of solicitor’s undertakings (that both of the seller’s solicitors had given undertakings that they had the true owner’s authority to receive the purchase monies paid to them);
• Negligence (against the seller’s solicitors in P&P and the buyer’s solicitors in Dreamvar); and
• Breach of trust (against the seller’s solicitors in P&P and the buyer’s solicitors in Dreamvar); that the solicitors had acted in breach of trust imposed on them by the receipt of monies paid to them. In both cases the solicitors claimed relief from breach of trust as provided for in s.61 of the Trustee Act 1925.

The claims aimed at establishing liability of one or more of the defendants for the loss of the money paid by the buyer to the fraudster. The first claim (breach of warranty of authority) and the third claim (negligence), failed. The second claim succeeded but, practically, was of little consequence because the fourth claim (breach of trust) was upheld and, for different reasons, s61 relief was denied in both cases.

Lord Justice Patten’s analysis of breach of trust and s.61 of the Trustee Act 1925 in Dreamvar is a forensic summation of the fiduciary responsibilities of a buyer’s and a seller’s solicitor in respect of the purchase monies in what, in practice, is generally an alarmingly short period of time. Thus:

On the Buyer’s solicitor receiving the purchase monies from his client (and his mortgagee and paying it over to the Seller’s solicitor

‘The entitlement of the solicitor to part with the money is governed by the instructions he receives from his client. It is not suggested that those instructions permitted the purchaser’s own solicitors to release the monies except on completion of a genuine sale and purchase of the property…’

On a Solicitor receiving and completing the transaction and releasing the purchase monies

‘At the point when the purchase money is released by the vendor’s solicitors to his client the solicitor has the authority of the purchaser to make the payment even if the transaction is not a genuine sale. If the vendor’s solicitor does not have the purchaser’s authority to make that payment then, subject to any question of relief under s.61, he acts in breach of trust.’

S.61 of the Trustee Act 1925, affords a defence to a proven breach of trust if the ‘trustee’ can prove that the payment (in breach of trust) was made reasonably and honestly and, that the trustee can show that he ought fairly to be excused for having made the payment.

In the P&P case, the Court held that the Seller’s solicitors could not have been said to have acted reasonably, due to a series of failures to carry out basic checks on their client. In Dreamvar, it was held that the buyer’s solicitors had acted reasonably and honestly. However, relief was still denied to them as –  in terms of balancing the relative consequences of the breach – it was apparent that the solicitors were in a better position (with or without insurance) to meet the loss than their client.

The registration of a fraudulent transfer

The fundamental concept of title registration is that the title register, at any one time, should be conclusive as to who owns a property. Therefore, once a buyer has registered at HM Land Registry a transfer of property to him he is the owner of that property, even if the transfer was fraudulent. However, the land registry system contains mechanisms for countermanding the injustice caused in such a case.

The Chief Land Registrar has the power to rectify a title to reverse the registration of such a transfer.  That power, once exercised, causes an immediate loss to the innocent buyer and, if the buyer has registered a charge in favour of his mortgage provider, to his mortgagee. In such circumstances, the buyer and the mortgagee may be entitled to recover their losses by claiming an indemnity from HM Land Registry.

A claim against HM Land Registry for such an indemnity is easier and cheaper to make than the institution of court proceedings against professionals. These payments are largely funded by the fees levied by HM Land Registry for the provision of registration services. However, it remains to be seen if HM Land Registry will, in future, seek to fund indemnity payments by claims against the solicitors acting for the buyers concerned.

Practical solutions post Dreamvar

Lawyers are now aware that those acting for the buyer will probably be held liable for any loss sustained as a consequence of a fraudulent sale. This heightened awareness has led to some interesting changes in conveyancing practice post the decision in Dreamvar.

Some buyer’s lawyers have sought to establish either an assumption of liability by a seller’s solicitor to a buyer (the first claim in Dreamvar) or seek some form of representation, or worse, undertaking that the person instructing on a sale is the ‘real’ owner. Some examples of such enquiries are:

• ‘Please confirm that you have undertaken all relevant AML and Proof of Identity checks against your client and that you undertake that you are 100% satisfied that your clients are who they purport to be and that they are, indeed, the true owners’;
• ‘Please confirm that you have undertaken sufficient due diligence on the identities of the sellers and that you are satisfied as to their identity’; and
• ‘We expect you to be able to confirm that you have identified your client in accordance with [the Regulations] and the Solicitors’ Code of Conduct, please confirm the same’

Occasionally sensible and simple suggestions to counter imposters are encountered such as asking a seller to provide copy utility bills addressed to the seller at the property for a period of years prior to the proposed sale. Unfortunately, the former examples of practice seem to be more prevalent that the latter.

There have also been some attempts to create insurance products for the protection of buyers but examination of the small print tends to identify requirements of any solicitor buying such a policy which amount almost to underwriting such policies.

Regulation

The Solicitors Regulation Authority (SRA) have been visiting solicitors’ firms to interview their Money Laundering Regulation Officers (and randomly selected members of staff) on the Anti Money Laundering policies and procedures operated by the firms concerned.

The purpose of these visits seems to enable the SRA to gauge how well firms (and particularly their MLROs) understand their duties under the Money Laundering Regulations 2017. Inevitably such visits do also have an audit element to them.

Post Dreamvar, there seems to be a heightened sense of the dangers that fraud poses, particularly to the property sector and a willingness to combat those dangers. Finding the tools to do so effectively and therefore moving towards an industry-wide fitness for purpose, however, remains challenging.

Peter Robinson, Partner