22 June 2018
P&P Property Ltd v Owen White & Catlin LLP and Dreamvar (UK) Ltd v Mishcon de Reya (A Firm)  EWCA Civ 1082
This case was recently heard by the Court of Appeal and judgment was handed down in mid-May. The outcome was eagerly awaited by solicitors and property professionals because it deals with the liability of the seller's and purchaser's solicitors in the event of a fraudulent property transaction. The case is also important because it may have an impact on how property transactions, and their registration, are conducted going forward.
The case deals with two very similar frauds on residential property. The facts in each case are alarming. In both cases, a fraudster pretended to own registered residential property in London. The fraudsters instructed solicitors, who thought they were acting for the real owners of the properties. Buyers were found for the properties, and the purchase money changed hands, only for the buyers to discover that they had not actually purchased the property – and that their money had disappeared.
The Court of Appeal looked at a number of technical aspects of the transactions, which are summarised briefly below.
Breach of warranty of authority
The court held that the seller's solicitors warranted that they were acting for the real property owner – and that they were in breach of that warranty. However, they held that the buyer's solicitors had not relied on that warranty.
The court held that the seller's solicitors did not owe a duty of care to the purchaser, and so were not liable to the purchaser in negligence for failing to adequately carry out their due diligence checks and verify the identity of their client.
Breach of trust
In both cases, the sellers' solicitors were in breach of trust, because they paid away the purchase price to a fraudster, rather than the real owner of the properties. The buyers' solicitors were also in breach of trust because they held the purchase price for the buyer as trustee, and could only part with the money in the case of a genuine completion. So the court has clearly stated that, in the case of a property fraud, both the buyer's and seller's solicitors will be in breach of trust if money is paid to an impostor, even if neither firm has been negligent. It isn't enough for the solicitors to show that they have acted honestly and reasonably.
Breach of undertaking
In residential property transactions, it is common for the solicitors to complete the purchase using the Law Society's Code for Completion by Post. This is a set formula that enables the transaction to complete without the solicitors meeting in person. In this case, the court held that at paragraph 7(i) of the Code, the seller's solicitor is undertaking that its client is the registered or real owner of the property that is being sold. The sellers' solicitors were in breach of that undertaking.
So did the buyers get their money back?
Yes – but not from the fraudster. The parties' solicitors (or, more accurately, their insurers) are liable to the innocent purchasers, in varying proportions, and will have to cover the buyers' loss. What proportions will be applied remains to be seen.
Our advice for purchasers and sellers
The key point to take away for purchasers of property is that there are a number of risk factors to be aware of, which applied in the Dreamvar cases. Look at the details of the property you are buying, and discuss any of these risks with your solicitor:
And, for sellers - you may find that your solicitors are even more thorough at verifying your identity and undertaking their anti-money laundering checks. Additionally, the buyer's solicitor may ask your solicitor to confirm that they have adequately verified your identity for the purposes of their client due diligence. Your solicitor is likely to refuse to give that confirmation (as it may lead to a duty being owed directly to the buyer) but you may be asked to consent to your identification details being passed to the buyer's solicitors, so that they can make their own checks.
For both sellers and buyers, there are some wider ramifications:
by multiple authors