Who bears the loss when a purchaser agrees to buy a property which isn’t the seller’s to sell? In recent years the courts have had to grapple with the problem caused by “identity fraud”, where a fraudster masquerades as the owner of property, “sells” it to the unsuspecting victim, and then absconds with the money.
The decision of the Court of Appeal in the combined appeals in P&P Property Ltd v Owen White Catlin and Dreamvar (UK) Ltd v Mishcon de Reya  EWCA Civ 1082 provides a route map of the way forward for the innocent purchaser, but may prove expensive for conveyancing solicitors – and their insurers.
The decisions in both cases are fact sensitive. In P&P the purchaser sued the seller’s solicitors Owen White Catlin (OWC) for breach of warranty of authority, breach of undertaking, negligence and breach of trust. To understand the final decision it is important to note two things. Firstly, the solicitor acting at OWC, Joyce Lim, accepted the vendor “Mr Harper” as her client despite the anti-money laundering (AML) check being referred because it wasn’t possible to identify him at the property address or verify his date of birth; nor did she check the credentials of the firm in Dubai who purported to verify his address. Secondly, Ms Lim herself signed the contract “on behalf of the Seller”.
On the basis that Ms Lim had herself signed the contract on behalf of the Seller, the Court of Appeal held that OWC were in breach of their warranty of authority, the warranty that they were acting for the only person who could sell the property, its owner Mr Harper. Although the point wasn’t decided – because it didn’t need to be – I suggest that if Ms Lim had insisted that her client sign the contract himself, then the result would have been different.
Despite this, the breach of warranty of authority claim did not succeed. Why not? Because the trial judge had not found – as a matter of fact – that P&P relied upon OWC’s representations that they acted for the Seller. The evidence of the director who gave evidence was that he had assumed that OWC had done all of the correct due diligence to establish the identity of their client, a subtle – and one might think, rather harsh – distinction, but a reminder that “reliance” is an essential element that must be established in any claim based on an allegation of misrepresentation.
There is clearly a lesson here for all conveyancing solicitors in ensuring that their identity checks are AML compliant (though with the emphasis on “know your client” I am surprised it still had to be learned). From the viewpoint of the purchaser’s solicitors, they might consider asking the seller’s solicitors for a warranty that they are indeed acting for the seller of the property, and then make sure they state that their client is relying upon it. Sellers’ solicitors may of course be reluctant to provide such a warranty but since they are in a unique position to confirm that their client is who he says he is, something by definition the purchaser cannot do, a refusal to provide such a warranty may raise questions and concerns with the purchaser.
Claims against OWC for breach of trust and breach of undertaking were however successful, as were claims by purchaser against the seller’s solicitors Mary Monson Solicitors Ltd (MMS) in Dreamvar. The effect of the decision in P&P, in my view, makes it clear that these will be the best remedies for a defrauded purchaser in the future.
A breach of trust claim by a purchaser against solicitors acting for the purported seller is based on an analysis of the meaning of “completion” in paragraphs 10 and 11 of the Law Society’s Code for Completion by Post (the Code):
“10. The seller’s solicitor will complete upon becoming aware of the receipt of the sum specified in paragraph 9 …. Unless
(i) The buyer’s solicitor has notified the seller’s solicitor that the funds are to be held to the buyer’s solicitor’s order;
11. When completing, the seller’s solicitor undertakes:
(i) to comply with any agreed completion arrangements and any reasonable instructions given under paragraph 8;
The authority of the seller’s solicitors to release the purchase monies, which are held on a bare trust for the purchaser, to their own client depends upon “completion” occurring, explained Patten LJ. However the solicitor does not have authority to make that payment unless the transaction is a genuine sale; the exchange of purchase money for forged documents will not amount to completion: “nothing can come of nothing”. The rationale is that the seller’s solicitor does not have authority to release it to their client because they are not acting for the owner and supposed seller of the property.
I note that paragraph 8 of the Code permits the purchaser’s solicitor to send the seller’s solicitor instructions as to matters required by the buyer’s solicitors. Those instructions could, in parallel with the request for a warranty suggested above, include a request that the purchase monies only be released to “the owner of the property”. Failure to comply with such a request would make it harder for the seller’s solicitors to obtain relief under section 61 of the Trustee Act 1925 (section 61).
For the same reason the sellers’ solicitors were also found to be in breach of the undertaking given at paragraph 7(i) of the Code:
“7. The seller’s solicitor undertakes:
(i) To have the seller’s authority to receive the purchase money on completion;…”
Section 61 permits the Court to grant relief to a trustee if three conditions are satisfied: the payment has been made honestly; it has been made reasonably; and the trustee can show that he ought to be fairly excused for having made the payment. OWC had made a series of failures in relation to their compliance with AML and therefore had not acted reasonably: no relief was granted.
A more controversial decision (literally because there is a compelling dissenting judgment from Gloster LJ on this point) was the decision to refuse relief to P&P’s own solicitors Mishcon de Reya (MdR) under section 61, there being, perhaps surprisingly, no appeal by MdR against the finding by the trial judge that they were in breach. The decision to refuse relief was upheld on the basis of the inequality of the position between MdR and its client, principally because MdR was insured.
This was the point Gloster LJ took exception to – “I do not consider that the Court’s sympathy should be with one commercial party… rather than another, simply because one, and not the other, has insurance” – and a point that I hope will be considered by the Supreme Court if the case goes further.
It should of course be noted that because of the concession by MdR, and because P&P did not sue their own solicitors, there is no appellate decision on the important question of whether a solicitor acting for a buyer is in breach of trust if the purchase monies it holds on a bare trust are paid to the seller’s solicitors on trust that they will be applied for a completion which does not take place.
As a coda, practitioners should note that the claim in negligence brought by P&P against OWC did not succeed – the Court of Appeal explaining that the “assumption of responsibility” is the foundation of liability in negligence and this is not one of those rare categories of cases where solicitors acting for a seller assume a duty of care to the buyer.
This article was first published on Practical Law’s Property Litigation Blog.