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Identity fraud: When the money has disappeared, who pays the price?

Identity fraud in property transactions is rarely satisfactorily resolved by the courts because it is a relatively new phenomenon and the case law is not sufficiently developed for the courts to answer consistently on this matter. But this is may be about to change. Lawyers and property investors alike are on the edge of their seats waiting for the decisions in two pivotal appeals, which are subject to reserved judgments which are likely to be delivered in the next two months and will set much-needed precedents.

What is identity fraud in property transactions?

Identity fraud is carried out in an increasing number of creative methods.

Essentially, a fraudster will purport to be a legitimate seller of a property. They will execute the sale, receive the sale proceeds and disappear. By the time the fraud is discovered – often by the true owner of the property upon finding the purchaser moving into or renovating their property – the money and the fraudster are untraceable. According to the sacrosanct rule of property, no one can give what he does not have, so the property still belongs to the true original owner. Therefore, the defrauded buyer who has paid the sale proceeds, which are now irretrievable, is left without any claim to the property which they thought they had purchased – losing what are often very large sums of money.

What happens when the money has disappeared?

What will concern victims of fraud most is: who bears the loss?

The seller will almost always recover their property, subject to time, hassle and costs.

However, the purchaser is left without their money and a property. Therefore, the defrauded purchaser will turn to the last resort – pursuing the professionals involved in the transaction on the basis that the seller’s solicitors, the buyer’s solicitors, and/or the property agents were negligent. However, before embarking on expensive and uncertain litigation, a claimant will want to be satisfied that they are pursuing a strong claim against the right party. The problem with the law as it currently stands is that it’s not entirely clear which professionals are liable, and in what circumstances.

What are the two pivotal appeals?

Let’s look at the two cases which may determine future cases.

P&P Property v Owen White and Catlin LLP [2016]

In this first case, the claimants, P&P Property, lost £1 million to a fraudulent seller.

The defendants, Owen White and Caitlin LLP (OWC) were the solicitors for the fraudulent seller. The fraudster approached OWC originally to refinance the property, but changed his mind half way through the process and instructed OWC to arrange a sale. The fraudster claimed to live in Dubai, and the documents all came from Dubai, even though the property was in the UK.

OWC conducted the standard Anti-Money-Laundering checks and they came back as ‘referred’, but OWC accounted for this by the fact that the client lived in Dubai.

The claimants, therefore, sued OWC in breach of trust on the grounds that, as trustees of the completion monies transferred to them by P&P Property, OWC had breached their fiduciary duty by failing to spot and avoid the fraud despite the red flags.

However, the claim failed because the transaction was completed under the Law Society’s Code for Completion by Post, which specifies that the completion monies are transferred to the seller’s solicitors as agent rather than as trustee. Had they been trustees, OWC would have had legal title to completion monies, but, as agents, OWC were held to be merely dealing with the completion monies. Therefore the requisite trustee relationship did not exist between OWC and P&P Property.

P&P Property’s second line of attack was to claim a breach of warranty of authority by OWC because OWC had held themselves out as agents for the seller with authority to act on their behalf when no such relationship existed between OWC and the seller, since the seller was a fraud.

The court considered whether, by providing P&P Property with the warranty of authority, OWC had also provided a warranty that the seller was a legitimate seller of authentic identity. The judge held that the warranty of authority only represents that the solicitor is authorised to act for the person they are receiving instructions from, and makes no representations to their characteristics or attributes. To do so would be to impose on the solicitors a guarantee that the seller was the registered title holder.

It was held that the OWC were not liable.

P&P Property also pursued the property agents in the transaction. The court found that the agents’ identity checks were ‘wholly inadequate’. Even so, this was the solicitors’ responsibility, and the agents did not owe a duty of care to the purchasers with whom they did not have a contractual relationship, and the agents were not liable. Despite sympathising for the claimant, the judge found that neither OWC nor the agent were liable in this case. The appeal case will be heard in the Court of Appeal early in 2018.

Dreamvar (UK) Limited v Mishcon de Reya [2016] EWHC 3316 (Ch)

In this second case, the purchaser, Dreamvar (UK) Limited, was defrauded £1.1 million.

The seller’s solicitors admitted that they had not performed the necessary checks on their client. Even so, the court did not find them in breach of trust because they could not be said to have warranted that the seller was genuine, using similar reasoning used in the above case of P&P Property v OWC.

Therefore, Dreamvar went after its own solicitors – Mishcon de Reya – for breach of trust in dealing with its client’s monies. The High Court found that Mishcon de Reya was in breach of trust as it was an implied term of its contract with Dreamvar that Dreamvar’s money would only be released to the seller on a genuine completion of the purchase of the property.

Having failed on their arguments based on breach of trust, Mishcon de Reya argued that they should be granted relief under the Trustee Act, which excuses trustees of breach of trust if they acted honestly and reasonably. The judge acknowledged that Mishcon de Reya had acted honestly and innocently.

The judge said that ‘the only practical remedy’ open to the claimant was against their firm of solicitors. It was pointed out that the claimant was not insured for the loss, whereas the firm was. Therefore, Mishcon de Reya was found liable even though it had not been negligent. This judgment will strike many as legally dubious. It is an allocation of risk based on affordability and policy considerations, rather than an allocation of liability based on established case law.

What’s next?

As the cases of Dreamvar and P&P await Judgment from the Court of Appeal, solicitors, property developers and lenders wait with baited breath in the hope that the Court l will finally lay out a clear rule as to who is liable in cases of identify fraud.

Whether the Court will give a clear and satisfactory answer is unknown. However, property owners and businesses can proactively arm themselves against the risk of identity fraud by signing up for the Land Registry’s property alerts – these notify subscribers if there are any searches or registrations against a particular property – and insist that their conveyancing teams do the proper checks prior to transacting.

No matter to whom the Court decides to assign the liability, all those involved in the fraud will lose money and time. Therefore, all parties including purchasers, solicitors and agents should be vigilant in detecting and avoiding these unfortunate and costly cases. 

Key contact

Jonathan Sachs – Partner

Published: 23 March 2018

Spring 2018

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