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

We look to the courts for answers on the distribution of liability on a wide range of issues, and often it answers clearly and sensibly. But sometimes the courts fail to provide us with an answer. Identity fraud in property transactions is one of those problems. As it currently stands, the case law simply comes short. The courts have grappled with the problem numerous times in the past decade, and are yet to reach a well-defined and consistent answer. However, lawyers and property investors alike, are sitting on the edge of their seats waiting for the decisions in an number of pivotal appeals which are due to be heard in early 2018.

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 nemo dat quod non habet (no one gives what he does not have) the property still belongs to the true original owner. Therefore, the defrauded buyer will have paid the sale proceeds which are now irretrievable, and 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. It is, however, the purchaser who is left without their money and a property. Therefore, the defrauded purchaser will turn to the last resort: to pursue 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 have the Courts said so far?

Below we look at four of the cases in which the courts have considered the question.

Santander UK plc v RA Legal Solicitors [2014] EWCA Civ 183

The lender agreed to lend £150,000 to an individual for purchasing a property. The defendant solicitors’ firm conducted the conveyancing and acted for both the lender and the borrower. A second firm of solicitors purported to be acting for the vendor of the property, when in fact the vendor had never agreed to any sale. The loan monies were released to the fraudulent firm and the property was never transferred. The lender sued their solicitors for breach of trust on the grounds that their solicitors released the funds without a real completion of the property taking place. The High Court found that this was indeed a breach of trust. Despite the breach of trust, the firm were allowed relief from liability under section 61 of the Trustee Act 1925, because the solicitors had acted in the genuine belief that a completion would take place, and because the fraud was committed by an unconnected party, for which the solicitors could not be held responsible. The case was referred to the Court of Appeal, which upheld that there was a breach of trust. However, they found that the loss stemmed from the solicitors inadequate requisitions and other procedural failings. Accordingly, the Court of Appeal did not allow relief for the solicitors, and they were held liable for the loss, ultimately finding in Santander’s favour. Santander was represented by Jonathan Sachs, now partner at Irwin Mitchell LLP.

P&P Property v Owen White and Catlin LLP [2016] EWHC 2276 (Ch)

In this case, the claimants lost £1 million to a fraudulent seller. Owen White and Caitlin LLP (‘OWC’) were the seller’s solicitors. 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 the seller’s solicitors in breach of trust for their failure to spot and avoid the fraud despite the red flags. However, because the transaction was completed under the Law Society’s Code for Completion by Post, which specified that the completion monies are transferred to the seller’s solicitors as agent rather than as trustee, the claim failed as there was not the requisite trustee relationship. On the issue of breach of warranty, the court considered whether, by providing the warranty of authority, the seller’s solicitors 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 seller’s solicitors were not liable. The claimants 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 the solicitors nor the agent were liable in this case. The case will be heard in the Court of Appeal early in 2018.

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

The purchaser 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 P&P. Mishcon de Reya were the purchaser’s solicitors. The High Court found the firm was in breach of trust as it was an implied term that the money would only be released on a genuine completion of the purchase of the property. Having failed on their arguments based on breach of trust, the firm argued that they should be granted relief under the Trustee Act. The judge acknowledged that the firm had acted honestly and innocently. However the judge said that ‘the only practical remedy’ open to the claimant was against their firm of solicitors. Furthermore, it was pointed out that the claimant was not insured for the loss, whereas the firm was. Therefore, the firm was found liable even though it had not been negligent. The judgment in Dreamvar 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. The case is being appealed to the Court of Appeal in 2018.

Law Society v Schubert Murphy [2017] EWCA Civ 1295

Finally, it is possible that beyond the professionals directly involved in the transaction, the Law Society might also be liable. A purchaser was defrauded by a fraudster who pretended to be a legitimate firm of solicitors selling a property. The fraudsters had stolen the identity of a retired solicitor, and registered under his name with the Solicitor Regulation Authority (‘SRA’). The purchaser’s solicitors checked the seller’s solicitors firm online via the Law Society’s ‘find a solicitor’ website. Having confirmed that this was a firm registered with the SRA, the deal was executed and the funds released. After the funds disappeared, the purchaser claimed against their solicitors, and the claim was settled. The solicitors therefore claimed against the Law Society for negligence by representing via their Law Society website that the seller’s law firm was a legitimate one, when in fact it was not. The Law Society sought to strike out the case on the basis that a regulator cannot owe a duty of care in relation to the way in which it carries out its regulatory function. Whilst the Court of Appeal agreed with this in principle, the application to strike out was dismissed on the basis that the regulatory function carried out by the SRA was separate from the trade organisation function of the Law Society. Making information regarding regulated solicitors available on the Law Society website was a voluntary service, and therefore a duty of care could attach to this function. Following this hearing, the case was settled and it will therefore remain unanswered (for now) whether the Law Society was legally liable.

What’s next?

As Dreamvar and P&P go to appeal this year, solicitors, property developers, and lenders wait with baited breath, in the hope that the Court of Appeal will finally lay out a clear rule which reconciles the previous cases which have thus far created considerable confusion. 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 (which 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.

Published: 22 January 2018


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