Are conveyancers now looking to be held strictly liable for all identity related fraud stemming from conveyancing transactions?
Though we might not be there quite yet, it seems we have moved one step closer with the news that solicitors Mishcon de Reya have been found liable for breach of trust after its client was duped into buying a London property from a tenant posing as the owner.
I have not seen the transcript of the judgment but from what I have read it seems the claimant, the purchaser client, was left out of pocket to the tune of £1m when it came to light that the seller was not the legal owner of the property, but rather the tenant purporting to be the owner.
The deputy High Court judge David Railton QC found in favour of the claimant in action brought against Mishcon de Reya based on a breach of trust. The judge found that Mishcon, presumably as the trustee of its client’s money, should have obtained an ‘undertaking’ from the sellers solicitors that it had taken all reasonable steps to establish its clients identity.
This differs from the cause of action in the similar case of P&P Property Ltd v Owen White & Catlin LLP & Anor, where the buyer failed in claims for breach of warranty of authority and negligence against its solicitors and estate agent.
The decision must be viewed as extremely worrying for conveyancers and, though it is likely to be appealed, it has clearly left practitioners in a state of flux.
Until clarity arrives what should a prudent conveyancer do?
Acting for the seller
To begin with, it will be important to always check the title documentation carefully and to identify transactions where the seller is shown to be living at a different address than the property address. Practitioners should also be alert to situations where the correspondence address for the seller is different from that shown on the title document for the property or the seller’s correspondence address.
I would suggest these transactions once identified should be brought to the attention of the compliance officer/partner/director and marked as a high risk transaction.
I also suggest an added level of client ID checking is undertaken. There is a need to make sure the client can show that he or she is connected to the ownership of the property. In our office we now ask in these situations for the client to provide us with details of the solicitors who acted on the purchase of the property and to provide documentation relating to the instruction of those solicitors if available. Our reasoning is that an imposter is unlikely to know the identity of the solicitors who acted. It will also be open to us to contact those solicitors and make appropriate inquiries if necessary.
If we were asked for an ‘undertaking’ or a warranty as to true identity of a client, the best advise will always be to say ‘no’ irrespective of the Mishcon de Reya decision. All that one should say, is that we have undertaken those checks which are required of us by legislation and professional regulation. It is clearly down to those who set these rules and requirements to issue further guidance and all one can do in the meantime is to follow and abide by what is currently in place.
Acting for the buyer
As above, when checking title and identify, those cases which could present the potential for fraud should be brought to the attention of the compliance officer, partner or director.
You can always ask the sellers solicitors to warrant that the seller is the true owner of the property or to provide an ‘undertaking’, though as I say above, I expect the seller’s solicitor will not be minded to assist.
You could also ask in the additional enquires for evidence linking the seller to the property to be produced - e.g. stamp duty return when the property was purchased or some other document only the true owner could produce. I suspect the seller’s solicitors may argue that this is not an appropriate enquiry to raise and refuse to answer.
What happens if the seller is not prepared to play ball?
The buyer client should be informed of the risk and advised in very strong terms not to proceed with the transaction without first seeing evidence of this type. If the client says notwithstanding this advice he or she still wishes to proceed then a written disclaimer should be sought from the client.
The judge in Mishcon de Reya decision is reported to have said that it was only fair for the claimant to make a recovery, as in his view, by finding in favour of the claimant this was the only ‘practical remedy’ in the light of the fact that the defendant had insurance. This reminds me of the days of Lord Denning when decisions were based not on the law and good practice, but rather on the equity of the situation. This is all well and good but its consequences are far reaching for the high street conveyancer and will surely leave a lot of us thinking is it really worth running and taking responsibility for all of these ever increasing risks when the fee we able to charge is often much less than that charged by the lender, the broker, the panel manager, and the estate agent.
One simple solution to all of this uncertainty and exposure is to provide an alternative to the holding of client money. Surely this decision cries out for serious consideration to be given to moving the management of client funds away from the conveyancer to a regulated and centralised third party.