Are conveyancers moving closer to a 'strict liability' regime for property related fraud?

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.

Conclusion

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. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

The practical implications for conveyancers arising out of the decision in Purrunsing v A’Court & Co & Anor - An article by David Pett Solicitor and Director MJP Conveyancing

HH Judge Pelling QC

In Purrunsing v A’Court & Co & Anor [2016] EWHC 789 (Ch) conveyancers for both the seller and buyer  were held liable for the actions of a rogue seller who committed a £470,000 property fraud.

In this article I examine the findings and provide some thoughts on how conveyancers may wish in the light of the decision to adapt certain parts of their processes. 

Facts

London based conveyancers Home Owners Conveyancing Limited (HOC) (the second defendant) acted for the purchaser (the claimant) of a property which was sold by a rogue seller who was purporting to be the registered owner of a £470,000 property.  The fraudster who claimed to be but was not the registered owner ‘Mr Dawson’ was represented by the Windsor based conveyancers A’Court & Co (ACC) (the first defendant).

By the time the fraud was discovered, the claimant has transferred the purchase monies to his conveyancer (HOC), and these monies had in turn been sent on to the fraudsters solicitors (ACC). Following completion of the transaction ACC then transferred funds to the fraudster to an account held in Dubai.

The issues

ACC the solicitors acting for the purported seller were initially found to have made the payments to the fraudster in breach of the duty of trust it owed to the claimant.

The issues before HH Judge Pelling QC in this case were as follows:

Having acted in breach of trust should ACC be granted relief under s61 of the Trustees Act 1925?  S61 provides:

"If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, … but has acted honestly and reasonably and ought fairly to be excused for the breach of the trust … then the court may relieve him either wholly or partly from personal liability for the same."

Should the claimant’s conveyancers (HOC) be liable to the Claimant for breach of contract or negligence?

In the event both firms of conveyancers should be held liable to the claimant how the liability should be apportioned between the two firms?

The findings – the claim against ACC (the ‘seller’s’ solicitors)

HH Judge Pelling found that ACC had not acted reasonably and were not entitled to relief under S61.

He based this on the following findings:

Upon considering the Money Laundering Regulations 2007 and the Proceeds of Crime Act 2002 he concluded:

‘……..that is that the solicitor concerned is required to look at all of the information available and assess whether it is consistent with the transaction that the client wishes to carry out being a lawful one. That much is obvious from ss.327-329 and s.340 of POCA. As the Note makes clear, that exercise "… may include considering whether the client is actually the owner of the property they want to sell"’.

He added:

‘As I have explained already, that will not be necessary or appropriate in every case in which a solicitor is retained to act for the vendor of residential property. In each case a judgment will be required based on the risk posed by the transaction in question. That is the effect of the part of the Handbook [Conveyancing Handbook set out above, which emphasises the need for a risk-based approach to be taken’.

In short, the Judge stated that a reasonable solicitor carrying out due diligence required by the MLR and adopting as per the Conveyancing Handbook a risk based due diligence approach ought to have considered whether Mr Dawson was the owner of the property he was purporting to sell in order to assess whether the transaction was a lawful one.  I will deal with the practical implications of this shortly.

The findings – the claim against HOC (the buyer’s solicitors)

The finding that HOC has acted in breach of contract and or duty of care was based on the following general principle applicable when considering the extent of the duty of care owed by a conveyancer to a client:

‘That in general a solicitor or licensed conveyancer is not obliged to undertake investigations that are not expressly or impliedly requested by the client but that if in fact a solicitor or licenced conveyancer acquires information that may be of importance to a client, then it is the duty of the solicitor to bring that information to the attention of the client.'

In this case HOC had raised an enquiry with ACC in the following terms:

"Please confirm you are familiar with the sellers and will verify they are the sellers and check ID to support same"

In reply ACC had responded:

‘2) As explained to you over the telephone, prior to being approached to act on the sale we have no personal knowledge of Mr Dawson, but we confirm that we have met him in person and have seen his passport (and retain a copy of the photo page) together with utility bills etc showing his UK address as notified to us’.

There was a failure on the part of HOC to inform the claimant that this question had been raised and also to make the claimant aware of the significance of the reply even though it was found that the claimant had failed to read the replies sent to him.

The Judge found:

‘HOC was in breach of contract and/or duty to the claimant in failing to inform him that (a) Additional Enquiry (2) had been raised, (b) that the purpose of that additional enquiry was to attempt to establish a link between the property and the apparent vendor, and (c) the answers received showed that (i) ACC had no documents whatsoever relating to this property, save for those already received (and thus for example they did not have the Deed of Gift of which Mr Beach had made enquiries by the earlier letter from him to Mr A'Court of 16 October 2012); (ii) ACC had no personal knowledge of Mr Dawson, and (iii) ACC had not verified, and could not confirm from the information available to them, or at least had not confirmed from the information available to them, a link between the vendor and the property, and (d) in consequence, there was a risk in proceeding with the purchase.’

The findings – Contribution

The judge found both firms of conveyancers equally to blame having regard to ‘…relative causal potency as well as comparative blameworthiness by reference to the facts and matters…’

The Practical Implications when acting for the seller

It is clear that when acting for any client there is a need to carry out a risk assessment not only on the client but the transaction itself.  In carrying this out one needs to keep in mind the MLR, POCA and Conveyancing Handbook requirements and guidance. 

The case assists in identifying certain risk indicators that any responsible conveyancer would be foolish to ignore.

In this case the solicitors acting for the rouge seller chose to reply blindly on routine money laundering checks ignoring the following warning signs:

They knew that the property was unoccupied

They knew that it was not subject to a charge

They knew that Mr Dawson had given an address that was not either the address for the property or the alternative service address that appeared in the proprietorship register for the property.

It is abundantly clear that faced with these facts that a reasonable solicitor should obtain from a seller documentation of any sort that could establish a link between that individual and the property.  In this case there were two addresses shown for the registered proprietor none of which matched the address given by the rouge seller to ACC.

It should be kept in mind that ACC knew that that a previous attempt to sell the property on behalf of the rouge seller fell through after the then prospective buyer pulled out when the rouge seller failed to provide evidence of employment in Dubai.  

So where a seller produces evidence of identity and of an address which is not that shown on the land Registry title it would be prudent to insist that the seller produces documents or other evidence which shows a connection between the seller and that of the property to be sold.

I also suggest that it may in some circumstances be wise to ask for details of the solicitor who acted on the purchase of the property so that appropriate checks can be made with that solicitor over identity etc

The Practical Implications when acting for the Buyer

It seems to me that the buyer’s solicitor in this case fell foul due to raising a question which probably they did not need to raise.  Remember the Judge in this case found for the claimant because of a failure on the part of the conveyancer to ‘…ensure that the claimant proceeded at all times on an informed basis.’

Therefore one may be best advised not to raise questions that go behind the Land Registry evidence of title since once raised there is then a professional obligation to make sure the client is made aware of any question and to ensure that when the reply comes in that advice is given on the reply and that any ambiguity and or uncertainty is fully addressed.

The rouge seller’s first attempt to sale failed however after the buyer solicitor was asked for evidence of the seller’s employment in Dubai.

It may in the light of this be prudent to raise as standard enquiries the following questions:

Is the seller based in the UK? 

If not please provide evidence of the seller’s employment based abroad.

A fraudster could still get around this and provide fake evidence but with reference to the S61 defence and the findings in this case it would at the very least show some attempt of trying to protect the buyer’s money.

You may also wish to ask whether there have been any previous attempts to sell the property and if there were why these did not proceed.  

Remember however that if you raise the questions do make sure that you receive full and complete replies.

Other implications

It is clear that when receiving replies to enquiries there is an obligation on a conveyancer to ensure the client sees the replies as well as raising with the client any issue within those replies which could influence the client’s decision to proceed with the transaction.   Sending the replies out to the client and asking the client to simply read and digest is not sufficient.

Conclusion

There is nothing remarkable about this decision other than the fact it should act as a reminder to all conveyancers of the need to keep the risk of fraud in mind at every juncture of the transaction and if acting for a buyer not to assume in every case that the seller has carried out full risk based due diligence. 

David Pett - Solicitor 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com