This was the very situation which a seller’s solicitor and estate agent faced in P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).
Facts
An impostor posing as the real owner of the property instructed
Winkworth to market the property and the First Defendant (‘OWC’) to undertake
the conveyancing. The impostor claimed
he was living in Dubai and was looking for a speedy sale. OWC
carried out the usual identity checks (in robotic form only) and the sale
proceeded with the purchaser P&P Property paying 1.03 million for the
unoccupied property.
Upon completion the net sale proceeds were passed on to the
purchaser. Subsequently the true owner when walking past his property was
alerted when he saw builders ripping out the kitchen of the property. By this
time the impostor had vanished with all of the net sale proceeds (£927,000).
The Claim
The purchaser who purchased from the impostor was not of
course happy and decided after the fraud came to light to bring a claim against
the seller’s solicitors and also the estate agent for breach of warranty of authority
and breach of duty.
There was a separate claim brought against the seller’s
solicitors for breach of trust relying on the fact the misappropriated funds
passed through the hands of the seller’s solicitors.
Breach of warranty
claim
The judge found that if a client appoints a solicitor the
only warranty that a third party dealing with that solicitor can rely on is
that the solicitor has authority to act on behalf of the client. There is no implied warranty that the
solicitor can vouch for the client’s authenticity as the owner of the property
to be sold.
The judge found:
‘The basic representation is only that the agent has
authority to act for another, a matter which arises between him and his
principal and is something which is usually peculiarly within his own
knowledge. An agent does not, simply by acting as agent, represent that his
principal will perform the contract or is solvent or make any other
representation as to the principal's attributes or characteristics. The court
should not imply a warranty of authority which has an effect going beyond the
basic representation, save where it is clear that the necessary promise is
properly to be implied. This is particularly so in relation to professionals,
including solicitors, who do not normally undertake an unqualified obligation.’
To extend the warranty to this level would in the view of the
Judge Robert Dicker QC constitute a guarantee
that the client was the registered proprietor of the property and essentially
create a strict liability for any loss arising if as in the present case the
client was found to be an impostor. The judge found that such warranty was also
entirely inconsistent with the practice adopted amongst conveyancing solicitors
and out of line with the Law Society Code for Completion by Post (2011).
The judge also found on the facts of this case that there was
not in breach of warranty on the part of the estate agent but did not rule out
the possibility that in certain circumstances a claim could be well founded.
Breach of Duty of Care
Again the Judge found in favour of both Defendants.
On the facts (and more particularly in the absence of evidence
to show a breach of warranty of authority) there was no evidence that the Defendants
had accepted responsibility to ensure that the client was the true owner or
that the impostor was not who he claimed to be.
The judge also found:
‘The imposition of such a duty of care on the part of Owen
White to take reasonable care to ensure that Mr Harper was the true owner of
the Property, would also, in my view, be inconsistent with the detailed rights
and obligations set out in the Law Society's Code for Completion by Post, which
I consider further later in this judgment’.
In terms of the claim against Winkworth the judge found:
‘I accept Mr Polycarpou's evidence [purchaser’s solicitors] that he expected Winkworth to have carried out
their client due diligence and anti-money laundering checks and relied on them
to have done so. However, reliance on its own is not sufficient to establish a
duty of care on the part of Winkworth.
On the basis of the test derived from Hedley Byrne v Heller,
it is also necessary to establish, amongst other things, the necessary
objective assumption of responsibility by Winkworth and, in this respect, the
primary focus is on statements or conduct which crossed the line between them.
Nothing was said by Winkworth about the steps taken in
relation to its client due diligence and anti-money laundering obligations. Mr
Polycarpou did not ask and Mr Hunt did not volunteer anything in this respect.
The furthest that the evidence went was that Mr Hunt appreciated that Mr
Polycarpou would have expected both Winkworth and Owen White to have carried
out their respective money laundering checks before marketing the property.
Assessing the relevant evidence as a whole, there was, in my
view, no communication or conduct which crossed the line such that, in this
particular case, objectively Winkworth are to be taken also to have assumed
responsibility to P&P Property for taking reasonable care when carrying out
their client due diligence to ensure that their client was the true owner’.
Breach of Trust
The Claimant claimed that OWC held the funds that it received
from the purchaser on trust, that no valid completion took place and that the
completion monies were therefore paid out in breach of trust.
The judge found in favour of OWC relying on paragraph 3 of
the Law Society Code for Completion by Post (2011 edition) (the
"Code")
This provides:
‘’In complying with the terms of the code, the seller's
solicitor acts on completion as the buyer's solicitor's agent without fee or
disbursement but this obligation does not require the seller's solicitor to
investigate or take responsibility for any breach of the seller's contractual
obligations and is expressly limited to completion pursuant to paragraphs 10 to
12".
The Judge found:
‘….that the fact
that paragraph 3 provides that the seller's solicitor is not required "to
investigate or take responsibility for any breach of the seller's contractual
obligations" is, in substance, inconsistent with the vendor's
solicitor being liable, as the purchaser's agent, for breach of trust in
releasing the money in the event that completion does not occur because the
seller does not have title. One of the seller's obligations is to provide a
genuine transfer of title. If the vendor's solicitor is liable for breach of
trust merely because no genuine transfer is provided it would effectively be
taking responsibility for what paragraph 3 says it is not. The extent of the
vendor's solicitor's obligations on completion are governed by the express
undertakings that it provides in accordance with the Code. In my view, in the
light of the guidance in cases such as Mothew
[Bristol and West Building Society v Mothew [1998] Ch 1]
, in these circumstances it would be wrong to
construe the Code so as to give rise to a breach of trust or, as a result, as
an effective guarantee of title.
In short the judge found that it would be
inconsistent with the terms of the code to hold that a breach of trust occurred
by reason of the seller releasing the completion funds to the purchaser when it
was argued that the seller was not in a position to provide a genuine transfer
of title. Essentially the judge took the
view that paragraph 3 specifically excludes the sellers solicitor from
liability for any breach of contract on the part of the seller.
Sellers
Solicitors Conduct
Helpfully the judge took the time to consider
whether the sellers solicitors would have been able to avail themselves of the
Section 61 of the Trustee Act 1925 relief had he found that a breach of trust
had occurred.
Section 61 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 trust … then the court may relieve him either
wholly or partly from personal liability for the same."
The judge it is safe to say was not impressed
with the seller’s solicitors and found that if there had been a breach Section
61 relief would not have been available.
In short the judge found there were sufficient ‘red
flags’ to alert the seller’s solicitors and to cause at the very least the
seller’s solicitors to raise further questions.
The
‘red flags’ (and there were many) in this case included:
Unoccupied property
‘Seller’ living abroad
No legal charge
Relatively high value
Impatient client
Discrepancies between
signatures
Lack of a correspondence
address or evidence as to where the ‘seller’ was in fact living and working or
how long he had been there.
Failure to pick up form
the ‘seller’s’ bank statements when presented the fact that most of the items
within it appeared to be London based.
Failed electronic
identity check.
The judge concluded:
‘The fraud was plainly a sophisticated one which
appears to have carried out with some expertise. However, in my view, it is
plainly possible that, despite the obvious sophistication of the fraud, further
questions would have revealed the true position or discouraged Mr Harper from
proceeding further and, even if they did not, they would have increased the
prospect of that occurring’.
Practical
Implications
This case is unremarkable and should not lead in
my opinion to any significant change in practice.
Upon acting for a seller it is important to keep
in mind both statutory and professional obligations particularly the widely
known obligation a conveyancer has to be alert to indicators of money
laundering and/or fraud and to identify and action ‘red flags’ as and when
these arise. To simply ignore and do nothing
is not advisable and could leave you exposed to liability.
It is clear that a responsible and alert
practitioner given these circumstances should have spotted that there was
something not quite right about the transaction. It should be clear by now that if you are
acting on a sale where there is no mortgage, the property is empty and the ‘seller’
purports to be living abroad, further inquiries should be made. In this case the seller’s solicitors should
have never allowed this transaction to proceed. There were clear warnings and to argue as the
seller’s solicitors did that she did not consider it was appropriate to raise a
large number of questions with her client simply is not an acceptable argument.
If in doubt the seller’s solicitors should
have terminated the retainer.
What more you might ask could the seller’s solicitors
have done? In this case I do take the view that further evidence to link the
seller to this property could have been sought. I do not consider it is unreasonable given the
large number of red flags to have asked the client to provide details of who
acted for the ‘seller’ on the purchase of the property and to contact those
solicitors to seek verification of identity.
I know some may argue this is a step too far and probably in the
majority of cases it is but as I say the alarm bells were constantly ringing in
this case.
If acting for a purchaser and it is noted from
the Seller Information Form that the property is empty and there is an
alternative address for the seller shown (which in this case the seller’s
solicitors failed to investigate) then I do consider that the seller’s
solicitors should be asked about the checks undertaken to ensure the seller is
in fact the registered owner. In other
words to ask for a warranty. If this is
refused then perhaps insurance should be considered or the buyer should be
warned of the risk of fraud.
Summary
In this case the I am of the view OWC was lucky
to have come away untouched. The
prominence given to the Law Society Code surprised me and was clearly and
cleverly used by the judge to find for the sellers solicitors which overall I
agree was the most just decision to reach.
The underlying message however is that a
conveyancer whether acting for a seller or purchaser needs to be alert at all
times and if there are red flags of the type which appeared in this case, and
which do not disappear on further investigation, not to be reluctant to report
these matters to the National Crime Agency, and ultimately to pull out of a
retainer.
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
