Charities and internal investigations
The Court of Appeal has handed down its much awaited judgment in what has become known as the ‘Dreamvar’ case (Dreamvar (UK) Ltd v Mishcon de Reya and others). The case is of interest to property and insurance professionals as well as the wider public as it concerned a fraudulent property transaction, an increasingly common occurrence. Given its importance to all conveyancing practitioners, but specifically smaller practices, the Law Society intervened so as to be able to make representations on behalf of the profession.
Dreamvar, a small property company, entered into an agreement to purchase a house in London. The purported vendor of the property was in fact a fraudster who had obtained the driving licence and TV licence of the true owner. Law firms are under strict obligations to check the identity of their clients and it is usual to ask to see the originals of identification documents or, alternatively, copies that have been certified by a solicitor as being true copies of the originals. In this case the documents were certified by a solicitor called Mr Zoi. These documents were then presented to a different law firm (Mary Monson Solicitors ( ‘MMS’)) to act on the fraudster’s behalf on the sale. MMS was negligent in the checks made against its purported client and did not pick up on discrepancies in the documentation. Mishcon de Reya (‘Mishcon’) were instructed to act for the purchaser, Dreamvar, an existing client. As is often the case with fraudulent transactions, the matter proceeded quickly and upon completion the completion funds of £1.1m were paid by Mishcon de Reya to MMS. The fraud was spotted by the Land Registry prior to registration of the purchase but by the time it was discovered MMS had transferred funds and the monies had disappeared.
Dreamvar sought recourse for the loss of its £1.1m and raised various claims against Mishcon and MMS namely:
In turn, Mishcon joined in MMS and claimed:
The first instance decision in the High Court caused shockwaves. Despite its clear failings in respect of its client due diligence, MMS managed to avoid any liability but Mishcon was found to be in breach of trust on the grounds that it was an implied term of the retainer with their client that the funds would only be released if the completion was genuine, which could not be the case on a fraudulent sale. The decision put the risk in such cases firmly on the purchaser, as opposed to the vendor’s solicitors even though it is their obligation to ascertain the identity of their client. The judge made it clear in his decision that Mishcon should be held accountable as it had insurance that could cover the full loss suffered by its client and was “far better able to meet or absorb it than Dreamvar”. He did not exercise the discretion that was open to him under Section 61 of the Trustee Act 1925 (‘Section 61’) which can be relied upon in defence if the trustee “has acted honestly and reasonably and ought fairly to be excused for the breach of trust”.
The Court of Appeal upheld the finding against Mishcon clarifying that, even though Mishcon acted honestly, in exercising its discretion under Section 61, the Court is entitled to compare the effect of the breach of trust on both parties. Mishcon was far better placed to cover the liability as it had professional indemnity insurance of at least £3 million pounds. However, the Court overturned the findings in relation to MMS and held that a vendor’s solicitor does warrant that they act on behalf of the genuine owner of the property. It also confirmed that, in relation to the Code for Completion by Post, the vendor’s solicitor only has authority to release the purchase monies to the true owner. Releasing funds to a fraudster will amount to a breach of trust. By virtue of the same Code, the vendor’s solicitors undertake to the purchaser’s solicitors that they will only release purchase monies to the true owner of the property. They will be in breach of this undertaking if they release them to any other party.
The upshot of the decision results in a far more balanced spread of risk between vendor and purchaser solicitors in fraudulent property transactions. With solicitors under increasingly onerous obligations in terms of client due diligence and money laundering, it seemed wholly unsatisfactory that a firm which had evidently failed in this regard, had escaped liability for the losses suffered as a result.
It is now clear that, if (contrary to best practice) they were not doing so previously, solicitors acting for vendors must be far more diligent about the checks they undertake to satisfy themselves as to the identity of their client and be able to demonstrate the steps undertaken. This is crucial in the fight against property fraud. Such checks need to be undertaken in the context of a continuing awareness of the other ‘red flag’ alerts of a possible fraudulent transaction. No doubt, solicitors acting for purchasers will be looking to place as much liability on to the vendor’s solicitors as possible and will seek specific assurances that reasonable steps have been taken to verify a vendor’s identity but no doubt this will give rise to dispute as not all circumstances will be straightforward. What are ‘reasonable’ checks? Given the likelihood of each party seeking to pass liability to the other, the Law Society will probably need to review conveyancing practice.
For clients, it may well be that conveyancing charges will increase to cover the cost of ensuring adequate checks are undertaken and firms will be looking at their terms of business to try and mitigate potential liability. Everyone has a part to play in fighting fraud. Solicitors should be routinely warning purchasers of the dangers of property fraud; properties of all values are at risk. Property owners are well advised to sign up to the Land Registry’s free Property Alert service which will monitor up to 10 properties free of charge. Property owners are notified whenever a search or an application is lodged against a protected property. If it relates to a purported sale or a mortgage that the owner is not aware of, the Land Registry should be contacted immediately to halt the registration and protect the property owner’s interest.
There is likely to be a great deal of commentary regarding this judgment as the full impact of it is considered by professionals and their regulatory bodies.
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