Solicitors’ PI: innocent solicitor ordered to pay damages following £1m property fraud

In a recent Chancery Court decision an innocent purchaser’s solicitor was ordered to pay damages for breach of trust where the registered seller was the victim of identity theft. Although not negligent, the paying away of the completion monies by the purchaser’s solicitor represented a breach of trust for which relief was refused under s 61 of the Trustee Act 1925. The decision appears harsh because it was the failure of the vendor’s solicitors to carry out adequate identity checks in accordance with the Law Society’s Code and Money Laundering Regulations which provided the opportunity for fraud. However, the vendor’s solicitor owed no duty to the purchaser who would otherwise be left with no remedy.

Background

In September 2014, Mr Vardar, the sole shareholder of a development company known as Dreamvar (UK) Ltd instructed Mischon de Reya (MdR) in connection with its proposed purchase of an unoccupied mews house in central London. A sale price of £1.1 million had been agreed and MdR was told by Mr Vardar that speed was of the essence since the vendor, Mr Haeems, wanted the sale completed before divorce proceedings were commenced.

MdR promptly contacted the vendor’s solicitors, Mary Monson Solicitors Ltd (MMS) who advised MdR that it had not yet received its “…clients ID or formal instructions in writing and the completed protocol forms…”. Thereafter, nothing further was heard from MMS until MdR was sent a draft contract, Land Registry entries and property information forms. MdR then raised a number of queries, including some issues for which MdR insisted indemnity insurance was obtained. Until such time as the form of the policy was agreed, MMS agreed to hold the purchase monies transferred to MdR’s order with completion taking place thereafter in accordance with the Law Society’s Code for Completion by Post.

Shortly after completion MMS was contacted by the Land Registry who were undertaking periodic checks. MMS was asked to confirm what steps it had taken to verify Mr Haeems’ identity and to provide copies of any evidence he had provided. As the Registry was unable to link Mr Haeems to the address given on the copy of what purported to be his driving licence and given the high value of the property, further investigations were then made leading to discovery of the fraudulent sale of which the real Mr Haeems knew nothing.

Dreamvar brought proceedings against (1) MdR alleging negligence and breach of trust and (2) MMS alleging breach of warranty of authority, breach of trust and breach of undertaking.

Decision

MdR

Dreamvar alleged that MdR ought to have advised that there were several features of the sale which the Law Society’s Practice Note on Property and Registration Fraud had identified as risk factors. However, the court noted that both the Money Laundering Regulations and the Law Society’s guidance placed the primary responsibility on a solicitor to be satisfied as to the identity of its own client, as it was that solicitor who was best placed to undertake the necessary due diligence. As a consequence, the ordinary expectation of a solicitor acting for a purchaser (where a vendor was represented by a solicitor) was that the vendor’s solicitor would carry out the necessary identity checks. To counter this, Dreamvar alleged that MdR was negligent in not seeking an undertaking from MMS that such checks had been made. Noting that it was not asserted that this represented standard conveyancing practice in 2014, or that there was otherwise anything in the public or professional domain alerting solicitors to seek such an undertaking, the court declined to find MdR had been negligent.

MdR had, however, held the purchase monies on trust for Dreamvar and the terms on which the monies could be paid away depended on the terms of MdR’s retainer. Since the issue was not expressly addressed in MdR’s retainer letter, the court held it was only authorised to release the purchase monies on ‘completion’ and (relying on the Court of Appeal’s decision in Lloyds TSB Bank plc v Markandan & Uddin, 2012) ‘completion’ meant a genuine completion of a genuine transaction. On that basis MdR was in breach of trust in paying away money to a fraudulent vendor for which relief was sought by MdR under s 61 Trustee Act 1925. This section provides:

“If it appears to the court that the trustee…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.”

Whilst the court accepted that MdR acted both honestly and reasonably, it declined to grant any relief because of two factors. First, although MMS was negligent in failing to undertake adequate checks as to its client’s identity it owed no duty to Dreamvar (see below), which would otherwise be left without a remedy unless it could recover against MdR. Secondly, MdR was in a much better position than Dreamvar to absorb the loss. In this regard the court made reference to and relied upon the Court of Appeal’s decision in Santander UK plc v RA Legal Solicitors (2014):

“Even if a trustee ought fairly to be excused….Much may depend at this discretionary stage upon the consequences for the beneficiary. An Institutional lender may well be insured…for the consequences of third party fraud. But the innocent purchaser may have contributed his life savings…and have no recourse at all other than against the Insured solicitor…”

Dreamvar was only a small development company whose purchase of the property had been funded by a loan from Mr Vardar’s father. The loss of the monies had potentially devastating implications for Dreamvar and Mr Vardar. Conversely, MdR was a large firm of solicitors that was insured; it was therefore more able than Dreamvar to meet and absorb the liability.

MMS

The vendor’s solicitor, whose admitted negligence gave the opportunity for the fraud, avoided liability. Whilst it was not alleged that MMS owed any tortious duty of care to Dreamvar in undertaking identity checks, both Dreamvar and MdR asserted that MMS was in breach of trust and/or undertaking in paying the completion monies over to the fraudster. Both claims failed.

The breach of trust claim failed because it was held to be inconsistent with the Law Society’s Code for Completion by Post. This specifically provides that whilst the seller’s solicitor acts as the buyer’s solicitor’s agent on completion this does not require the seller’s solicitor to investigate or take responsibility for any breach of the seller’s contractual obligations. Here, the only obligation placed on MMS was to hold the purchase monies until such time as an indemnity policy on title had been agreed.

The breach of undertaking claim also failed. Although the Code stated that “The seller’s solicitor undertakes: (i) to have the seller’s authority to receive purchase monies…”, Dreamvar and MdR’s contention that this meant the genuine seller’s authority was rejected. The court noted that MdR’s evidence that no solicitor would give a warranty as to the identity of its client was inconsistent with the argued for interpretation.

Comment

Although the decision, on its face, appears harsh on MdR, the court had to decide which of the two innocent parties would be least penalised by the decision. The fact that MdR was in a better position to absorb the loss mitigated against granting relief for an otherwise wholly excusable breach of trust.

An application for permission to appeal has been lodged with the Court of Appeal and the outcome is awaited. In the meantime, in order for the buyer’s solicitors to seek protection for themselves (and their insurers), they could consider amending their retainer letters to make it clear that they do not independently verify the seller’s identity. Clients should be advised to undertake their own due diligence before completion. Although an undertaking could be sought from the vendor’s solicitors that any monies forwarded to them are to be held in trust until released to the registered proprietor, i.e. the real person properly entitled to receive them, such an undertaking could be difficult to secure until the Law Society promote this as good practice. Buyers’ solicitors must be alert to the risks of fraud, ask more questions when the red flags mentioned in the Law Society’s guidance apply and report and discuss the risks with the buyer.

Further reading: Dreamvar (UK) Ltd v Mischon de Reya

[2016] EWHC 3316 (Ch)