This case concerns the purported purchase of a vacant unencumbered property in London by the claimant Dreamvar. They are a small property company and entered into the agreement to purchase the house for £1.1m without needing to apply for a mortgage. Their solicitors were Mishcon de Reya (‘Mishcon’). Unbeknown to Dreamvar, the seller was a fraudster who had managed to obtain both the driving and TV licence of the true owner, and get them certified by a solicitor, Mr Zoi. The vendor contacted a second set of solicitors, Mary Manson Solicitors (‘MMS’), with instructions to act on his behalf in the sale of the property. Normally solicitors would expect to see originals of identification documents as they have a strict duty to check the true identity of their clients. Sometimes however documents which have been certified by a solicitor as being a true copy of the original are accepted in lieu.
MMS were negligent in the checks made against its client in not noticing the discrepancies in the documentation. The transaction moved quickly and the purchase moneys were transferred to MMS. Although the Land Registry noticed the fraud, it was too late: the money had already been sent to the fraudster by MMS and had disappeared. Dreamvar were left without the property or their money.
Understandably Dreamvar sought a remedy for their loss and commenced an action against both firms of solicitors. In particular that; Mishcon had failed to advise Dreamvar on the risk of identity fraud and had not received an undertaking from MMS that it had taken reasonable steps to confirm the identity of the vendor and were therefore negligent. Further that Mishcon was in breach of trust by paying the money to the fraudster rather than the true owner. Dreamvar also alleged that MMS were in breach of a warranty that they acted for the true owner (a warranty of authority).
Mishcon joined MMS in the action on the first two counts and in addition alleged that MMS was in breach of an undertaking that they were receiving the purchase money on behalf of the rightful owner.
There’s no point in running away. Running away only wears out your shoes.”
Del Boy
When the case was heard in the High Court the outcome caused consternation through the profession. Mishcon were found to be in breach of trust of an implied term of their instructions that their clients funds would only be released if the completion was genuine (this could not be the case with a fraudulent sale). It was made clear by the Judge that he felt that Mishcon should be held accountable as their insurance provision made it far easier for them to meet their client’s loss – it was “far better able to meet or absorb it than Dreamvar”. In making this decision, the Judge put the risk squarely on the purchaser’s solicitors, rather than the vendor’s, even though it is clearly their obligation to verify the true identity of their client. Furthermore the Judge did not choose to exercise the discretion available to him under s61 Trustee Act 1925 which can be relied on in his own defence, if a trustee “has acted honestly and reasonably and ought fairly to be excused for the breach of trust”.
The case came before the Court of Appeal. They upheld the finding against Mishcon, making it clear that, even though Mishcon had acted honestly at all times, the Court was entitled to consider the effect of the breach of trust on both parties, when exercising its discretion under s61 Trustee Act 1925. Mishcon had professional indemnity insurance with cover to at least £3m and was therefore far better placed to absorb the liability.
However the Court found, contrary to the High Court, that MMS (as the vendor’s solicitor) did warrant that they acted on behalf of the rightful owner of the property. The Court also reaffirmed (as contained in the Law Society’s Code for Completion by Post) that the vendor’s solicitor should only release the purchase monies to the true owner, and that sending them to the fraudster was therefore a breach of trust. Under the same Code the vendor’s solicitor undertakes to the purchaser’s solicitor that they will only release monies to the true property owner. They are in breach of this undertaking if the funds are released to anyone else.
The case has implications in that there is now a more balanced risk between vendor’s and purchaser’s solicitors in fraudulent property transactions. In the fight against property fraud, solicitors acting for vendors must be meticulous about checking their clients’ identity and credentials and be able to demonstrate the steps taken. The Law Society may need to review conveyancing practice as it seems likely that solicitors for both parties will be increasingly looking to put the blame on each other. Conveyancing costs and professional indemnity premiums may well increase for the consumer. Owners, particularly absentee landlords, are advised to sign up for the Land Registry’s free Property Alert service.
Link: Dreamvar(UK)Ltd v Mishcon de Reya and Mary Monson Solicitors [2018] EWCA Civ 1082
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