Friday frauds – allocation of risk among the innocents

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The court reviews warranty of authority, breach of duty, breach of trust and the allocation of risk amongst the innocents in fraudulent property transactions.

London has always been a hot property market. Investment properties sell in a matter of days at ever increasing prices. Therefore nothing was seen as unusual when a Mr Harper said he wanted to sell his property, with a seven figure price tag, in a matter of days so he could use the money for a purchase he was making in Dubai. After the sale went through it became clear that Mr Harper was a convincing imposter when the real Mr Harper walked past his property and saw builders ripping out his kitchen! Such were the circumstances which led to the claim by the purchaser against the seller’s solicitors and estate agents in P & P Property Ltd v Owen White & Catlin and Crownvent in which Robin Dicker QC, sitting as a deputy High Court judge, determined where the loss should fall.

The purchasers based their claim on breach of warranty of authority and also breach of duty against both the solicitors and the estate agents. They also claimed there was a breach of undertaking and breach trust by the solicitors, through whose account much of the purchase price flowed.

Warranty of authority

Those who deal with these claims will be aware that there is a real concern about warranties of authority given by professionals. A warranty of authority is strict so it doesn’t matter that the professional wasn’t negligent and was innocently duped by the fraudster. If there is a breach, the professional is liable for the losses which flow. For this reason, professionals have for years tried to narrow the scope of the warranty. Rather than warranting that a professional acts for the actual owner of the property, defendants have been saying that the warranty is merely that the professional acts for a client who says he is the owner of the property.

The difference between the two warranties is huge. If the warranty is the wider one the professional, and their insurers, are effectively the guarantor of the transaction even though the professional could never have identified that there was a fraud. If it is the narrower warranty, the professional is unlikely to be liable for the lost purchase price unless they expressly agreed that their client was the actual owner of the land.

The judge has, no doubt to the relief of professionals and their insurers, continued the court’s recent tendency to adopt the narrower warranty.

Breach of duty

A professional in a property transaction, normally the solicitor or licensed conveyancer, obviously owes duties to their own client. That is uncontroversial. But do they owe a duty to the other side? While the professional will routinely give undertakings that give rise to a duty to the other side, the court has accepted that there is no standalone duty of care.

This approach has faced criticism, especially in these times of sophisticated property frauds where the purchaser and their advisers are not able to investigate whether the seller is genuine. Has the absence of a duty survived this change in the type of claims which are arising? The judge says it has and that no duty arises.

While we consider that decision to be correct, it does place the risk of there being a fraud on the party least able to investigate whether there has been one. As such we can imagine this is an area where some form of insurance product might be devised to help step in where, as in this case, title had not yet been registered so the statutory protection from the Land Registry isn’t in place. Savvy purchaser’s solicitors would recommend this to their clients to protect against potential claims against themselves.

Breach of trust

Breach of trust has been an area of real concern to seller’s and purchaser’s solicitors, especially since the recent decision of Judge Pelling QC in Purrunsing v A’Court & Co where it was agreed between the parties, and accepted by the judge, that purchase monies paid out in a transaction which turned out to be a fraud, and which was therefore void, were paid in breach of trust.

The submissions before the judge were that Purrunsing was wrongly decided, or that the concession agreed by the parties was wrong. Mr Dicker QC has not gone that far. He concluded that Purrunsing did not help, because Purrunsing arose from the 1998 edition of the Law Society’s Code for Completion by Post whereas P & P Property Ltd concerned the 2011 code. Under the 2011 code he found there was no breach of trust.

This will leave parties in older transactions potentially at risk of a breach of trust but will be of relief to professionals in the majority of transactions, given that most frauds which now arise will have occurred after 2011. Since breach of trust is another example where there is effectively a strict liability, which will only be avoided if relief is granted under section 61 of the Trustee Act 1925, again the professional would otherwise be at risk of effectively being a guarantor of the transaction. Interestingly the judge in this case would not have granted relief under section 61, which gives some guidance as to what sort of investigations are needed to get the benefit of that relief.

Breach of undertaking

The court concluded that undertakings given under the 2011 Code do not amount to enforceable undertakings as to the identity of the seller, which will again be of relief to professionals and their insurers.

Conclusion

This is an important decision in an area where, depressingly, claims are arising with increasing regularity. The problem is that the immediate victim, the purchaser, is the party least likely to be able to protect themselves but if the seller’s solicitor or estate agent is liable to make good the loss, they are equally innocent victims. No matter how good the money laundering checks, sophisticated frauds will still occur.

It therefore feels like an area where some statutory scheme should step in, or where the insurance market should find a solution to protect buyers. Until then, the decision will be of considerable relief to solicitors, estate agents and their insurers.

To help protect themselves, savvy purchaser’s lawyers should be asking for express warranties from the seller’s solicitor, but savvy seller’s solicitors should not be agreeing to provide them. 

Niall Innes and Jacqui King of Mills & Reeve acted for the successful estate agent. If you would like any further information or to discuss the claim you should speak to Niall or to Angus Turner

The judge thought that the case raised important issues and therefore granted permission to appeal.

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