Healys Secure £1.08 Million Judgement For Developer Victim Of Property ID Fraud

Mr David Railton QC, sitting as a Deputy High Court Judge in the Chancery Division, recently handed down a judgment of widespread significance to the solicitors' profession in Dreamvar UK Limited v (1) Mishcon de Reya (2) Mary Monson Solicitors Limited [2016] EWHC 3316 Ch. Jerome O'Sullivan, a Partner at Healys' Commercial Litigation department, acted on behalf of the Claimant.The Claimant is a small business engaged in the purchase and development of London properties. The Claimant had instructed City firm of solicitors Mishcon de Reya to advise him on the sale and purchase of a number of properties.The Managing Director of the Dreamvar was shown around a mews property in London by estate agents Douglas & Gordon.  The estate agent informed him that the asking price was �1.1m and that the vendor wanted to complete the sale quickly.After researching the market, the claimant formed the view that the asking price represented good value and he instructed Mischon de Reya to act on his behalf in regard to the purchase of the property. The vendor instructed Mary Monson Solicitors, a firm based in Manchester. Neither the Claimant, Mishcon de Reya, nor Mary Monson ever met the vendor.The purported vendor took fake documents to a third small firm of solicitors in London, Denning Solicitors Ltd. Denning certified the purported vendor's ID on behalf of Mary Monson.The sale exchanged and completed on the same day and Mary Monson was instructed to promptly send the entire purchase funds to Denning, who in turn sent it to an account in China. The SRA intervened in the practice of Dennings Solicitors on 13 October 2016.When it came to registering the sale, the Land Registry noticed a number of inconsistencies in the documentation. It emerged that the purported vendor was a fraudster and had no interest in the property whatsoever. He has absconded and none of the funds have been recovered.

Proceedings

‍Dreamvar issued proceedings against Mishcon de Reya for negligence and breach of trust and claimed against Mary Monson for breach of trust and breach of warranty of authority. Mishcon de Reya issued Part 20 claims against Mary Monson for breach of trust, breach of undertaking and breach of agency agreement.Mary Monson had demonstrated a range of failings in relation to its AML checks, both in relation to its own policies and Law Society guidance. These included:

1. relying upon a TV licence issued online as a proof of address;
2. relying upon a photocopy of a driving licence issued a week before the transaction as proof of identity;
3. failing to request original documents;
4. failing to carry out enhanced due diligence, despite never having met the vendor face to face;
5. failing to notice that the address the vendor had given had no connection with the property;
6. failing to obtain a bank account statement from the vendor; and
7. failing to insist upon paying the proceeds into such account.

For most of the proceedings, Mary Monson denied any liability in relation to these failures. However, a few weeks before the trial, it amended its defence and admitted that it had failed to undertake such identity checks on the purported vendor as would have been undertaken by a competent solicitor, fully appreciating his obligations under its own AML policy. It also belatedly accepted that it should have insisted upon the vendor attending a meeting at their offices with original proof of identity and proof of address.

‍Judgment against Purchaser's Solicitors

‍The claim for negligence was dismissed. However, Mishcon de Reya were found to be in breach of trust in paying away the purchase monies in exchange for forged documents. While liability for breach of trust is strict, under Section 61 of the Trustee Act 1925, if a trustee can show to the Court that it acted honestly, reasonably and ought fairly to be excused, then the Court may grant relief from breach of trust. The Judge held that Mishcon de Reya had acted honestly and reasonably.However, he went on to compare the effect of the breach of trust on both parties before applying the Court's discretion. He compared the catastrophic effect upon Dreamvar and the fact that they were uninsured against the fact that Mishcon de Reya was a large City law firm, who enjoyed insurance cover of at least £3 million to cover such a liability. He also took into account that he found that our client had no recourse against Mary Monson. He therefore decided that Mishcon de Reya ought not to be excused for breach of trust and found in the Claimant's favour.As a result the claimant was awarded the sum lost which was approximately £1.08 million, together with interest at 4.5% per annum from the date that the monies were stolen.

‍Judgement in favour of the Vendor's Solicitors

‍The Judge also held that Mary Monson was not liable to either Dreamvar or Mishcon de Reya for breach of trust. He held that Mary Monson was entitled to release Dreamvar's monies in exchange for forged documents.The Judge found that the relevant undertaking was to provide a TR1 form executed by their client, not the registered owner. Consequently, Mary Monson was not in breach of their undertaking to Mishcon de Reya.The Judge also found that the implied warranty that Mary Monson had given to Dreamvar was that they had the authority of a client, not necessarily the authority of the registered owner of the property. Furthermore, the Judge had not been persuaded that the solicitor with conduct of the matter at Mishcon de Reya had relied upon any implied warranty given by Mary Monson.

‍Correct Interest Rate

‍The ruling on the rate of interest that should apply is also significant. The standard approach of the Courts in commercial disputes is to award interest in the region of 1% above LIBOR, which is currently 1.25% per annum. In the real world, only the very largest firms can borrow at a rate even approaching such a low rate. In this case, the Judge took on board Dreamvar's arguments that a small property development company has to borrow money at a substantially higher rate. Consequently, he ordered that Mishcon de Reya pays interest on the award at a rate of 4.5% per annum from the date that the money was paid to the fraudster in breach of trust.

‍Appeals

‍Mishcon de Reya have been granted permission to appeal against the judgements in favour of Dreamvar and Mary Monson. Dreamvar has been granted permission to appeal against Mary Monson. This case and a similar case (P & P Property Limited v Owen White & Catlin LLP [2016] EWHC 2276 Ch) are likely to be heard by the Court of Appeal in autumn 2017

‍Significance of the Case

‍This case has wide implications for the legal profession as a whole. It is relevant to all solicitors who deal with property transactions and all matters where funds are held on client account in relation to any intended transaction.The vendor's solicitors are in the best position to carry out reasonable due diligence to verifying the vendor's identity. For practical and legal reasons, the purchaser's solicitor is not in a position to carry out such checks.However, the result of this ruling is that, even if the vendor's solicitor is negligent in carrying out these checks and admits such negligence, it has no liability to the purchaser, either under breach of warranty of authority or breach of trust.This type of fraud is regrettably on the increase. The detective who is investigating this fraud is also dealing with 20 other similar frauds, the proceeds of which all have been traced to Middle Eastern countries. The fraudster or their accomplice often gains access to the property by letting the property on a short tenancy.The ruling is likely to lead to increased professional indemnity insurance premiums for solicitors engaged in property transactions.