Dreamvar: a cautionary tale

The duty of conveyancers to check the identity of the parties in a property purchase became more onerous, following the ruling in Dreamvar. So what is the extent of their due diligence duties to verify identity in conveyancing practice today?

Conveyancing is a high risk area of legal practice because of the large sums of money involved, attracting fraudsters and cyber criminals taking advantage of unsuspecting clients. The Dreamvar case followed a £1.1m ‘sale’ by a fraudulent seller, and the crucial question of who was liable for the lost purchase monies.

What’s the background?

Mishcon de Reya, acting for a repeat client (the buyer), was caught up in a fraudulent property transaction in which an individual purported to a sell a London property. MMS acted for the fraudster but it had not conducted adequate identity checks on the seller. Mishcon relied on the checks made by MMS and the transaction was completed (quickly on the ‘seller’s insistence).

On completion, Mishcon paid the balance of the purchase price of £1.1m to MMS but the fraud was not picked up until HM Land Registry spotted it before registration took place. Meanwhile, the fraudster had disappeared with the money, and the buyer issued claims against both law firms.

The ruling of the Court of Appeal was long-awaited (it also heard a similar case at the same time)

but it brought bad news for conveyancers: it ruled that despite the fact that Mishcon had acted honestly, parting with the purchase money in what was a sham sale amounted to breach of trust. This is because the Law Society’s Code for Completion by Post gives authority to solicitors only to release money to the true owner. In this case, they were released to a fraudster.

The fact that Mishcon had performed its duties without fault was not, apparently, relevant. Its application for relief under Section 61 Trustee Act 1925, on the basis that it had acted honestly throughout the transaction, was refused. One factor for the Court was that Mishcon was in a better position than the buyer to absorb the losses.

Furthermore, MMS was held partially liable and had to pay a contribution of the compensation. This was on the basis that a seller’s solicitor warrants that it acts on behalf of the genuine property owner.

What does this mean for conveyancers?

The ruling seems unfair and illogical given the lack of contact between the buyer/buyer’s solicitor and the fraudster, particularly in circumstances where the courts found no fault in the performance of Mishcon’s service to its client. A duty of trust is still owed to the purchaser.

This means that whatever the practical difficulties (and potential tensions between solicitors over the issue), due diligence must be undertaken particularly carefully. Unfortunately, the CA ruling is lacking in any guidance as to how conveyancers can protect themselves, and there remains many questions about the practical implications and risks for conveyancers and their insurers.

Following the ruling, the Law Society warned that even full compliance with the regulations and other regulatory requirements will not prevent liability if a solicitor acts in breach of trust. The Society published a formal response and set out various steps conveyancers can take – including reviewing and establishing policies and procedures which practitioners will find invaluable.

 

 

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