Property fraud: controversial case decision
A question of fraud
2 June 2017
Mark Brassey looks in detail at a controversial decision in a case of property fraud
The case of P&P Property Limited v (1) Owen White and Caitlin LLP (OWC) (2) Crownvent Ltd t/a Winkworth was heard before Robin Dicker QC in the High Court. A firm of solicitors, OWC, and estate agents, Winkworth, managed successfully to defend a claim against them that came about as a result of a property fraud.
The case raises difficult questions about who is liable for a property fraud, especially when the fraudster cannot be found and the proceeds of sale are transferred overseas; it also considers what steps solicitors and estate agents must take in relation to knowing their client and money-laundering checks. It is understood that the claimants have permission to appeal the decision and it is likely to be heard in the Court of Appeal towards the end of 2017.
The facts of the claim
On 20 November 2013, a fraudster posing as the real owner, Mr Harper, instructed OWC as his solicitors in relation to a house in Hammersmith, London. The fraudster first contacted OWC to say that he was arranging a bridging loan on the property to allow him to purchase a property in Dubai urgently; the transaction later became a sale of the London property, with Winkworth instructed as the estate agents. P&P, the purchaser, agreed a price of £1.03m. Contracts were exchanged on 6 December, with completion to take place on 12 December 2013.
P&P, believing that it was the genuine owner of the property, instructed contractors to commence stripping-out works on 13 January 2014. Three days later, however, the real owner turned up at the house and asked the builders what they were doing. At this point, the fraud came to light.
P&P pursued claims against OWC for breach of warranty of authority, breach of duty of care, breach of trust and breach of undertaking. It also claimed against Winkworth for breach of warranty of authority and breach of duty of care.
Breach of warranty
What is breach of warranty?
When a person makes a representation that they are acting on behalf of someone, either through their words or actions, and induces someone to do something that they may not have otherwise done, the person making the representation is deemed to have warranted that the representation is true. They are therefore liable for any loss caused to a third party by a breach of that warranty.
P&P argued that OWC and Winkworth were both liable for breach of warranty of authority on the basis that they acted for the true owner of the property and that P&P relied on their representations, suffering loss and damage.
When a person makes a representation that they are acting on behalf of someone, either through their words or actions, and induces someone to do something that they may not have otherwise done, the person making the representation is deemed to have warranted that the representation is true
The judge reviewed a number of authorities on this issue. He first considered what is arguably the leading case in this field, Penn v Bristol and West Building Society  1 WLR 1356, which involved a mortgage fraud. In this case, the husband forged his wife’s signature and the solicitors were held liable as having given a warranty that they were instructed by the real owners. He also considered Zwebner v The Mortgage Corporation plc  PNLR 769, another mortgage fraud case in which the Court of Appeal recognised the existence of an implied warranty.
However, after examining these cases, the judge decided there was no general rule, stating:
"These cases do not, in my view, establish that any solicitor who acts for someone impersonating the true owner is necessarily liable for breach of warranty of authority."
In order to balance the arguments, he took into account a number of authorities that ruled that professionals are not normally held to be strictly liable or treated as guaranteeing a favourable outcome. These included cases where claims against professionals failed, such as Excel Securities plc v Masood and ORS  EHWC 3912 (QB) and Stevenson v Singh  EWHC 2880.
The judge concluded P&P by saying: "The checks that solicitors are required to undertake are designed to reduce the risk of fraud and cannot reasonably be thought to eliminate it." The claims against both defendants were dismissed.
It is not easy to follow some of the judge's reasoning. Most professionals would automatically presume that if a solicitor and estate agent say that they are acting on behalf of someone called Clifford Harper and that is the name of the registered proprietor, they are in fact acting on behalf of the Clifford Harper who actually owns the property. Why would they think otherwise?
The judge's decision is, however, supported by Excel and Stevenson. The onus appears to be very much on purchasers' solicitors to ensure that they make extensive enquiries to ascertain that the seller is indeed the real seller and not a fraudster.
Duty of care
P&P claimed that both defendants owed it a duty of care, and that they acted negligently. In his reasoning, the judge referred to the decision in Gran Gelato v Richcliff  CH 560 in which Sir Donald Nicholls held:
"In my view, in normal conveyancing transactions, solicitors who are acting for a seller do not in general owe to the would-be buyer a duty of care when answering inquiries before contract or the like."
The judge did not consider that there were any special circumstances in the case that would result in OWC accepting a direct responsibility to P&P to take reasonable care to ascertain the identity of Harper or ensure he was the true
owner. His conclusion was that OWC did not owe P&P a duty of care. The claim against Winkworth was also dismissed.
Breach of trust
P&P argued further claims against Owen White for breach of trust. It said that Owen White held the funds it received from the purchaser on trust, that no valid completion took place and that the completion monies were therefore paid away in breach of trust.
The judge found that Owen White's obligations need to be construed by reference to the Law Society Code for Completion by Post’s 2011 edition, which he distinguished from an earlier version in 2008. In short, he accepted the argument that the seller's solicitor was not required to "investigate or take responsibility for any breach of the seller's contractual obligations". The judge concluded that it would be wrong to construe the code so as to give rise to a breach of trust or, as a result, as an effective guarantee of title.
Breach of undertaking
P&P argued that OWC was in breach of undertaking. Paragraph 7(i) of the code states:
"The seller's solicitor undertakes to have the seller's authority to receive the purchase money on completion and that the seller's solicitor will complete upon becoming aware of the receipt of the sum specified in paragraph 9."
P&P argued that in breach of undertaking, OWC did not have the true vendor's authority to receive the purchase monies and that no valid completion took place.
The judge accepted the defendant's argument that there was no breach of undertaking on the basis that the reference to seller was to the person agreeing to sell the property, not the true owner.
This case emphasises the important issue of due diligence and 'know your client' procedures. Although it is difficult not to empathise with P&P's situation, solicitors, estate agents and their insurers will be pleased to have noted the conclusions reached by the judge.
This case will highlight to practitioners the risks and heighten the greater possibility of property fraud when certain red flags are raised. In these circumstances, a number of practical action points can be considered.
- Sellers' solicitors could be requested to give an express warranty that the seller is in fact the true and genuine person who owns the registered title to the property.
- If the seller's solicitor refuses to provide such a warranty, it will be even more apparent that there could be a property fraud. The purchaser can then decide whether or not to proceed with the purchase.
- The purchaser can make enquires as to whether there is any insurance that may protect them against the risk.
The legal and property professions will doubtless be interested in the subsequent ruling of the Court of Appeal on this case.
Mark Brassey is a partner with Child & Child
Related competencies include: Purchase and sale
This feature was taken from the RICS Property journal (May/June 2017)