This was the very situation which a seller’s solicitor and estate agent faced in P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth  EWHC 2276 (Ch).
An impostor posing as the real owner of the property instructed Winkworth to market the property and the First Defendant (‘OWC’) to undertake the conveyancing. The impostor claimed he was living in Dubai and was looking for a speedy sale. OWC carried out the usual identity checks (in robotic form only) and the sale proceeded with the purchaser P&P Property paying 1.03 million for the unoccupied property.
Upon completion the net sale proceeds were passed on to the purchaser. Subsequently the true owner when walking past his property was alerted when he saw builders ripping out the kitchen of the property. By this time the impostor had vanished with all of the net sale proceeds (£927,000).
The purchaser who purchased from the impostor was not of course happy and decided after the fraud came to light to bring a claim against the seller’s solicitors and also the estate agent for breach of warranty of authority and breach of duty.
There was a separate claim brought against the seller’s solicitors for breach of trust relying on the fact the misappropriated funds passed through the hands of the seller’s solicitors.
Breach of warranty claim
The judge found that if a client appoints a solicitor the only warranty that a third party dealing with that solicitor can rely on is that the solicitor has authority to act on behalf of the client. There is no implied warranty that the solicitor can vouch for the client’s authenticity as the owner of the property to be sold.
The judge found:
‘The basic representation is only that the agent has authority to act for another, a matter which arises between him and his principal and is something which is usually peculiarly within his own knowledge. An agent does not, simply by acting as agent, represent that his principal will perform the contract or is solvent or make any other representation as to the principal's attributes or characteristics. The court should not imply a warranty of authority which has an effect going beyond the basic representation, save where it is clear that the necessary promise is properly to be implied. This is particularly so in relation to professionals, including solicitors, who do not normally undertake an unqualified obligation.’
To extend the warranty to this level would in the view of the Judge Robert Dicker QC constitute a guarantee that the client was the registered proprietor of the property and essentially create a strict liability for any loss arising if as in the present case the client was found to be an impostor. The judge found that such warranty was also entirely inconsistent with the practice adopted amongst conveyancing solicitors and out of line with the Law Society Code for Completion by Post (2011).
The judge also found on the facts of this case that there was not in breach of warranty on the part of the estate agent but did not rule out the possibility that in certain circumstances a claim could be well founded.
Breach of Duty of Care
Again the Judge found in favour of both Defendants.
On the facts (and more particularly in the absence of evidence to show a breach of warranty of authority) there was no evidence that the Defendants had accepted responsibility to ensure that the client was the true owner or that the impostor was not who he claimed to be.
The judge also found:
‘The imposition of such a duty of care on the part of Owen White to take reasonable care to ensure that Mr Harper was the true owner of the Property, would also, in my view, be inconsistent with the detailed rights and obligations set out in the Law Society's Code for Completion by Post, which I consider further later in this judgment’.
In terms of the claim against Winkworth the judge found:
‘I accept Mr Polycarpou's evidence [purchaser’s solicitors] that he expected Winkworth to have carried out their client due diligence and anti-money laundering checks and relied on them to have done so. However, reliance on its own is not sufficient to establish a duty of care on the part of Winkworth.
On the basis of the test derived from Hedley Byrne v Heller, it is also necessary to establish, amongst other things, the necessary objective assumption of responsibility by Winkworth and, in this respect, the primary focus is on statements or conduct which crossed the line between them.
Nothing was said by Winkworth about the steps taken in relation to its client due diligence and anti-money laundering obligations. Mr Polycarpou did not ask and Mr Hunt did not volunteer anything in this respect. The furthest that the evidence went was that Mr Hunt appreciated that Mr Polycarpou would have expected both Winkworth and Owen White to have carried out their respective money laundering checks before marketing the property.
Assessing the relevant evidence as a whole, there was, in my view, no communication or conduct which crossed the line such that, in this particular case, objectively Winkworth are to be taken also to have assumed responsibility to P&P Property for taking reasonable care when carrying out their client due diligence to ensure that their client was the true owner’.
Breach of Trust
The Claimant claimed that OWC held the funds that it received from the purchaser on trust, that no valid completion took place and that the completion monies were therefore paid out in breach of trust.
The judge found in favour of OWC relying on paragraph 3 of the Law Society Code for Completion by Post (2011 edition) (the "Code")
‘’In complying with the terms of the code, the seller's solicitor acts on completion as the buyer's solicitor's agent without fee or disbursement but this obligation does not require the seller's solicitor to investigate or take responsibility for any breach of the seller's contractual obligations and is expressly limited to completion pursuant to paragraphs 10 to 12".
The Judge found:
‘….that the fact that paragraph 3 provides that the seller's solicitor is not required "to investigate or take responsibility for any breach of the seller's contractual obligations" is, in substance, inconsistent with the vendor's solicitor being liable, as the purchaser's agent, for breach of trust in releasing the money in the event that completion does not occur because the seller does not have title. One of the seller's obligations is to provide a genuine transfer of title. If the vendor's solicitor is liable for breach of trust merely because no genuine transfer is provided it would effectively be taking responsibility for what paragraph 3 says it is not. The extent of the vendor's solicitor's obligations on completion are governed by the express undertakings that it provides in accordance with the Code. In my view, in the light of the guidance in cases such as Mothew [Bristol and West Building Society v Mothew  Ch 1] , in these circumstances 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.
In short the judge found that it would be inconsistent with the terms of the code to hold that a breach of trust occurred by reason of the seller releasing the completion funds to the purchaser when it was argued that the seller was not in a position to provide a genuine transfer of title. Essentially the judge took the view that paragraph 3 specifically excludes the sellers solicitor from liability for any breach of contract on the part of the seller.
Sellers Solicitors Conduct
Helpfully the judge took the time to consider whether the sellers solicitors would have been able to avail themselves of the Section 61 of the Trustee Act 1925 relief had he found that a breach of trust had occurred.
Section 61 provides:
"If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust … but has acted honestly and reasonably and ought fairly to be excused for the breach of trust … then the court may relieve him either wholly or partly from personal liability for the same."
The judge it is safe to say was not impressed with the seller’s solicitors and found that if there had been a breach Section 61 relief would not have been available.
In short the judge found there were sufficient ‘red flags’ to alert the seller’s solicitors and to cause at the very least the seller’s solicitors to raise further questions.
The ‘red flags’ (and there were many) in this case included:
‘Seller’ living abroad
No legal charge
Relatively high value
Discrepancies between signatures
Lack of a correspondence address or evidence as to where the ‘seller’ was in fact living and working or how long he had been there.
Failure to pick up form the ‘seller’s’ bank statements when presented the fact that most of the items within it appeared to be London based.
Failed electronic identity check.
The judge concluded:
‘The fraud was plainly a sophisticated one which appears to have carried out with some expertise. However, in my view, it is plainly possible that, despite the obvious sophistication of the fraud, further questions would have revealed the true position or discouraged Mr Harper from proceeding further and, even if they did not, they would have increased the prospect of that occurring’.
This case is unremarkable and should not lead in my opinion to any significant change in practice.
Upon acting for a seller it is important to keep in mind both statutory and professional obligations particularly the widely known obligation a conveyancer has to be alert to indicators of money laundering and/or fraud and to identify and action ‘red flags’ as and when these arise. To simply ignore and do nothing is not advisable and could leave you exposed to liability.
It is clear that a responsible and alert practitioner given these circumstances should have spotted that there was something not quite right about the transaction. It should be clear by now that if you are acting on a sale where there is no mortgage, the property is empty and the ‘seller’ purports to be living abroad, further inquiries should be made. In this case the seller’s solicitors should have never allowed this transaction to proceed. There were clear warnings and to argue as the seller’s solicitors did that she did not consider it was appropriate to raise a large number of questions with her client simply is not an acceptable argument. If in doubt the seller’s solicitors should have terminated the retainer.
What more you might ask could the seller’s solicitors have done? In this case I do take the view that further evidence to link the seller to this property could have been sought. I do not consider it is unreasonable given the large number of red flags to have asked the client to provide details of who acted for the ‘seller’ on the purchase of the property and to contact those solicitors to seek verification of identity. I know some may argue this is a step too far and probably in the majority of cases it is but as I say the alarm bells were constantly ringing in this case.
If acting for a purchaser and it is noted from the Seller Information Form that the property is empty and there is an alternative address for the seller shown (which in this case the seller’s solicitors failed to investigate) then I do consider that the seller’s solicitors should be asked about the checks undertaken to ensure the seller is in fact the registered owner. In other words to ask for a warranty. If this is refused then perhaps insurance should be considered or the buyer should be warned of the risk of fraud.
In this case the I am of the view OWC was lucky to have come away untouched. The prominence given to the Law Society Code surprised me and was clearly and cleverly used by the judge to find for the sellers solicitors which overall I agree was the most just decision to reach.
The underlying message however is that a conveyancer whether acting for a seller or purchaser needs to be alert at all times and if there are red flags of the type which appeared in this case, and which do not disappear on further investigation, not to be reluctant to report these matters to the National Crime Agency, and ultimately to pull out of a retainer.