Dreamvar ruling: what this means for fraudulent property transactions

Dreamvar ruling: what this means for identity fraud in conveyancing transactions
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Law firms might be more liable for identity fraud claims than previously imagined, following a Court of Appeal ruling.

In essence, the ruling means that conveyancing solicitors are now the effective guarantors that a property transaction is genuine.

Combined with a rise in identity fraud claims, this ruling could place upwards pressure on conveyancers’ professional indemnity insurance rates.

What happened

Who should bear the risk of loss when a fraudster pretends to sell a property?

The fundamental issue at stake in the case of Dreamvar (UK) Ltd v Mishcon de Reya was: “Who should bear the risk of loss when a fraudster pretends to sell a property?”

In simple terms, the Court of Appeal’s ruling was that the loss should be shared across the solicitors for the buyer and seller.

The decision partly upheld the first instance ruling against the purchaser’s solicitors, Mischon de Reya, which had transferred £1.1m to the solicitors of fraudsters posing as owners of a property (the money was then released to the fraudsters).

The Court of Appeal reversed the first instance ruling on the seller’s solicitor, however. Mary Monson Solicitors Limited had originally been excused of liability in circumstances where they had failed to carry out adequate money laundering checks, which ultimately led to the identity fraud on the part of the alleged seller.

The Court of Appeal decided that both solicitors (for purchaser and seller) were liable.

It concluded that the seller’s solicitor was in breach of trust, on the basis that completion must mean a “genuine” completion. Both firms need to contribute towards the loss either by agreement or through the court.

Mishcon De Reya was judged to have acted reasonably and honestly, and there was no finding of negligence. Yet the Court of Appeal upheld the first instance ruling that it should not be granted relief from breach of trust.

This raises questions about in what circumstances relief from ‘breach of trust’ would be granted to solicitors.

The Court in first instance had held that it was not equitable that Mishcon De Reya be excused from breach of trust, on the basis that it had the benefit of professional indemnity insurance and was better placed to absorb the loss than the actual property buyer, which was a small company with limited resources.
 
The Court of Appeal declined to overturn this aspect of the decision, holding that the analysis underlying the original decision was unimpeachable. This raises questions about in what circumstances relief from ‘breach of trust’ would be granted to solicitors.

Risk mitigation

The decision will continue to cause some consternation for conveyancing firms and their insurers. Although we do not anticipate a “knee jerk” reaction from insurers, there could well be an effect on premiums, particularly when insurers are faced with settling more identity fraud claims.

A question for all firms, whether acting for the purchaser or seller, is: how do we manage an exposure over which we have potentially no control?

Ask for confirmation as to how and what processes were used to verify the seller’s identity.

Due to the changing and sophisticated nature of some fraudsters’ methods, no risk mitigation steps are full proof. We would advise firms, however, to take the following steps:

• Ensure your client-vetting procedures are robust – and properly implemented. For high-risk transactions, electronic identity checks should be used as standard. Ensure you keep a record of your process/findings on the file.

• Refer any high-risk transactions to either a Senior Partner or a Risk & Compliance Partner (eg, back-to-back transaction or where there is a disparity between the address being used for correspondence and the property address).

• Ask for confirmation as to how and what processes were used to verify the seller’s identity (if you are acting for the purchaser). You may wish to request formal evidence of the seller’s property ownership (request a document that only the real owner is likely to be able to produce).  

• Advise your (purchaser) client of any requests for information to which you have not received a satisfactory response.

Conveyancing has traditionally been the source of a disproportionally large number of professional indemnity claims, and this Court ruling could make it an even greater area of focus for insurers. Solicitors’ ability to demonstrate good procedures and checks on identity might prove to be even more important in future, and help to mitigate any upward pressure on rates.

For more information, please contact Steve Holland on:

steve.holland@uk.lockton.com

+44 (0)20 7933 2444