Dreamvar – the selling agent's perspective

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Dreamvar – the selling agent's perspective

Published 18 October 2018

The Dreamvar decision sent shock waves through the legal profession when non-negligent solicitors nevertheless found themselves exposed to victims of identity fraud.

But what about the estate agents, how did they fair?  In short, very well even if it is not altogether easy to determine how they did escape when their legal counterparts did not.

Background

A fraudster, pretending to be the true owner of a London property, instructed Owen White & Catlin LLP ("OWC") to act on his behalf in relation to a re-mortgage which subsequently turned into a sale of the property.  Winkworth, appointed as selling agent by the fraudster on 2 December 2013, were asked to market the property for a quick sale.  It was marketed with an asking price of £1m (some £200,000 - £300,000 less than its actual market value). 

P & P Property Ltd ("P&P"), who were registered on Winkworth's database as potential purchasers of properties in the same area, were approached and swiftly agreed to purchase the property for £1.03m.  Contracts were exchanged on 6 December 2013 with completion taking place on 12 December 2013.  Following completion, builders were instructed to carry our renovation works.  However, these were put permanently on hold when the real owner of the property turned up and HM Land Registry refused to register P&P's interest.

First instance decision

P&P brought claims against both OWC and Winkworth alleging: (i) breach of warranty of authority in holding themselves out as acting for the true owner of the property, and (ii) negligence in failing to carry out adequate identity checks in accordance with anti-money laundering regulations ("AML").  Additional claims of breach of trust and breach of undertaking were also raised against OWC alone.

In respect of the claims against Winkworth, the Court determined that:

  • The memorandum of sale provided by Winkworth (which advised P&P of the name of the person selling the property) should not be constructed as a warranty that their client was the true owner of the property.  Further, whilst Winkworth were subject to AML obligations (the Court determining that such obligations had not been complied with), the obligations did not create a representation that Winkworth were acting for the true owner.  As such, the claim for breach of warranty of authority was dismissed.
  • There was no duty of care owed to P&P as a vital ingredient, namely an assumption of responsibility by Winkworth to take reasonable care to ensure that their client was the true owner of the property, was absent.  The claim in negligence therefore failed. 

As an aside, whilst dismissing the claims against Winkworth, the Court took the step of reducing recoverable costs by 10% to take into account what it considered to be wholly inadequate AML checks on their part.

The claims against OWC were also dismissed.

Court of Appeal decision

The decision of the lower Court, insofar as Winkworth was concerned, was upheld by the Court of Appeal, save that the costs 'penalty' was set aside.  Key points of the judgment from the selling agents' perspective were:

  • The failure to comply with AML legislation renders the relevant person liable to a civil penalty and/or constitutes a criminal offence, but does not create a statutory liability on the part of estate agents (and solicitors) to innocent third parties who are victims of fraud.
  • The memorandum of sale is not sufficient to provide a warranty to a third party that the selling agent acts for the true owner of a property.
  • Winkworth made no representations to P&P as to the level of due diligence carried out i.e. AML checks, thus no duty of care was owed.

OWC's were not so lucky but that is a different (and already well publicised) story.

Commentary 

The case is a useful reminder for estate agents as to their obligations to comply with AML regulations and professional body guidance notes.

Such identity checks are elevated where physical access to the client is not possible for identification purposes or where there are unusual aspects to the transaction – in this case monies were being sent to a high risk jurisdiction, sale was at significantly less than market value and the transaction progressed at an unusual speed.  Arguably those known facts should have alerted the agent and the Court of Appeal's decision may be regarded as a lucky escape.

The claim in negligence failed against Winkworth due to there being no assumption of responsibility.  Each case will inevitably turn on its own facts, but had Winkworth made representations to P&P in relation to the level of due diligence carried out in respect of the vendor so as to create an assumption of responsibility upon which P&P relied, the decision of the Court may have been somewhat different in circumstances where, at first instance, it considered that "Winkworth's approach to its client's due diligence and anti-money laundering obligations was wholly inadequate"

More generally, it remains to be seen whether the decision will result in conveyancing transactions becoming more protracted and expensive: will purchasers' solicitors request specific warranties from those acting for the seller as to their client's identity upon which reliance is expressly stated? Will such a warranty be readily provided given the potential exposure it would open the seller's solicitor to bearing in mind the relative ease of a fraudster being able to obtain forged documents to satisfy AML requirements?

Either way we expect lawyers to look to limit responsibility so as to minimise risk of future exposure and it is not inconceivable that in so doing the 'baton' may be one they seek to pass to the agent, if not wholly at least in part.

There is also the question as to the possibility of professional indemnity insurance premiums rising for conveyancers on the back of the decision, given that they would appear to have ultimately become the guarantors for property fraud.  If so, this could see a rise in professional fees charged for the sale and purchase of properties which may impact upon the market.

Looking further ahead, in order to resolve any potential impasse between those acting for buyer and seller, we understand that the insurance market is developing products to provide cover for potential identity fraud.
 

Authors

Gareth Robinson

Gareth Robinson

Leeds

+44 (0)113 251 4740

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