Vendor fraud – still a risk despite a shift in the landscape?
Purchasing a property can be a stressful experience. Those that have been through the process will undoubtedly recall the moment that the property was first viewed, and when the offer was accepted; almost as much as remembering the nervy moments running up to exchange of contracts (the point at which the sale becomes binding).
It is perhaps, therefore, entirely understandable that the vendor's identity is not routinely questioned by a purchaser (in circumstances where the vendor has instructed their own solicitors and the purchaser's solicitors have not raised specific concerns as to the vendor's identity).
In Dreamvar (UK) Ltd v Mischon de Reya and others  EWHC 3316 (Ch) Dreamvar (UK) Ltd (Dreamvar), a property development company that had been the subject of a vendor fraud, sought damages (of circa £1.1m) for negligence and breach of trust from its own solicitors, Mischon de Reya (Mischon) and damages for breach of trust, breach of warranty of authority and breach of undertaking from the rogue vendor's solicitors (MMS).
The claims against MMS failed, and the prospect of a fruitful recovery from the fraudster appeared to be perilous. Mischon had not acted negligently for, amongst other things, failing to seek an undertaking from MMS in respect of the rogue vendor's identity (as this went beyond standard practice). Mischon had, however, committed a breach of trust by transferring Dreamvar's purchase monies to MMS in the absence of a 'genuine' completion. Despite acting honestly and reasonably, Mischon was refused relief from liability under section 61 of the Trustee Act 1925 because Dreamvar had no other avenues for recourse (e.g against the rogue and MMS) and Mischon (as a city law firm) was in a better position to handle the financial consequences of the breach of trust (with or without PI insurance) than Dreamvar.
Mischon have been granted leave to appeal and it is understood that the Law Society is considering intervening in the appeal (given the ramifications for the legal services market).
The judgment is a reminder that vendor fraud is a real risk and the reality is that it has taken several years for Dreamvar to get its money back. Social landlords, and those involved in the purchase or sale of properties, should remain vigilant (particularly because of the involvement of public money):
- If an opportunity sounds too good to be true, it usually is. Do your due diligence;
- be conscious of 'high risk' transactions;
- consider requesting an undertaking from the vendor's solicitor in respect of the vendor's identity; and
- if in doubt, talk to your solicitor. They are best placed to provide specific advice in relation to the risk of a transaction, and how that risk can be mitigated.