The judgement by the Court of Appeal in what is commonly known as the ‘Dreamvar’ case (Dreamvar (UK) Ltd v Mishcon de Reya and others) holds critical significance for property and insurance professionals, alongside the wider public, shedding light on identity impersonation and title fraud - fraudulent property transactions increasingly prevalent in the last few years.
The case, with its implications for all conveyancing practitioners, particularly smaller practices, saw the Law Society intervene, advocating for the profession's interests.
Today - 5 years since its conclusion - the Dreamvar case stands as a powerful warning to always be vigilant against property fraud and identity impersonation, for both property owners and industry professionals.
How It All Started
Dreamvar, a small property firm, entered into an agreement to purchase a house in London, unaware that the purported vendor was, in fact, a fraudster who had illicitly obtained the true owner's personal documents - a typical case of identity impersonation.
Law firms are under strict obligations to check the identity of their clients and, usually, originals of identification documents are requested, or copies that have been certified by a solicitor as being true copies of the originals.
In this case, the documents were certified by a solicitor called Mr Zoi.
In adherence to legal protocols, identification documents certified by the solicitor were then presented to another law firm, Mary Monson Solicitors (‘MMS’), representing the false property owner in the sale.
It soon became apparent that, regrettably, MMS failed in diligent client checks, overlooking discrepancies in the documentation.
Mishcon de Reya (‘Mishcon’) represented the purchaser, Dreamvar. The transaction swiftly progressed, with Mishcon transferring £1.1 million as completion funds to MMS.
The fraud was detected by the Land Registry before the purchase was registered. Regrettably, the transferred funds had already vanished by then.
The Dreamvar Case in Short
Dreamvar sought recourse for the loss of its £1.1m and raised various claims against Mishcon and MMS.
Summing up the salient points of these claims, Dreamvar argued that:
· Mishcon was negligent in that it failed to warn of the risk of identity fraud and did not obtain an undertaking from MMS that it had taken reasonable steps to confirm the identity of the seller.
· Mishcon was in breach of trust by paying the purchase money to the fraudster and not the true property owner.
· MMS was in breach of warranty of authority (i.e. that it warranted to act for the true property owner).
In turn, Mishcon joined in MMS by claiming that:
· MMS was negligent having failed to identify the fraudster (a claim made jointly with Dreamvar).
· MMS was in breach of trust in having paid the purchase money to the fraudster (again, a joint claim with Dreamvar).
· MMS was in breach of undertaking that it would receive the purchase money on behalf of the true owner.
The first instance decision in the High Court caused shockwaves.
Despite its clear failings in respect of its client due diligence, MMS managed to avoid any liability, while Mishcon was found to be in breach of trust, on the grounds that it was an implied term of the retainer with their client that the funds would only be released if the completion was genuine - which could not be the case on a fraudulent sale.
The decision puts the risk in such cases firmly on the purchaser, as opposed to the vendor’s solicitors even though it is their obligation to ascertain the identity of their client.
The judge made it clear in his decision that Mishcon should be held accountable as it had insurance that could cover the full loss suffered by its client and was “far better able to meet or absorb it than Dreamvar”.
Court of Appeal Verdict
The Court of Appeal upheld the finding against Mishcon clarifying that, even though Mishcon acted honestly, the Court is entitled to compare the effect of the breach of trust on both parties.
Also, Mishcon was far better placed to cover the liability as it had professional indemnity insurance of at least £3 million pounds.
However, the Court overturned the findings in relation to MMS and held that a vendor’s solicitor does warrant that they act on behalf of the genuine owner of the property.
In a nutshell:
While confirming Mishcon's accountability, the Court overturned the earlier findings regarding MMS, establishing that a vendor's solicitor warrants acting on behalf of the genuine property owner.
Therefore, the release of purchase money to anyone other than the true owner constitutes a breach of trust, aligning with the Code for Completion by Post.
Implications for Solicitors
The judgement allocates a more balanced risk distribution between vendor and purchaser solicitors in fraudulent property transactions.
This decision mandates stringent client due diligence by vendor solicitors to combat property fraud effectively. Solicitors for purchasers will push for increased liability on vendor solicitors, triggering a potential revaluation of conveyancing practices by the Law Society.
If (contrary to all best practices) they were not doing so previously, solicitors acting for vendors must be far more diligent about the checks they undertake to to ascertain the identity of their client and be able to prove the steps taken - a key element in the fight against real estate fraud. Such checks must be performed in the context of a constant awareness of other red flags of a possible fraudulent transaction.
While potentially causing increases in conveyancing charges for clients, as firms adapt to mitigate liabilities by reinforcing their business terms, all stakeholders are urged to actively participate in combating property fraud.
Solicitors should caution purchasers about property fraud risks, while property owners are advised to always be wary, monitoring any suspicious activities related to their properties.
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