So what is property title fraud? In a typical scenario, a fraudster pretends to own a property and purports to sell that property to a prospective purchaser. Hence this is also known as a ‘property hijack’. Normally, the fraudster will deceive their solicitor into believing that they are the true owner of the property.
The end result is that the purchaser pays substantial sums to the fraudster and does not obtain the property for which they have bargained. Often there will be a lender who advances a mortgage and is left without its security.
Certain properties are more vulnerable to this fraud, including those with absent owners (for example, buy-to-let properties or where the owner is elderly and in a care home), high value properties and mortgage-free properties.
The fraud can be discovered at different stages. The Land Registry might pick it up, with the result that the purchaser never secures legal title to the property and the lender’s charge is never registered. In many cases, however, the transaction will be registered at the Land Registry, with the owner only subsequently discovering what has happened. Typically, by the point of detection, the fraudster will have vanished with their ill-gotten gains (with their solicitor having been instructed to transfer the funds to an overseas bank account).
Why is this relevant now?
The prevalence of identity fraud is at record levels. According to Cifas, the UK’s largest fraud sharing database company, 89,000 incidents of identity fraud were recorded in the first half of 2017. This figure exceeds the reported incidents in the whole of 2008. Also, notably, the number of fraudulent loan applications increased by more than 50% year-on-year.
Against this backdrop, the Land Registry has been working hard to reduce the number of fraudulent property sale applications it registers. As reported by the Financial Times in December 2017, the value of such fraudulent applications stopped by the Land Registry has more than tripled since 2013. In the period 2012-2013, it declined to register fraudulent transactions in the aggregate amount of just over £7 million. Last year, this figure had risen to almost £25 million.
In September 2017, the Land Registry and Law Society released a joint note on property and title fraud. It recognised that the law might change in the next twelve months but, given the increase in this activity, considered it important to release further guidance to the solicitor profession. The joint note recommends steps for solicitors to take to mitigate the risk of fraud.
The guidance follows three important High Court decisions, which considered the liability of the professionals involved in property hijack transactions and two of which are the subject of appeal.
The current cases
Purrunsing v A’Court & Co and House Owners Conveyancers Ltd  EWHC 789 (Ch)
In this case, the purchaser sued both his own solicitors and the solicitors who acted for the fraudster. The court held that both sets of solicitors were liable to the purchaser and that they were equally culpable.
P&P Property Ltd v Owen White and Catlin LLP and Crownvent Ltd t/a Winkworth  EWHC 2276 (Ch)
This time, the purchaser brought claims against the solicitors who acted for the fraudster and also the estate agents who marketed the property. Unlike in Purrunsing, the High Court held that the fraudster’s solicitors were not liable to the purchaser and the case against the estate agents also failed. The innocent purchaser was therefore left without a remedy.
Dreamvar (UK) Ltd v Mischcon de Reya and Mary Monson Solicitors Ltd  EWHC 3316 (Ch)
The purchaser’s claim against the fraudster’s solicitors also failed in this case. As for the claim against the purchaser’s solicitors, the court held that they had acted reasonably and were not negligent. It did, however, rule that they had acted in breach of trust and they were denied relief under section 61 of the Trustee Act 1925. One of the reasons given for the decision was that the solicitors had insurance to cover the loss.
On the face of it, the different liability outcomes in respect of the fraudsters’ solicitors are difficult to reconcile. The Purrunsing case is distinguishable on the basis of a different version of the Law Society’s Code for Completion by Post. In each case though, the decision appears to be based on the court’s view on fairness.
P&P and Dreamvar were heard by the Court of Appeal at the end of February 2018. Judgment was reserved and is eagerly awaited.
Current remedies for the lender
As matters stand, lenders have the following potential remedies in cases of property title fraud:
Right of subrogation
If a previous lender’s charge was redeemed using the (new) lender’s funds, the lender may have a right of subrogation. The amount for which the lender will be secured will be limited to the amount redeemed under the previous charge, while they will also be subject to any contractual limitations under the previous charge. Whether or not such a right arises will depend on the particular circumstances. When available, and depending on the sums involved, it can be an effective way to mitigate loss.
A claim against the lender’s solicitors
The possibility of making a claim for negligence or breach of contract against the lender’s solicitors will depend on the facts of the case. Whether or not section 61 relief is available for breach of trust will often turn on the discretion of the court. In Dreamvar, the fact that the purchaser’s solicitor was an insured professional, whereas the purchaser had no insurance, was an important consideration.
However, it does not necessarily follow that the outcome would have been the same if the claim had been brought by a lender. That said, in many cases, it may be possible to point to some conduct by the lender’s solicitors to contest a claim for section 61 relief.
A claim against the fraudster’s solicitors and estate agents
Following P&P and Dreamvar, and pending clarification by the Court of Appeal, a claim against the fraudster’s solicitors and estate agents will be much harder to prove, but not necessarily impossible. The current position is that the fraudster’s solicitors give no warranty as to the identity of their client, only that they act for a client of a certain name.
However, there might be circumstances which mean that the fraudster’s solicitors or the estate agents are liable to the lender (or purchaser) and each case will need to be considered on its own facts.
The mechanics of the transaction, including the undertaking given, the edition of the Code used and the representations made, should all be carefully assessed in considering such a claim. Also, if there has been any dishonesty by those parties, claims for dishonest assistance and/or knowing receipt may be available.
A claim against the Land Registry
Where the fraudulent transaction is successfully registered at the Land Registry, the lender might well have an indemnity claim against the Land Registry. The registrar has previously vigorously resisted such claims, but following the Court of Appeal’s decision in Swift 1st Ltd v The Chief Land Registrar  EWCA Civ 330, the Land Registry now faces a more difficult task in doing this.
Of course, in circumstances where the Land Registry detects the fraud prior to registration, no indemnity will be available. It is also worth noting that the Land Registry (via the Law Commission) is looking at ways it can reduce its liability including, in particular, in relation to claims from lenders.
Pursue the fraudsters and their accomplices
Often the money has vanished before the fraud is detected. But, where the issue is spotted early, it may be possible to trace part or all of the funds. Similarly, if it is possible to ascertain the true identity of any of the people involved, claims for deceit (amongst other things) could be considered.
The Court of Appeal decisions
It is difficult to predict what the Court of Appeal will decide. The High Court’s decision in Dreamvar was not without controversy. The purchaser’s solicitors faced a bill in excess of £1 million despite being found to have acted reasonably and not negligently. In contrast, the fraudster’s solicitors were found to owe no liability to the purchaser, notwithstanding their failure to comply with their regulatory obligations to properly check their client’s identity.
Many in the industry have expressed sympathy for the purchaser’s solicitors in Dreamvar. Some have wondered whether the solicitors who failed to perform reasonable due diligence should bear some responsibility for the fraud and argue that the fraudster’s solicitors are in the best position to identify their client and (potentially) prevent the fraud. No doubt the Court of Appeal will carefully scrutinise these decisions and: (i) re-consider breach of warranty of authority, the terms of the undertaking given by the fraudster’s solicitors and whether there is a breach of trust; and (ii) review whether section 61 relief should be provided to a purchaser’s solicitor in circumstances where they have acted reasonably.
One of the difficulties with section 61 relief is that, subject to the trustee acting reasonably and honestly, it is a matter for the court’s discretion. This creates a significant amount of uncertainty.
While each case will turn on its facts, the general principle of whether or not the purchaser’s solicitors, the fraudster’s solicitors, both or neither should be liable is, in part, a question of policy. It is likely also to have repercussions for conveyancing. The Law Society intervened in the appeals. In particular, it expressed concern about the potential impact of the Dreamvar decision (if not overturned) on smaller law firms due to the risk that it could lead to an increase in insurance premiums.
Subject to regulatory considerations and questions of enforceability, solicitors may seek to exclude liability and, in higher value transactions, limit their liability by way of (lower) financial caps. Lenders (and purchasers) should be alive to this and consider whether such variations to the terms of retainers are commercially acceptable.
If the conveyancing process is not adjusted to better mitigate the risk of hijack fraud, lenders may wish to consider undertaking their own checks on the identity of the seller.
As with most fraud, the best cure is prevention. Tightening procedures by all those involved, including all sets of solicitors, estate agents, property owners and lenders, is key.
Inevitably, hijack fraud will continue to happen and, when it does, it’s important to act promptly. The earlier you act, the better the prospects of securing the original funds from the fraudster, and the sooner steps can be taken to preserve the lender’s position.
It will be interesting to see how the Court of Appeal addresses this important policy issue: who should generally foot the bill when this fraud succeeds? Whatever the court decides, it would be no surprise if this issue ends up before the Supreme Court in the next twelve months. Lenders and conveyancers should be ready to react quickly.
- Property title fraud, also known as property hijack, is where a fraudster pretends to own and sell a property and the purchaser unknowingly pays substantial sums to the fraudster. Often the lender who advances a mortgage is left without its security.
- The Land Registry has been working hard to reduce the number of fraudulent property sale applications it registers. The value of fraudulent applications stopped by the Land Registry has more than tripled since 2013 from £7 million to almost £25 million in 2017.
- The Land Registry and Law Society have issued a joint note recommending steps for solicitors to take to mitigate property and title fraud. The guidance follows three High Court decisions, two of which are the subject of appeal.
- Current remedies for the lender to mitigate loss include a right of subrogation, a claim for negligence or breach of contract against the lender’s solicitors, a claim against the fraudster’s solicitors and estate agent, an indemnity claim against the Land Registry and to pursue the fraudsters.
- If the conveyancing process cannot mitigate the risk of hijack fraud, lenders may consider undertaking their own checks on the identity of the seller. As with most fraud, the best cure is prevention.
Neil Franklin is a partner and Sam
McCollum is an associate in TLT’s
Financial Services Disputes and