Know Your Client! What the recent Court of Appeal ruling on property fraud means for estate agents

The decision in P&P Property Limited –v- (1) Owen White & Catlin LLP (2) Crownvent Limited t/a Winkworth came as something of a relief for agents (and a disappointment for solicitors and their insurers), but there are still some important lessons to be learned…

The facts will be depressingly familiar. Agents receive a call from ‘Mr Smith’, a would-be seller of a high value London property.

The property is vacant and the seller wants the agent to find a cash buyer who can complete in a very short timescale. The agent knows at least half a dozen property developers who would jump at the chance to take advantage of this type of opportunity. In 48 hours, the agent has a written offer from one of his developer contacts and completion takes place the following week.

The developer is keen to start work and instructs contractors to strip out the property in readiness for a major refurbishment. The true Mr Smith turns up at the property and asks the contractors what they are doing trespassing on his property.

Of course, ‘Mr Smith’ was a fraudster and both he and the purchase monies are long gone.

Fingers are pointed at the solicitors acting for ‘Mr Smith’, and also at the agent who introduced the innocent developer-purchaser to the property and to the fraudster.

These are the outline facts of the case of P&P Property Limited –v- (1) Owen White & Catlin LLP (2) Crownvent Limited t/a Winkworth which was first considered by the High Court back in the autumn of 2016.  Together with another case with very similar facts, the Court of Appeal recently considered several appeals by the various parties, including an appeal against the High Court’s decision that Winkworth (acting as agent for the seller/fraudster) had no liability to the purchaser either for breach of warranty of authority or negligence.

A claim for breach of warranty of authority arises where an agent holds itself out as acting for a principal, but without proper instructions and/or authority. So where an agent claims that it is acting for the owner of a property, and agrees a sale without the owner’s authority, the would-be buyer can claim for its losses which flow from the agent’s actions in exceeding / overstating / fabricating the extent of its instructions.

The negligence claim against Winkworth was based on its failure to carry out any of the usual CDD/KYC checks on the purported seller, notwithstanding their obligations under the Money Laundering Regulations 2007 (now the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).

Winkworth had not assumed any special duty to the developer-purchaser, and was responsible only to its own client

The High Court had dismissed both claims against Winkworth, and the Court of Appeal did the same. On the facts, the Court found that Winkworth had done no more than confirm that it was instructed by an individual who had given his name as ‘Mr Smith’ and could not be said to have given a warranty that its instructions came from the true owner of the property. In relation to the claim of negligence, Winkworth had not assumed any special duty to the developer-purchaser, and was responsible only to its own client (i.e. the fraudster).

In contrast, the Court of Appeal held that both the seller’s and the purchaser’s solicitors had acted in breach of trust by releasing the purchase monies for a purpose other than a genuine completion. Both sets of solicitors will be liable for the whole of the purchase price, and there will likely be separate litigation to determine the proportion each must contribute.

While this decision will be a relief for agents (and a disappointment for solicitors and their insurers), there are lessons to be learned from Winkworth’s experience:

  • Review your standard form memorandum of sale and make it clear that you are not giving any assurances as to the validity of the seller’s title or any other aspect of the transaction
  • Be aware that purchasers may ask for specific confirmation or undertakings as to the extent of your instructions and/or the CDD/KYC checks you have carried out
  • Carry out your CDD/KYC checks promptly, and don’t be afraid to ask questions when the information is inconsistent or simply not provided.
  • Know the warning signs; the properties that are most vulnerable to a fraud are:
    – Empty or tenanted properties;
    – Mortgage-free; and/or
    – High value

If you have clients with properties that meet these criteria, you can suggest that they sign up for the Land Registry’s Property Alert service which allows owners of registered properties to monitor activity on their titles such as applications to register a sale or a charge. You can find more information here.