Welcome to the August 2017 edition of the Real Estate Bulletin
In this edition we update you on recent decisions and legal developments affecting the property industry:
- A decision in the High Court is a salient reminder of the dangers posed by an imposter fraudulently adopting a registered owner's identity to sell their property without their knowledge. All developers and agents should be aware of this increasing threat!
- A housebuilder is, on this occasion, successful in obtaining the discharge of a restrictive covenant prohibiting development
- An important County Court decision has determined that the presence of Japanese knotweed can be an actionable nuisance even before it has caused physical damage to neighbouring land because of its effect on the amenity value of the property
- This Court of Appeal decision serves as a useful reminder of the importance of ensuring that notices are served, in this case using the most up-to-date address available
- A Court of Appeal decision considers whether works undertaken by the landlord were obligatory repairs or discretionary improvements and whether the costs were recoverable as service charges
- Landlords who do not carry out the terminal works of repair but nevertheless claim their former tenant should have done so run a significant risk that they may be unsuccessful in a diminution in value claim
- Even a contrived 'charade' may satisfy ground (f) of the Landlord and Tenant Act 1954 and prevent a tenant from renewing their lease
IDENTITY FRAUD ALERT!
We have previously written about a number of cases involving fraudsters who sell residential property they do not own (see our Real Estate Bulletin - Summer 2016).
The case of Dreamvar UK Limited v (1) Mischon de Reya (2) Mary Monson Solicitors Limited  EWHC 3316 ch should serve as a warning to all parties dealing in residential property. The claim against two different firms of solicitors arose out of the purported sale of a property by a fraudster. The judgment (which is proceeding to an appeal) has wide-ranging implications in both the property and insurance markets and for estate agents.
The Claimant, Dreamvar UK Limited ("Dreamvar") was a small property development company. The managing director of Dreamvar instructed Mishcon de Reya (MdR) to advise on the purchase of a residential property in Earls Court ("the Property"). Mr David Haeems was the registered owner of the Property. In September 2014 a fraudster purporting to be Mr Haeems ("the Vendor") offered the Property for sale, marketing it through a reputable estate agent. The Vendor instructed Mary Monson Solicitors ("MMS"), a firm based in Manchester.
Exchange and completion occurred simultaneously on 17 September 2014 following which MdR paid Dreamvar's £1.1 million purchase monies to MMS, who transferred this on to the Vendor. Some months later, but prior to registration, the Land Registry noticed some inconsistencies in the documentation. It was discovered that the Vendor was a fraudster with no proprietary interest in the Property and the Land Registry would not complete the registration. By this stage the Vendor had disappeared, leaving Dreamvar with substantial losses.
Dreamvar sought to recover the losses it had suffered as a result of the fraud from its solicitors, MdR, and from the vendor's solicitors, MMS.
Dreamvar brought claims against MdR for:
- Negligence in failing to advise as to the risk of identity fraud, especially given the unusual features of the transaction, including the speed insisted on.
- Negligence in failing to obtain an undertaking from MMS that it had taken reasonable steps to confirm the identity of Mr Haeems.
- Breach of trust in releasing the monies to the fraudulent seller.
Dreamvar and MdR brought claims against MMS for:
- Breach of an undertaking that it had the authority of the real Mr Haeems.
- Breach of warranty of authority. In acting for the Vendor it was alleged that MMS had warranted that it had the authority of the registered owner of the Property.
- Breach of trust in releasing the monies to the fraudulent seller.
Judgment against MdR
Both allegations of negligence against MdR were dismissed. However, MdR was held to have acted in breach of trust since "it was an implied term of [the] retainer that [Mischon] would only release the monies...for a genuine completion." There was no genuine completion here.
Section 61 Trustee Act, which provides a defence in the event that a trustee "has acted honestly and reasonably and ought fairly to be excused for the breach of trust", failed to save MdR in this case. Whilst the Judge found that MdR had acted honestly and reasonably, he declined to exercise his discretion under Section 61 because of the comparative financial consequences of the breach of trust. The effect on Dreamvar would be catastrophic, whereas the effect on MdR, who had at least £3 million in insurance to cover the liability, would be limited to the excess payable and any resulting premium increases.
MdR was ordered to pay £1.08 million together with interest.
Judgment in favour of MMS
MMS admitted it fell short in its client due diligence and antimoney laundering checks. Its failures included: (i) failing to request original documents; (ii) failing to carry out enhanced due diligence, despite never having met the vendor; (iii) relying upon a TV licence as proof of address; and (iv) failing to notice that the address the vendor had given had no connection with the property.
However, despite this, MMS successfully defended all the substantive allegations made against it and escaped liability. The Judge found that MMS was entitled to release Dreamvar's monies even though the transfer document received in return was not genuine; as such, there was no breach of trust. MMS was held not to have breached an undertaking because the relevant undertaking was with reference to the seller, which did not necessarily mean the registered owner. The breach of warranty of authority allegation failed on similar grounds - the authority given was limited to that of the client (in this case the fraudster), rather than the authority of the true registered proprietor.
This decision will be of concern to solicitors and their insurers. The Court took a practical approach, choosing to impose a liability on MdR, the purchaser's solicitors, notwithstanding the fact that they acted honestly and reasonably. In making its decision the Court concluded that MdR was "far better able to meet or absorb [the losses] than Dreamvar."
This case is relevant to all solicitors who deal with property transactions. The decision highlights the significant burden that a purchaser's solicitors face in carrying out due diligence. They may be found to be in breach of trust even where they comply with normal conveyancing standards, or where the seller's solicitor is negligent in carrying out their checks.
It is trite, but nevertheless true, to say that this case turned on its own particular facts. Permission to appeal has been granted, with the Law Society considering whether to intervene. We will closely follow the outcome and report back in a later edition of the Bulletin.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.