Mishcon De Reya – what does it mean for bridging lenders?
Jonathan Newman is the senior partner of Brightstone Law.
Dreamvar (UK) Ltd v Mishcon de Reya & Others has created quite a stir.
The headlines present a well-known, long established city practice as being financially responsible for losses suffered by their client defrauded when a property purchase failed, and the purchase monies were siphoned off to a mysterious bank account in China.
Behind the sensationalist headline, is the legal story.
The Court held that in law, Mishcons had not been negligent. And that the Sellers solicitors who had in fact, not been acting for the true owner, but an imposter, and who had palpably failed to obtain sufficient identity evidence to identify their own client, owed no duty of care to the buyer or their solicitors.
Mishcons, however, were found to be liable in breach of trust. This was because the purchase monies were received by them from their client on trust, to be paid over for completing their client’s purchase; completion meaning obtaining and providing title to the property for their client – which they failed to do when Land Registry uncovered the fraud prior to registration. Significantly, and departing from previously decided cases, the Court declined to give Mishcons relief against remedy even though they had been found not to be negligent in spotting the fraud, and had no obligation to warn against the risk of fraud. But they were still held financially responsible for the loss suffered by their client.
On its face this seems a surprising result on the facts, and from a practising lawyer’s perspective, a touch unfair. No one cries for lawyers!
But before bridging lenders rub their hands, and begin their celebrations, thinking that their own solicitors will pick up the tab on a vendor fraud, a sober word of warning.
Because the Court seems to have arrived at their determination, most notably because, they stated
• Mishcons was better placed to consider and achieve greater protection against fraud than its client, and
• The buyer had no recourse against the seller’s solicitors, and no practical likelihood of tracing the fraudster, or making recovery, and
• Mishcons was in a better position, being insured, to absorb the loss
It followed, as far as the Court was concerned, that the only practical remedy was to allow the buyer to obtain financial remedy from its own solicitors.
So good news for the defrauded buyer, bad news for solicitors and their professional indemnity insurers.
Cause for celebration?
This case did not involve a mortgage lender.
Mortgage lenders, and bridging loan lenders have long been acutely aware of the significant risk of fraud in their space. Fraudsters have often targeted short term lenders in the belief that high-speed bridging loan transactions, means lighter touch due diligence, and increased opportunity. Prudent lenders have been, or should be aware, of the availability of sophisticated, tried and tested insurance products available to them, to cover risk of fraud. Therefore, this Court may well have reached a different conclusion on the same facts, had the Claimant been a professional short term lender with a hefty loan book and balance sheet, rather than a recently established and comparatively small development company funded by family members. Short term lenders are aware of the fraud risk, whereas this buyer claimed not to be.
An application for permission to appeal has been lodged – so watch this space. This particular story may not be at its end.
What do we learn?
Without dismissing the legal significance of this judgment, there must be lessons to be learned for the bridging loan lender, the short-term market, and the legal profession who continue to transact in cases many of which bear some or all of the hallmarks present in Dreamvar.
What were the facts and circumstances?
Dreamvar came to its purchase through a known agent. The story told was of a seller seeking to dispose of a tenanted property quickly and at keen price. The need for speed arose out of a divorce situation. The seller required a sale within 3 days, before he said, he was to file for divorce or was to be petitioned in divorce. The property was in Earls Court, London. The seller’s solicitor was based in Salford, Manchester. The seller gave his residential address as a property in SE6, London (Catford) but not the property address. The seller’s solicitors procured ID information for their client; in this case copies of a driving licence and TV license. They never met the client. They relied on certified ID, copies certified as being true and accurate by another solicitor based in Barking, Essex. The driving licence had been issued only a short time before the transaction. On completion, the purchase monies were paid, in their entirety, by the seller’s solicitors to another firm for the purpose of an unrelated independent transaction. The monies were then paid on by that firm to a bank account in China, the same firm that the certifying solicitor was employed by. Completion took place in the usual way, and application for registration of title was submitted. Land Registry, making periodic checks, sought clarification from the buyer’s solicitors as to what steps were taken by them to verify the identity of their client. Having reviewed the documentation, Land Registry was unable to link the seller to the address given on the ID evidence, and the fraud was uncovered. Application for registration was rejected and the buyer, left with no property, and his purchase money gone and irrecoverable. The buyer sought to recover from his solicitors, Mishcons, and the seller’s solicitors.
Why is the Sniff Test so important?
At Court, the buyer identified 10 features of the transaction which they said should have alerted a competent solicitor to a potential fraud, and argued, had the buyer been alerted to the possibility of fraud, which he said he should have been, then he would have taken the view not to proceed, and consequently he would have suffered no loss.
These ten features are listed in the judgment as follows;
1. the property’s high value
2. the absence of mortgage debt
3. vacant occupation
4. the seller’s address did not correspond with the property address
5. the seller had no proprietary interest in his residential address
6. it was surprising that someone residing in Catford should be the owner of a high value property in Earls Court
7. seller had instructed a Manchester firm to act
8. the sale was being rushed through
9. the seller had little or incomplete information on the annual charges at the property or indeed the name of the management company
10. the transfer documentation was dealt with by post
The Court rejected that Mishcons had been negligent in not suspecting a fraud, or alerting their client to the potential of fraud, notwithstanding all these features were present.
Most law firms practising in the short-term lending space would surely have raised at least one eyebrow, at the incidence of so many characteristics commonly regarded as warning flags. It should be second nature to apply a sniff test to unusual features in a transaction, and even more so, when there are so many features collected in one single transaction.
There are even more features present than those listed by the seller,
For example, it is notable that;
• the transaction did not proceed to the timeline demanded by the seller, but there was no suggestion of the seller pulling out, or applying pressure
• most sellers today, armed with online valuation resources, recognise the true value in their property and are reluctant to discount for speed
So, in the hands of an experienced transactional lawyer, I strongly suspect that these warning signs would have been brought to the attention of a lender client, who may well have identified the warning signs themselves. Having reached that point, enhanced due diligence would surely have followed.
Never stop learning
In this case the buyer obtained remedy, it would appear, because he had nowhere else to go. The result may well have been different for a commercial lending company, with a healthy bank balance, long experience in the short-term space, and with the option and availability of specific insurance options.
But no lender wants to have to rely on insurance, or suffer the uncertainty of lost security. Even when a title insurance claim is successful, there is a significant in house cost and administrative expense in pursuing the claim, which cost and expense will not be indemnified and never recovered. So, a number of lessons can still be learned and processes strengthened.
First, ensure that you engage with the right professional advisers, with not only the right level of technical competence but also, as importantly, the right level of specific transactional experience to perform the sniff test, lawyers who are familiar with this space, short-term business and fraud risk.
Second, your relationship with your lawyers is key. There must always be open and frank dialogue between the two. Pick up the phone if you have concerns. We do. Lawyers must be competent and confident enough to go beyond the documents, and have no fear of alerting the risk, even if the transaction later proves to be genuine.
Third, go behind the transaction, and dig deep at application stage. Seek as much seller information, both ID and purpose, as you can from the borrower, and or the seller’s solicitors. Undertakings from seller’s solicitors would be ideal but are unlikely to be offered or made available. Worth a try at least.
Fourth, consider and pursue independently, fraud insurance options – if you haven’t already got these in place. These are available in the market. Some providers are tried and tested, and are invaluable.