Summer 2018 ISSUE
FIRST COMMENT IN THIS ISSUE: • DREAMVAR IN THE COURT OF APPEAL • COMMON PITFALLS IN RESIDENTIAL CONVEYANCING • WHOSE RIGHT IS IT ANYWAY? • PRODUCT FOCUS – LACK OF RIGHT TO OVERHANG / UNDERSAIL
Leading Title Insurance
Welcome to the Summer edition of our newsletter for 2018. In this issue we have a contribution from our regular writer. Paul Butt, of Rowlinsons Solicitors, gives his thoughts around the Court of Appeal judgment on the Dreamvar fraud case. We have two underwriter contributions for this quarter: Laura Lapsley, in our Glasgow office, reviews the potential risks from residential conveyancing, and Shobana Bala, in our London office, offers an insight into how hard it is to abandon an easement.
Dreamvar in the Court of Appeal by Paul Butt Consultant Solicitor Rowlinsons Solicitors
Introduction So we now have the Court of Appeal’s decision in the appeals of P&P Property Ltd v Owen White & Catlin LLP and Crownvent Ltd and Dreamvar (UK) Ltd v Mishcon DeReya and Mary Monson Solicitors  EWCA Civ 1082. Like many Court of Appeals decisions, there is some good news in it, but also much bad. The bad news is that due to a rigorous – dare one say over-enthusiastic – application of out dated trust law, the buyer’s conveyancer will be held liable to reimburse a buyer who loses money by agreeing to buy property from a fraudster. And this will be irrespective of any fault on the part of that conveyancer. Similarly, the fraudulent seller’s conveyancer will also be liable for breach of trust and breach of an undertaking – again, even though they have not been at fault in any way. Presumably the two innocent conveyancers will then be expected to pursue some sordid squabble as to how the loss should be split between them,
even though both of them had fully complied with their legal and professional obligations. The logic behind this is that the conveyancer will be insured against such loss, whereas the client is not and it would thus not be ‘fair’ for the client to bear the loss. To be fair, the Court was faced with a judgement of Solomon. Where a fraudster sells property belonging to another and then disappears with the cash, who should fairly bear that loss? Sometimes either the seller’s or the buyer’s conveyancers may have acted negligently, for example the seller’s conveyancer may not have carried out proper identification checks on their client – as indeed happened in the two cases the Court of Appeal was concerned with. In that case, it would seem ‘fair’ that they should be liable for the loss. But why should they if they have done nothing wrong and could not have prevented the fraud in any way? Conveyancers are in effect
being made to be guarantors of all property transactions they are involved in. But if they were not held liable, then it would be the buyer who would have to bear the loss. Could the legal profession survive the wave of bad publicity this would provoke – money grabbing, over paid lawyers etc? Heads we lose, tails we lose! The judgements contain no guidance as to how conveyancers should proceed in future. Urgent guidance is therefore needed from the Law Society and the Council for Licensed Conveyancers, but it is inevitable that this will take some time. In the meantime it is likely that we will see buyers’ and sellers’ conveyancers involved in schemes to try and pass all of the liability to the other. All this will result in is more work for individual conveyancers and more delay and uncertainty in the conveyancing process. This does not benefit anyone, and will inevitably result in more bad publicity for conveyancers as a whole. We should all await the guidance from our professional bodies. But in the meantime, let us look further at the judgement.
The Facts These are depressingly similar. A buyer agreed to buy property from a fraudster who pretended to be the true owner of the property. The purchasers instructed their own solicitors, and proceeded to exchange of contracts and completion in accordance with the Law Society Code for Completion by Post. Following completion, but before registration of title, the fraud was discovered but the fraudster and the purchase money had disappeared. In both cases the sellers’ solicitors (and the estate agents in P&P) had failed to properly carry out anti-money laundering identity checks on the purported seller. In P&P the buyer sued the sellers’ solicitors and estate agents, but neither were held liable at first instance. In Dreamvar, the buyer sued its own solicitors and the sellers’ solicitors. At first instance only the buyers’ solicitors were held liable (for breach of trust) and most controversially the judge refused to relieve them from liability under section 61 of the Trustee Act 1925 on the basis that it was not ‘fair’ to do so. Mishcon DeReya were insured and thus better able to bear the loss than the buyer itself. 4
FIRST COMMENT The Court of Appeal Decision The Court held that both buyers’ and sellers’ conveyancers hold the purchase monies on trust and can only release them if a genuine completion takes place. So if the seller turns out to be a fraudster, then there is no genuine completion and so both sets of conveyancers are liable for breach of trust. There is strict liability for breach of trust, but under Trustee Act 1925, s.61 a trustee can be relieved from liability if it has acted honestly and reasonable and ought fairly to be relieved. Not surprisingly, in both cases the sellers’ solicitors were refused relief. The bad news is that the majority upheld the judge’s refusal to relieve Mishcon DeReya from liability – even though they had done nothing wrong. Patten LJ (with whom Floyd LJ agreed) stated that “in my view his conclusion is unimpeachable.” However, Gloster LJ disagreed and thought that they should have been relieved from liability. Whether this point will be appealed to the Supreme Court is not known. On the facts of the case, it is irrelevant as the sellers’ solicitors were also held liable for the loss – but what if they had not been at fault in any way? Why should the conveyancers carry the loss in any case? As Gloster LJ said:
“I do not consider that the fact that MdR is insured should in the circumstances of this case lead to the conclusion that MdR should bear financial responsibility for Dreamvar’s loss. Dreamvar was entering into what was for it a relatively substantial property development as a business transaction. I do not consider that the Court’s sympathy should be with one commercial party (in reality with its loan creditors, given its insolvency) rather than another, simply because one, and not the other, has insurance.” Indeed, can one venture to query whether the law of trusts has any place in a situation where a conveyancer’s client has agreed to buy a house – or indeed any other property?
Although the sellers’ solicitors in both cases and the estate agents in P&P had failed to carry out their AML obligations, this did not give any right of action in negligence or otherwise to a buyer. One again has to query this – why not? If the estate agents had carried out their obligations properly it may well have been the case that the property would never have been marketed and so no one would have suffered loss. One possible head of liability was breach of warranty of authority. This can be defined as follows: “An agent who represents to a third party that he has authority to act on behalf of someone else is treated as warranting that he has such authority and is liable for any loss caused to the third party in reliance on the representation.” (Patten LJ). But in the P&P case, the Court of Appeal held that although the sellers’ solicitors had given such a warranty that there had been no ‘reliance’ on this representation and so no liability under this head. Note, however, that this warranty of authority was only held to have been made in the unusual circumstances of that case where the fee earner acting in the transaction signed the contract herself on the seller’s behalf. In the case of the estate agents, no warranty of authority had been given at all. Patten LJ stated quite clearly: “I do not consider that the objective bystander would regard this as a statement or warranty by the selling agent that they had been given those instructions by the real Clifford Harper”. One would have thought that no prospective buyer would proceed if he or she knew that the estate agent did not have the authority of the true owner to market the property, but apparently that is not the case. It does seem strange that the estate agent, who is usually the first professional involved in a sale of property – and is the one who makes the most money out of the transaction in most cases – should be the one to escape liability completely. This cannot be correct. There is no indication in the case as to whether the estate agents were actually paid and if so whether they were required to return their fee when the fraud was discovered.
It was held that the use of the term ‘seller’ here does not mean the fraudster but meant the real owner of the property. In Patten LJ’s view the sellers’ solicitors in both cases “gave undertakings that they had the authority of the real Clifford Harper and David Haeems to receive the purchase monies on completion”. As they did not, they were in breach of their undertaking given in the Code. The Court of Appeal also held that the sellers’ solicitors were in breach of undertakings given under the Law Society Code for Completion by Post. The relevant part of the Code is as follows: The seller’s solicitor undertakes:
(i) to have the seller’s authority to receive the purchase money on completion; and (ii) on completion, to have the authority of the proprietor of each mortgage, charge or other financial incumbrance which was specified under paragraph 6 but has not then been redeemed or discharged, to receive the sum intended to repay it; BUT if the seller’s solicitor does not have all the necessary authorities then: (iii) to advise the buyer’s solicitor no later than 4pm on the working day before the completion date of the absence of those authorities or immediately if any is withdrawn later; and (iv) not to complete without the buyer’s solicitor’s instructions.”
Lessons to be learnt So it would appear that the result of this appeal is that in cases where the sellers’ conveyancers have complied with their AML identification obligations, the buyers’ conveyancers will be liable for breach of trust and will be refused relief under section 61. But the sellers will also be liable for breach of trust – presumably they will not be excused for liability either or will they? This is not clear. And will the loss be split 50:50 in such a case? But the sellers’ conveyancers will in any event be in breach of their undertakings under the Code – assuming that it is used or not varied. Does this mean that they will be required to reimburse the full amount of the purchase price? Everything is still not clear. And why should conveyancers in effect guarantee the security of conveyancing transactions whereas estate agents carry no responsibility at all? Are we now going to see sellers’ conveyancers expressly excluding liability for breach of warranty of authority or trying to modify the Undertakings given under the Code? Buyers should beware such steps. As already stated, we sensibly must await the guidance of our professional bodies before rushing to take action. The Law Society has stated: “The ruling provides valuable guidance on Law Society’s Code for Completion by Post, which was a central feature of the case. That will be reflected in the work to update the Code for Completion and associated documents, which is currently underway. The amendments to the Code should provide greater clarity as to roles and responsibilities. We hope our amendments will assist in the smoother operation of the housing processes.” Don’t we all!
FIRST COMMENT One also hopes that the Law Society will also clarify the sellers’ solicitors’ obligation under the Conveyancing Protocol to verify the identity of the seller client. Does this impose any obligation which could be enforced by buyers?
“Have we now gone too far the other way and become over complacent?”
So we must wait, but it is significant that in both these cases the sellers’ solicitors had failed in their obligations to identify their client. The writer recalls that when these AML obligations were first introduced there was worry in the profession about its obligations and the risk of a 14 year prison sentence as a sanction. But have we now gone too far the other way and become over complacent? But as the cases show identification is important – we must ensure that it is correctly carried out in accordance with the regulations. We must ask ourselves whether our staff need further training in this area. In Dreamvar, for example, the seller’s solciitors had accepted a TV licence as proof of identity. It is to be hoped that the Law Society can come up with some solution that means that neither buyer’s nor sellers’ conveyancers will be liable in cases of fraud – UNLESS, they have been at fault in some way. But in the meantime we should remember that, whilst fortunately instances of fraud are statistically very rare, we should still all carry out identity checks and look out for warning signs of fraud with the greatest of care. Prevention is always better than arguing over liability!
Common pitfalls in Residential Conveyancing by Laura Lapsley Assistant Commercial Underwriter
When buying or selling a residential property, there are a variety of risks which can come to light throughout the conveyancing process. Sometimes these issues only arise at the last minute, with completion drawing near, and the purchaser or lender may be unwilling to proceed unless these issues are addressed. Given the tight timescales involved, obtaining
title insurance can be a quick and cost-effective solution to protect the purchaser, their lender and future successors in title. There are numerous risks which might affect the purchase of a residential property, however, some of the most common issues which arise relate to transfers at undervalue or missing documentation, which should be included with the title deeds.
Transfers at Undervalue
When considering this type of cover, we would have to be satisfied on the solvency of the transferor. Therefore, cover would be provided on the assumption that there is a clear and up to date bankruptcy search against the transferor and that there are no notices or adverse entries on the title to the property.
It is not unusual for a property to be transferred for less than what it is worth or for no consideration at all, perhaps as part of a separation or as a gift from parents to children. However, when such a transfer has occurred, the purchasers and their lender need to be wary of Section 339 of the Insolvency Act 1986. This section provides a statutory basis for the challenge of a transfer at undervalue by a debtor and there is a risk that the transaction may be set aside. Therefore, the lender will generally require additional comfort that the transfer was not done with the intention of avoiding creditors in anticipation of impending bankruptcy, and indeed, in these circumstances the CML Handbook requires that a clear bankruptcy search against the seller is obtained and also suggests obtaining title indemnity insurance if a clear certificate of title cannot be provided.
Our policy protects the insured in the event that the transfer is set aside by the Trustee in Bankruptcy because the person who transferred at undervalue has become insolvent.
Missing Documentation A solicitor acting in the sale or purchase of a property is required to check that all of the relevant title documentation is available and included with the title deeds. This paperwork might include building consents (or Listed Buildings Consents) and completion certificates or perhaps a previous transfer of the property
containing matters that are still relevant. If certain documents are missing, title indemnity insurance can help to plug the gap in the title and avoid further delays to the transaction.
Building Regulations When a house is being sold, it is common for the solicitors involved to note that works or alterations have been carried out to the property and are therefore required to check that all of the relevant local authority consents and certificates have been obtained and are with the title documents. It might be the case that these building regulations consents / certificates are missing, or perhaps were not obtained at all. The solicitor could remedy this by contacting the local authority for a letter of comfort or retrospective certification, however, this could cause serious delays to a sale or purchase. There is also the concern that if the local authority is alerted to the existence of unauthorised works, they might require further remedial works or even removal of the new structure, which could be costly and reduce the value and / or marketability of the property. An alternative to contacting the local authority would be to obtain title indemnity insurance. First Title can provide a policy, which would protect the purchaser in the event that the local authority takes enforcement action due to the absence of the relevant paperwork. When underwriting this type of risk, we would check when the works were carried out and that there had been no contact with the local authority which may have alerted them to the risk. It is also helpful for us to consider the nature of the works and whether the building is listed.
Policy Coverage First Titleâ€™s residential policies cover the full purchase price of the property (or the loan amount if lender only cover is being obtained) to ensure that the insured party is fully covered for their actual loss in the event of a claim. More than one risk can be covered on the same policy if a number of issues come to light in the course of the transaction. It is also worth noting that most of our policies last in perpetuity and therefore are designed to cover the incoming purchaser, the lender and successors in title.
Whose right is it anyway? by Shobana Bala Commercial Underwriter
Does abandonment of easements actually exist as a legal concept? The recent Court of Appeal decision in Annetts v Adeleye  EWCA Civ 555 has demonstrated just how hard it is to abandon an easement in reality.
Background This case concerned three different properties. The first property (Summerhill) benefitted from an express right of way granted in 1962 over an access that was located on the adjoining second property (Salterns). A strip of land from the first property was severed and transferred to the owner of the third property (Dawning) in 1988. The owner of Dawning had access to their land elsewhere. As part of the transfer the owner of Dawning covenanted with Summerhill to erect and forever maintain a 3’ 6’’ high fence along the boundary between the strip of land and the access route, effectively blocking the
use of the access. The owner of Salterns claimed that this meant that the right of way had been abandoned in respect of the strip of land. The county court judge held that this was “one of those exceptional cases where it can be said that the right of way (insofar as it previously benefited the strip) has been abandoned or released by implication”. It concluded that (1) the covenant to fence justified abandonment of the right, and (2) the right of way would not be restored if title of the strip reverted to the owners of Summerhill.
right of way
R O A D
fence Diagram by depiction only of adjoining titles and access
FIRST COMMENT Points to Note 1. This case is a good example of how hard it is to show that an easement has been abandoned. Once a right of way is granted the court will generally take the view that a property owner will not give up a right even if they have no present use for it. This is demonstrated in the 1992 case of Benn v Hardinge, where non-use of a right of way for 175 years did not create a presumption that a right of way had been abandoned.
The Court of Appeal overturned the decision of the County Court and held that the right of way had not been abandoned. Whether a person intended abandonment was a question of fact and depended on the objective intention of that person as perceived by the reasonable hypothetical servient owner. The dominant owner’s conduct must have made clear an intention that neither that person nor any successor in title would in future make use of the easement.
The covenant to fence did not demonstrate an intention to abandon the right of way over the access benefitting the strip of land transferred;
The fencing covenant could not be enforced by the owner of Salterns;
The fencing covenant could be released by Summerhill and Dawning (the parties to the covenant) at any time.
The Court of Appeal held that the transfer of the strip suspended and did not extinguish the right of way for the duration of the fencing covenant.
2. The Law Commission recommended in its 2011 report (‘Making Land Work: Easements, Covenants and Profits A Prendre’), that where an easement has not been used for a continuous period of 20 years, there should be a rebuttable presumption that it has been abandoned. However, these recommendations have still not made their way into statute or case-law.
Practical Points 1. An express deed of release between the dominant owner and the servient owner could be used to resolve uncertainty as to whether there has been abandonment of easements. This in turn would allow for an application to the land registry for the title register to be updated and to remove the said right of way from the relevant titles, if this is in fact the desired intention of the parties. 2. In light of the issues raised in this case, developers considering redevelopment where parcels of land have been split into several ownerships over time - should question if rights burdening the title are actually no longer used or if they are too impractical to enforce. Consider title indemnity insurance to assist your transaction and discuss your specific requirements with an experienced underwriter in our team.
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Lack of Right to Overhang / Undersail Background •
Who is the insured? The purchaser.
What is the land? Offices with associated ancillary uses allowing for internal and external alterations.
Did the insured have planning? No.
What is the issue that brought the insured’s law firm to us for an insurance solution? Lack of a right of overhang and lack of a right to undersail.
The insured is the purchaser of the land. Cover was required on a continued use basis with allowance for internal and external alterations on the basis that such alterations did not impact on the overhang or undersail structures.
Demolition: The ultimate sanction following a breach of the requirement to obtain an appropriate licence, should the Highway Authority not be prepared to grant a retrospective licence, is the right to force the landowner to demolish or otherwise alter the building.
Criminal offence: Constructing a building which overhangs or undersails any part of a public highway without obtaining the relevant licence is a criminal offence, which is usually punishable by a fine.
Solution Following a full analysis, First Title was able to underwrite the risk and provide a policy to the insured, ensuring they would be indemnified in the event of a claim.
Challenge It is an offence to overhang or undersail adopted highway without the requisite licence from the Highways Authority being in place. Failure to obtain the appropriate licence could result in the Highways Authority taking enforcement action against the insured which could result in, amongst others: 15
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First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. First Title Insurance plc is registered in England under company number 01112603. Registered office: First Title Insurance plc, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.