Codes for Completion: moving with the times; the Dreamvar case

The recent case of Dreamvar (UK) Limited v Mishcon de Reya & Anor [2016] EWHC 3316 (Ch) has caused alarm bells to ring in the offices of property lawyers. It involves a multiplicity of claims brought by a defrauded purchaser of property in London, against its own solicitors, and also against the solicitors acting for the purported seller. The case explores the responsibilities taken on by solicitors acting on the completion of a property transaction. For completion, we usually make use of The Law Society’s Code for Completion by Post. This was first introduced in 1984 to deal with what was then just an increasing practice of completions being arranged by solicitors without the attendance of the buyer’s solicitor. Historically, if, because of the distance between the two, the buyer’s solicitor was unable to attend at the seller’s solicitor’s office, the buyer’s solicitor would appoint an agent (e.g. another solicitor in the locality of the seller’s solicitor’s office) to attend on his behalf. However, it was considered easier if the buyer’s solicitor asked the seller’s solicitor to conduct the completion on behalf of the buyer’s solicitor. Hence, how the practice of postal completions grew.

As completion is the most important moment in a property transaction, risk, and the management of it, has always been a prime consideration in formalising completion arrangements. The lack of a formal protocol for such postal completions, and the decision of the Privy Council in Edward Wong Finance Co. Limited v Johnson Stokes & Master (a firm) [1983] UKPC 32, led to the publication by the Law Society of the original Code for Completion by Post. Under this, and under all subsequent versions, the seller’s solicitor would act as buyer’s solicitor agent, without a fee, for the purposes of completion. The Code specifically provided at paragraph 3 that the vendor’s solicitor “undertakes that on completion he: (1) will have the vendor’s authority to receive the purchase money; and (2) will be the duly authorised agent of the proprietor of any charge upon the property to receive the part of the money paid to him which is needed to discharge such charge”. In Edward Wong, completion of a Hong Kong transaction was effected in accordance with local practice. Solicitors for the buyer and its mortgagee paid over completion money to the seller’s solicitor in return for an undertaking to send title documents and a mortgage discharge. However, the seller’s solicitor simply absconded with the funds, and the seller’s bank refused to discharge its charge. The Privy Council held that the buyer’s solicitors had been negligent, even though they had completed in accordance with normal professional practice current in Hong Kong at the time. The buyer had suffered loss as a result of an obvious risk that could have been protected against, simply by the buyer’s solicitors taking reasonable steps to satisfy themselves that the seller’s solicitor was authorised as agent of the mortgage lender to receive the money required to redeem the charge. The Code, in original and current form, does not require actual evidence that the seller’s solicitor is the agent of the seller’s mortgage lender, but it provides an assurance from the seller’s solicitor that he/she is. This does not provide absolute protection for the buyer, but has always been considered sufficient protection for the buyer’s solicitor against a similar negligence suit. (A counsel of perfection would involve actually seeing evidence that the seller’s solicitor is mortgagee’s agent).

The 1984 Code remained in place until the current version was published in 2011. However, amendments were made to the 1984 version in 1998 requiring, in particular, that the seller’s solicitor specified in writing the mortgages or charges secured on the property which were to be redeemed or discharged following completion, and introducing an express undertaking (whether or not otherwise provided – see Davisons Solicitors (a firm) v Nationwide Building Society [2012] EWCA Civ 1626) to redeem or obtain discharges for every mortgage or charge so specified. Changes in practice, and the need for greater risk management in property transactions, saw a re-issue of the Code in 2011. Mortgages could now be discharged electronically, rules relating to identification of parties had been introduced by the Land Registry, and the credit crunch had led to a spate of cases in which sellers’ mortgages were left undischarged, often because acting solicitors had not obtained satisfactory redemption figures; (as to which, see Angel Solicitors (a firm) v Jenkins O’Dowd & Barth [2009] EWHC 46 (Ch) and Clark v Lucas LLP [2009] EWHC 1952 (Ch)). 

The 2011 version of the Code follows very much the structure of the previous version, but includes several additional features. First, it makes it clear that, while the seller’s solicitor acts on completion as the buyer’s solicitor’s agent, this does not require the seller’s solicitor to investigate or take responsibility for any breach of the seller’s contractual obligations. This has been interpreted in recent cases (P&P Property Ltd v Owen White & Catlin LLP & Anor [2016] EWHC 2276 (Ch) and Dreamvar (UK) Limited v Mishcon de Reya & Anor) as meaning that the seller’s solicitor is not responsible to the buyer for a breach of the fundamental obligation of a seller which is to provide a genuine transfer of title at completion. Astute buyers’ solicitors may wish to give express instructions to their counterparts not to complete transactions without an assurance that the seller’s solicitor holds a “validly” executed transfer. Second, the Code requires the seller’s solicitor to specify not only the charges to be redeemed on the property, but also the method of discharge. Where the discharge of a mortgage is electronic, it requires the seller’s solicitor to notify the buyer’s solicitor as soon as confirmation is received from the chargee that the discharge has taken or is taking place. Third, in addition to the undertaking to discharge, the Code requires the seller’s solicitor to undertake that the proprietor of each charge to be redeemed has been identified by the seller’s solicitor to the extent necessary for the purpose of the buyer’s solicitor’s application to HM Land Registry. This undertaking is to enable the buyer’s solicitor to rely upon the seller’s solicitor’s assurances when satisfying Land Registry identification requirements on Form AP1. It is a risk management provision. Fourth, note 6 of the Code states that the undertaking expressed in paragraph 11(ii) of the Code (i.e. to discharge a seller’s mortgages) “is to be taken, unless otherwise stated, as including confirmation that a satisfactory redemption statement has been obtained from the lender whose charge is to be redeemed.” This is included following decisions in the cases referred to above (Angel Solicitors and Clark v Lucas LLP). However, importing this confirmation does not assist if the seller’s solicitor simply has not obtained such a redemption statement, although it may prevent an allegation of negligence being made against the buyer’s solicitor for not having asked in the first place. Astute buyers’ solicitors, concerned that standards of conveyancing may not be what they used to be, will often seek express assurances.

The recent case of Dreamvar (UK) Limited v Mishcon de Reya & Anor [2016] EWHC 3316 (Ch) may well result in a further refinement of the Code for Completion. The case explores which of two firms of solicitors should be responsible for a fraud carried out against an innocent intending purchaser of property in Earl’s Court for £1.1m. Worryingly, while the purported seller’s solicitors were at fault for failing to verify the identity of their fraudulent client, the only remedy held to be available to the buyer was against its own solicitors, Mishcon de Reya, in breach of trust, even though that firm had acted honestly and reasonably throughout. The case involves a typical property fraud: the targeting of an unoccupied, un-mortgaged property; impersonation of the registered proprietor; steps taken by the fraudster to convince a solicitor of his/her identity (involving, as was the case here, slack due diligence by the purported seller’s solicitor); “completion” of the transaction; remittance of sale proceeds to a distant account; objection to the registration of a forged transfer; and ultimate loss to the buyer. Among the claims brought by the buyer, Dreamvar, against the seller’s solicitors were claims emanating from undertakings and responsibilities under the Code for Completion. Specifically, under the Code, it was alleged that where, at paragraph 7, the seller’s solicitor undertakes “to have the seller’s authority to receive the purchase money on completion” this was, in effect, an assurance that the purported seller was the registered owner of the property being sold. The judge held that such a strict liability was not assumed by sellers’ solicitors. Astute buyers’ solicitors may therefore require sellers’ solicitors to confirm that they have taken all reasonable steps to verify that their client is the registered proprietor of the property. This does not sound like an unreasonable request, since this is what the seller’s solicitor are supposed to be doing in any event. Further, it was alleged that, in undertaking to comply with express instructions for completion given by the buyer’s solicitor (to send a “TR1 executed by the seller”), the seller’s solicitors had taken responsibility for ensuring that the transfer would be valid. Again, the judge did not think that the undertaking should be interpreted strictly as meaning that they had secured execution of a transfer by the true registered proprietor (as opposed to the purported “seller”). As mentioned above, astute buyers’ solicitors may seek an assurance that the seller’s solicitor holds a “validly” executed transfer.

The Code for Completion has always evolved to deal with emerging risks in conveyancing transactions. It may need to evolve again as a result of this recent case. However, we should not rush to judgment on the fitness for purpose of the current Code: the Dreamvar (UK) Limited v Mishcon de Reya case is heading to the Court of Appeal.

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