The revised Code for Completion by Post – what’s changed?

Completion requires and relies on satisfactory undertakings to ensure that the intentions of the parties to the transaction (and their lenders, if any) are put into effect. Solicitors’ undertakings are personal and, of course, may be enforced against them. But what should happen when one of the parties intends to commit fraud against the other by pretending to sell a property they do not own, and who should be responsible for any loss?

Assuming the money has disappeared, an innocent buyer has potential claims against their own solicitors in breach of trust and negligence, in addition to claims against solicitors acting for the fraudster seller for breach of trust, breach of warranty of authority and breach of undertaking. Until recently, it was not clear whether a seller’s solicitor’s undertaking meant that they had the true seller’s authority or only that of the fraudster. While the position is now clear – that the undertaking means that they had the true seller’s authority, and that the effect of this is that solicitors acting for fraudulent sellers will be in breach of such an undertaking – questions remain as to whether the Law Society’s Code for Completion by Postapplies, and then how liability may be attributed between a buyer and seller’s solicitors where they are both found liable to an innocent buyer.

In this article, I look at some of the key changes in the code, and what they mean for both buyers’ and sellers’ solicitors.

The history of the code

Completion in person in practice is generally restricted to very complex and/or high value transactions. For the vast majority of transactions today, completion will not take place in person, but instead by post, despite completion in person enabling greater scrutiny of the documentation required to complete the transaction, and perhaps also the personalities involved.

The Code for Completion by Post was first introduced in 1984. At the time, it was becoming more common for completions to take place without attendance by the buyer’s solicitors, as it was convenient to allow the seller’s solicitors to conduct the completion on the buyer’s solicitors’ behalf. The code remained largely unchanged (save for some amendments) until the 2011 version appeared. The 2011 code dealt with changes in practice, better risk management, electronic discharge of mortgages, and rules relating to the identification of parties by HM Land Registry.

Changes following Dreamvar and P&P

The Law Society has now revised the code and produced a new 2019 version. The 2019 code came into effect on 1 May 2019, in response to the position following the Court of Appeal’s ruling in P&P Property Limited v Owen White & Catlin LLP andDreamvar (UK) Limited v Mischon de Reya [2018] EWCA Civ 1082. Both were decisions involving the liability of solicitors in cases of property transaction identity fraud.

Both the P&P and Dreamvar decisions involved fraudsters who had posed as sellers of properties in London, each of which was worth around £1m. The fraudsters instructed estate agents who found genuine buyers. The fraudulent sellers and the genuine buyers then each instructed their own solicitors.

The sales progressed; contracts were exchanged, and completion took place on the basis of the 2011 code. The frauds were only discovered after completion of the transactions, but before registration at Land Registry. As completion had not in fact been effected, the buyers were entitled to recover their purchase monies. But by that time, the fraudsters and purchase monies had disappeared. So the buyers issued claims to recover sums paid against the sellers’ solicitors for breach of warranty of authority, breach of trust, and breach of undertaking. In the Dreamvar case, they also took action against their own solicitors for breach of trust.

In Dreamvar, the Court of Appeal found that, in addition to the buyer’s solicitor being in breach of trust in parting with completion money, the fraudster seller’s solicitors were in breach of the undertaking to the buyer’s solicitors implied by the 2011 code. Properly interpreted, this required the seller’s solicitors to use the completion money only for a genuine completion, even though it did not include a term expressly providing for the monies to be released. They had received the money via the buyer’s solicitors on trust to use it for a genuine completion. It did not matter that the 2011 code required completion to take place as soon as the seller’s solicitors became aware of the receipt of completion funds, because there will always be some period of time when it is held in the account as agent for the buyer’s solicitors.

The updates to the 2019 code seek to implement the position in Dreamvar by incorporation of the decision into it.

What this means for solicitors

Paragraph 2(i) of the 2019 code defines all references to “seller” throughout the 2019 code as being references to the person or persons who will, at the point of completion, be entitled to convey the legal and/or equitable title to the property.

Paragraph 4(ii) of the 2019 code states that where the seller’s solicitors receive and/or hold the money received for completion, they receive and/or hold that money on trust for the person or persons who provided it, to be either (a) paid away only in respect of a completion in which the seller executes and delivers a valid conveyance or transfer, or (b) repaid to the person who remitted it, if completion does not take place.

The sixth note to the 2019 code states that in view of the P&P and Dreamvar decisions, paragraph 8(i) of the 2019 code constitutes an undertaking that the seller’s solicitors have authority from the true owner of the title to the property named in the contract to receive the purchase money, and that such person is, at the point of completion, entitled to convey such title as the contract states will be conferred.

So the 2019 code attempts to make it even clearer that the seller’s solicitors are acting in a genuine sale, and to give greater consumer confidence in the conveyancing process.

Although this places a further burden on a seller’s solicitors, the argument that they are best placed to carry out robust due diligence and/or identification checks against their selling clients must be a reasonable one. The buyer’s solicitors are generally not in any position to be able to carry out such searches and/or checks. Attempts by a buyer’s solicitors to obtain from their counterpart seller’s solicitors representations, warranties or undertakings that they have carried out such searches and/or checks are likely to be either ineffective or, even worse, make a buyer’s solicitors’ position worse than not asking the questions if no or a poor response is given to them.

There may still be some scope for argument, particularly, for instance, if it can be said that the 2019 code does not apply, either because it was not expressly agreed that it would be adopted, or that it was not impliedly adopted through use of the Law Society’s Conveyancing Protocol. This creates its own difficulties and risks for solicitors, not least of which is that they then cannot be accredited under the Law Society’s Conveyancing Quality Scheme.

At the heart of the Code’s recommendations is a review of policies and practice for risk-assessing transactions, identifying factors that may make a matter high risk, and then putting procedures in place to deal with those risks and factors.

It is worth noting that many of the fraudster cases share common features and factors considered high risk, often creating multiple red flags that ought to alert solicitors by triggering robust policies and procedure. Indeed, in both P&P and Dreamvar, the pressure of very quick sales and sales at a discount, coupled with sellers being based abroad, referrals of anti-money laundering checks, and requests to transfer purchase monies were all red flags that were missed or not properly acted upon. It is unlikely that insurers would ever want to do step in, in the absence of robust policies and procedures or in disregard of them.

The Dreamvar decision left open the issue that liability between the buyer’s and the seller’s solicitors can be apportioned and determined by way of contribution proceedings under the Civil Liability (Contribution) Act 1978. The majority of the Court of Appeal considered it was right that distribution between solicitors both found liable should be achieved through contribution proceedings rather than (as had been argued) granting relief to a buyer’s solicitor under section 61 of the Trustee Act 1925. This grants relief on the basis that a trustee has acted honestly and reasonably, and ought therefore fairly to be excused for a breach of trust. Given that proceedings under the Civil Liability (Contribution) Act 1978 provide courts with a much wider discretion to apportion liability based upon what is just and equitable, having regard to the extent of a person’s responsibility for the damage in question, the approach must be right.

There is now greater certainty in respect of this aspect of the 2019 code, given the decisions that led to its creation, and this has increased the risk for all solicitors in respect of the potential fraud of their clients. The next battle to be fought (and perhaps never to be won) is between professional negligence lawyers acting for solicitors on either side of conveyancing transactions. It is at least arguable that buyer’s solicitors currently have the upper hand, given the clarity and certainty the P& P and Dreamvar cases provide, now embodied in practice by the 2019 code.