Fraud Warnings

December 2010

Dr Julian Farrand

At the Council of Mortgage Lenders (CML) Fraud conference in October we heard about the growing threat of mortgage and identity fraud. By its nature the precise losses can never truly be known but estimates from the CML, KPMG and others put it at more than £1bn each year and rising.  Whilst this is an incredible number, in the US the FBI assess it at $4-6bn and in Australia the assessment is around $2bn this year.

My own observations from the conference were as follows:

  • That lender's possess a wide range of fraud detection mechanisms, usually software driven.
  • Where it is well organised, fraud can rarely be prevented, whether by software or professional expertise.
  • Where anti-fraud tools fail, the victims have no satisfactory safety net.
  • Whilst the various enforcement agencies are clearly striving to deal with the problem, the evidential burden they have is difficult to overcome and their powers to punish and deter fraudsters do not seem up to the job.

These observations occurred to me as the day wore on.  Of course, we were only talking about mortgage lenders.  But what of the consumer? 

If the combined might of the lending industry feels such vulnerability, what about house buyers and, indeed, house owners?  How can they protect themselves or be protected? 

So serious is the situation that The Law Society and the Land Registry have, for the first time, produced a joint Practice Note about Property and Registration Fraud.  This was published just before the CML Conference with a Press Release emphasising that it constitutes a warning.  The Practice Note is addressed to solicitors carrying out work involving Land Registry applications and begins by stating the issue as follows:

"Fraud is on the increase and there is a rising incidence or awareness of fraudsters targeting the properties of both individuals and companies. These attacks often include identity and other types of fraud and the presentation of forged documents to Land Registry for registration. Land Registry wishes to bring these matters to the attention of the public and have issued public guides to this effect.

This practice note aims to assist you when acting in property transactions. It may also help you make your clients more aware of how they may protect their property interests against fraud and safeguard their rights as legitimate property owners on the register."

The Practice Note proceeds to offer illustrations of the types of fraud encountered.  Evidently, the impersonation of conveyancers and of their firms is currently popular.  An example was seen in a recent case (Lloyds TSB Bank Plc v Markandan & Uddin [2010] EWHC 2517).  There the defendant solicitors were instructed by Mr. Davies, a fraudster posing as a purchaser, who obtained an advance from a lender for which they also acted.  The solicitors supposedly acting for the vendors was the London branch of a firm based in Luton: the firm existed but had no London branch.  The defendants tried to check, but were cleverly conned by production of a forged letter from the Solicitors' Regulatory Authority, into paying the advance, some £700,000, to the branch office which vanished with Mr. Davies and the money.  The solicitors were held liable for breach of trust and not allowed to plead contributory negligence by the lender.

Another popular type of fraud, highlighted by the Practice Note, involves "intra-family/associate frauds".  This too has been seen in a recent case (Amir Nouri v Ali Marvi & Ors [2010] EWCA Civ 1107).  Here Mr. Nouri was the registered proprietor of a flat which he allowed a family friend, Mr. Marvi, to occupy.  Then, holding himself out as Mr. Nouri, Mr. Marvi instructed solicitors called AKS to act for him on a sale of the flat to himself as Mr. Marvi and he also instructed another firm of solicitors to act for him as the purchaser. Then there was a simultaneous exchange of contracts and completion which resulted in AKS releasing to Mr. Marvi's solicitors a transfer containing Mr. Nouri's forged signature.  So the flat became registered in Mr. Marvi's name.  He also mortgaged the flat, paying off existing loans and retaining the balance, before selling on to an unconnected third party who became registered as proprietor.  Fortunately for AKS, their imaginary client was not a diligent man: Mr. Nouri's claim against them was held to be statute-barred.

The Practice Note contains a great deal of detailed advice as to steps which solicitors can take in "mitigating fraud threats" which is well worth reading in full and following so far as possible.  In addition, it sets out certain relevant Land Registry requirements which ought to be complied with anyway.  However, the Practice Note also includes some warnings of a different sort which should be especially heeded by solicitors:

  • "This advice is not exhaustive. Many aspects of mortgage fraud can also be adapted to commit registration fraud" (para.1.2).
  • "Even where you have followed usual professional practice the court may hold that the steps taken exposed someone to a foreseeable and avoidable risk and amounted to a breach of duty of care" (para.3(1)).
  • Although the Land Registration Act 2002 provides for the payment of indemnity for loss suffered by reason of (among other things) the rectification of the register and certain mistakes in the register, "no indemnity is payable if the loss is wholly as a result of the claimant's lack of proper care" and "any indemnity will be reduced if the loss is partly as a result of the claimant's lack of proper care" (para.4.3).
  • "Land Registry may seek to limit its indemnity in certain circumstances where it considers that the conveyancer failed to make reasonable checks in relation to identity" (para4.3). To which is added: "There is case law which establishes that a lack of proper care by a conveyancer will be attributable to their client, and may therefore lead to a reduction in any indemnity payable to the client. An example of a case in which delayed notification by a conveyancer to Land Registry led to such a reduction is Prestige Properties Ltd v Scottish Provident Institution and another [2002] EWHC 330 (Ch)".
  • "Land Registry has statutory rights to recover money it has paid out by way of indemnity ... The registrar may have a right of recourse against a conveyancer ... However, Land Registry's policy is that it does not seek recovery from a conveyancer who has not been at fault, even though there may be circumstances where, strictly, it would have a right to do so."

Poor Mr. Nouri, in the case of identity fraud cited, he lacked proper care as did the solicitors concerned.  Consequently, he has been unable to obtain rectification of title to restore his name as the registered proprietor of his former flat and is not entitled to any indemnity from the Land Registry to compensate him for his loss.  Usually, however, where indemnity is refused in such a case an action for negligence against solicitors could be brought.  Having his action against the solicitors statute-barred surely adds extreme insult to the severe injury suffered by Mr. Nouri.

A registered proprietor of a property, like Mr. Nouri, might well have believed that he had an indefeasible title backed by a state guarantee.  However, in law this is little more than a myth.  Under the LRA 2002, the register may be rectified, altered or corrected even if this "prejudicially affects the title of a registered proprietor" (Sch.4, para.1).  The nearest thing to indefeasibility is to be found in the one positive limitation on rectification, namely, that the title of a registered proprietor cannot be rectified without his consent "in relation to land in his possession" (Sch.4 para.3)

But there are two express exceptions to this limitation.  The first is where "the proprietor has by fraud or lack of proper care caused or substantially contributed to the mistake " (para.3(2)(a)).  Mr. Nouri's case is an example of this but, another case not involving fraud may be more worrying.  In Wilson v Grainger [2009] EWHC 3145, the Land Registry's mistake was to include pieces of land in a registered title despite the fact that they were already included in a neighbouring registered title.  It was held that the applicants had been guilty of a lack of care in wrongly claiming ownership of the pieces of land in their statutory declaration because they "certainly ought to have known that there was another person with a claim to title of that land".  So their title was rectified against them.

The second exception to the principle of no rectification against a proprietor in possession is where: "it would for any other reason be unjust for the alteration not to be made" (para.3(2)(b)).  In Cygnet Healthcare Limited v Greenswan Consultants Limited [2009] EWHC 1318, where the judge treated the two exceptions as linked: the sole proprietor of the registered proprietor company and his/its solicitors had contributed to the mistake by confusing contractual capacities so that it would also be unjust not to rectify the title so as to show that their land was bound by a restrictive covenant preventing use for a competing business.

In addition, it is often overlooked that, for the limitation to apply, the required possession of land must be by "the proprietor of a registered estate" therein (para.3(2)) and that "'registered estate' means a legal estate the title to which is entered in the register, other than a registered charge" (s.132(1) of the LRA 2002; italics supplied for emphasis). Therefore, the protection against rectification afforded to persons in possession is not available to lenders.

Another difficulty with rectification is central to a current fraud case.  Primarily, the register can be rectified to correct a "mistake".  In Barclays Bank Plc v Guy [2008] EWCA Civ 452, it was accepted that a transfer from Mr Guy to a fraudster, purportedly for £15m, was a forgery.  The fraudster had charged the land to Barclays to secure a debt exceeding £100m.  Although Mr Guy could obtain rectification to restore himself as the registered proprietor, it was held that he would be subject to Barclays' charge because its entry on the register had not been a "mistake": at the time the fraudster had been the registered proprietor with power to charge the land.  The outrageous aspect of this decision is that, if there really was no "mistake", then Mr Guy will similarly not be entitled to claim any indemnity from the Land Registry for the loss of his land (LRA 2002 Sch.8 para.(1)(b)).  It is understood that an appeal will be heard in late November and that a number of solicitors await the outcome with interest because of the negligence claims outstanding against them!

Of course, the imposition of registration of title in the UK has proved generally beneficial as a basis for conveyancing practice and as method of evidencing land ownership.  But the system is far from fraud proof.  Indeed, it is arguable that it has begun to facilitate fraud following the opening of the register to public inspection coupled with the abandonment of title/charge certificates.  The continuing development of e-conveyancing may bring further hazards.

The cases show that where fraud occurs, the success of a claim for rectification and/or indemnity will turn on case facts and timing issues, so cannot be relied on as a catch-all safety net.  A fundamental dilemma of principle or policy arises.  If the courts maintain the integrity of the register, this would mean that, as in Mr. Guy's case for example, Barclays was able to rely on the land register which named as proprietor  the fraudster who had taken the true owner's identity.  It also means that the true owner could not rely on the simple fact that he was the registered proprietor.  The dilemma is which of two innocent parties, say Mr. Guy or Barclays, should be protected - owner or purchaser/mortgagee? 

Where does this leave practitioners?  How do they adopt the suggestions made in the Practice Note?  Does this advice mean, for example, contacting all previous conveyancing clients who fall into the "vulnerable" category, who bought properties for rental, property free of mortgage, bolt-hole property whilst they enjoy retirement overseas?  Should they write to these clients and make them aware of the potential risk they face?  Should they encourage these owners to register a caution or notice on their property so that they are warned of any dealing with it?

Is it time that the Land Registry indemnity provisions were reviewed again so as to take account of the boom in property fraud?  It seems unlikely that in these straitened times any government would enthusiastically embrace this idea.  More promising perhaps would be implementation of the long-rumoured plans, currently under consultation, to realise some capital by privatisation.  In the meantime, could private insurance sit alongside state indemnity to plug the gaps?