Conveyancing solicitors have been put on high alert by a judgment ordering a firm that fell victim to identity fraud to pay more than £1m.

City firm Mishcon de Reya was found to be liable for breach of trust after its client was duped into buying a London property from a tenant posing as the owner.

The claim was based on an alleged failure by the firm to seek an undertaking from the purported seller’s solicitors that it had taken reasonable steps to establish its client’s identity. A claim for negligence against Mishcon, as well as all claims against the buyer’s solicitors, failed.

The Gazette understands permission to appeal was granted on Friday, and the decision is stayed pending that appeal.

The ruling’s effects will set off alarm bells among firms worried about falling victim to an increasingly common scam in which rogue tenants pose as owners to sell a property. The buyer is left with a mortgage for a property they have no right to and may seek to recover losses from professionals involved in the transaction.

In the case involving Mishcon de Reya, deputy High Court judge David Railton QC accepted the firms involved had acted honestly and innocently in carrying out their respective roles.

Railton said Mishcon de Reya had insurance to cover the loss suffered in full, and was in a better position than the client to face the consequences. The judge added the ‘only practical remedy’ open to the client was to target the City firm.

Last year the High Court ruled that conveyancers on both sides of a transaction were liable for a rogue seller who committed a £470,000 fraud. His Honour Judge Pelling said that Windsor firm A’Court & Co made no serious attempt to comply with anti-money laundering regulations to prevent the fraud, and, critically, obtained no documentation linking the seller to the property.

Pelling also ruled that the buyer’s conveyancer, north-west London firm House Owners Conveyancers Limited, was responsible for not drawing attention to any concerns after asking whether the purported owner was entitled to sell the property.

Lawyers will now watch the Court of Appeal with interest as a similar case (P&P Property Ltd v Owen White & Catlin LLP & Anor) is heard later this year. The buyer last year failed in claims for breach of warranty of authority and negligence against its solicitors and estate agent.

Niall Innes, a partner at national firm Mills & Reeve representing the estate agent in the P&P case, said there is an urgent need for clarity. ‘I have five cases on my desk around this area. It is a really big area and growing,’ Innes told the Gazette. ‘The courts are stuck in a position where the seller’s estate agent and solicitor, and the buyer’s solicitor, have done all they can.

‘There has to be a solution to recognise the purchasers have done nothing wrong, with a window to recover. There needs to be an insurance solution but I suspect that few insurers will be interested as they are not confident they can persuade the general public to protect against identity fraud loss.’

The Land Registry advises homeowners, especially absent landlords, to sign up to its Property Alert Service which sends out free notifications if certain activity occurs on a registered property.