Negligence claims concerning property advice on the increase. Lessons learnt?
Over the past few months there have been several claims against law firms resulting from their involvement in property transactions. The last financial crisis, and its effect on property values, meant that many lenders suffered losses for which they sought recompense from their solicitors. The present cases are not all lender-focused, but suggest that claims against solicitors in relation to property continue apace.
Acting on behalf of an imposter
In a recent case, LSC Finance Ltd v Abensons Law Ltd (2015), it was successfully alleged against a solicitor (who acted for a borrower but not the bridging finance lender) that a duty was owed to the lender (who had separate representation). A written undertaking was provided by Abensons to the lender confirming execution of a legal charge as security for the loan. It transpired that the borrower was an imposter and the charge was not registered; the loan monies were lost. The court found that there was sufficient evidence on the file (for example, the differing signatures of the borrower client) to put the solicitors on notice of the fraud. They were held to be not only strictly liable in breach of warranty of authority, but also to have owed a duty to the lender and were liable in negligence.
This case can be contrasted with other recent cases in this area. Consider Excel Securities Plc v Masood & ors (2009), which dismissed an application for summary judgment against a solicitor who had innocently represented that he acted for a borrower who posed as someone else. The lending monies were paid to the imposter and when the fraud came to light the real property owner vacated the lender’s charge over the property. On the facts of the case and on the higher legal standard required of the claimant lender on a summary judgment application, the court found that there was no suggestion that the solicitors had not taken reasonable care in establishing the identity of their client. They had complied with money laundering requirements, and the lender’s own identity checks had also failed to spot the fraud.
Abensons can be seen perhaps as a return to the line of judgments following Penn v Bristol & West Building Society, in which a lender obtained judgment against a solicitor who innocently thought he was acting for both husband and wife in a mortgage transaction, but in fact the wife’s signature had been forged in a mortgage fraud. In Abensons, there were similar questions about how the solicitor had felt able to confirm he was acting on behalf of both husband and wife.
Reporting on planning
In Orientfield Holdings Ltd v Bird & Bird LLP (2015), the firm of solicitors acted for the purchaser of a high value property (the deposit was £2.575 million). The solicitors obtained the results of a planning search which showed that, on the same road as the property, two small schools were to be redeveloped into an academy for 1,400 pupils. This was not provided to the solicitors’ client. On learning of the development later, the client pulled out of the purchase and sought to recover the part of the deposit that was lost from the solicitors. A court found that Bird & Bird were in breach of duty, and caused loss, in failing to pass on the results of the planning report. Bird & Bird confirmed at the time of the judgment that an appeal was being considered.
The recent case of AIG Europe v OC320301 LLP & Ors (2015) is the first judgment interpreting the aggregation provisions of the Solicitors Regulation Authority’s (SRA) minimum terms, and is important for other reasons. The background to the case, however, is property investment schemes relating to developments in Morocco and Turkey.
The solicitors entered into an escrow agreement with the investors in relation to the funds they subscribed. The investors also became beneficiaries of a trust, which held security over the land. The deed of trust contained a test to be applied by the solicitors before they paid out the investment funds to the local development company. However, the developments failed, and it became clear that all of the investment monies had been paid by the solicitors from the escrow account to the developer’s local companies in order to fund the development. The main allegation in the investors’ case against the solicitors, which has not yet been heard, was a failure to apply the proper test to payment of monies from the escrow account, with the result that the escrow funds were released without adequate security.
Advising outside experience
A recent Solicitors Disciplinary Tribunal (SDT) finding related to a solicitor who acted in a transaction which bore all the hallmarks of fraud: misrepresentation of the purchase price; incomplete contractual documentation; and unusual events in the transaction such as the intended immediate creation of several leases from the freehold, which should have been reported to the lender. The defence given by the solicitor, which was accepted by the SDT, was that he “did not know how to conduct conveyancing at even its most fundamental level”. The SDT accordingly did not find that he lacked integrity, the solicitor having already admitted failures in relation to reporting to the lender and complying with the Money Laundering Regulations. A fine of £11,000 was imposed.
Property title fraud
A freedom of information request made of the Land Registry revealed in August that compensation claims in excess of £31 million have been paid by the Land Registry since 2012. Whilst losses arising from fraudulent property titles may result in a claim against the Land Registry, it is entirely conceivable that solicitors could also face claims in this regard if they knew enough to make it unreasonable not to enquire further into the land owner’s identity.
What can one learn from these cases? It is difficult to discern a theme, or an overall problem capable of simple resolution. The need to advise only within your area of expertise, or to report to your client on planning, might appear obvious. With other examples, it is perhaps easy to be wise after the event.
For those running a practice, it is not possible to micro-manage the workload of every fee earner to exclude the possibility of a claim, even at large and well-respected practices. There is, and should be, a degree of trust in the professional capabilities of your colleagues. Inevitably, sometimes points will be missed, or things will go wrong, the result of which is that indemnity insurance will come into play. Perhaps the lesson to be learned is to give your renewal terms careful consideration with your broker. The sting in the tail, in the Abensons case, was that due to insuring with an insurer who became insolvent, the solicitors faced a significant claim in respect of which no insurance cover was available.
This article was submitted to be published by Howden Insurance Brokers Limited as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.