Showing posts with label conflict of interests. Show all posts
Showing posts with label conflict of interests. Show all posts

Tuesday 2 December 2014

Lender and client relationship and the potential for conflict



Article by Georgie Harrington - Trainee Lawyer 

Where a client seeks the aid of a mortgage, they are no longer the only party legally represented. Where the same firm of solicitors represents the client and lender, there are many scenarios in which a conflict of interest may arise.

This article will focus on the unusual, yet extremely important scenario whereby the client creates a charge in the property in favour of the lender for the purpose of providing financial support and benefit to another party. This scenario is known to the conveyancing industry as “third party security”.

What is third party security?

A modern example is that of a second mortgage against a property to create a source of capital to finance the start-up of a new business. It is obvious to assume this arrangement may be between a married couple or partnership, but this is not always the case.

The potential for conflict

(1) The danger within such an arrangement is largely associated with the right the lender has to reclaim possession of the property from the third party for default in payment.

(2) Furthermore, a “client conflict” may arise if a solicitor opts to act for the third part, borrower and the lender.  Chapter 3 of the SRA handbook describes client conflict as: “any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict”.


Case Law

The topic of third party security cannot be discussed further without reference to the leading judgment of Royal Bank of Scotland plc v Etridge (No.2). The House of Lords declared how lenders are to operate under these circumstances as well as steps to be satisfied by the acting legal representative.

The case involved a wife acting as the third party, who sought her property for security to account for her husband’s debts. The loan was not repaid to the lender and repossession was claimed on the property. The wife attempted to sue the solicitors for professional negligence on the grounds that they had not acted within their duty to advise accordingly. The question considered by the Court of Appeal was: Had the wife been properly advised, would she have signed the necessary documents to enter into such a transaction? The Court of Appeal held that the solicitors firm were in breach of their duty as they has failed to evaluate and advise the wife of the risks.


Judgment requirements

Lender responsibility
Solicitor responsibility
Write to the third party informing that for their own protection, the lender will require written confirmation from the solicitors that the nature of the charge will be explained.
Explain to the client that the lender may rely on the written confirmation from them that the nature of the transaction and charge has been sufficiently explained.
Ask that the third party instruct a solicitor. It is for the solicitor to decide whether there is a potential conflict of interest in taking on the instruction for the third party, borrower and lender and whether this is in the best interests of the client.
Seek confirmation that the third party is happy for legal representation under the circumstances and advise accordingly thereafter of the legal and practical implications.
Provide the third party with the financial information necessary for advice to be provided accordingly.
Check that no earlier lending is secured under the third party’s guarantee.
Provide the solicitors with any information that is reasonably considered may evidence the fact that the third party has been mislead in coming to such a decision.
Explain the nature of the documents to be executed by the client and the consequences of entering into the transaction. The solicitor must obtain consent from the client to write to the lender confirming this has been explained to the client.
Do not proceed on the transaction without written confirmation from the solicitor.
Discuss the client’s financial means and whether any other assets may be the subject of repayment in place of third party security. The solicitor can at this point offer to negotiate the terms of the transaction with the lender under instruction of the client.

Meet with the client face to face without the borrower present. An attendance note of the meeting is necessary.


Decision in Etridge

The consideration of Lord Neuberger M.R. was that the length of the client meeting in relation to third party security did not necessary satisfy the duty the solicitor has in advising the client. Mere advice to proceed was simply not sufficient: “…she should have been told in clear terms that a hurried short meeting was simply inappropriate, bearing in mind the importance, riskiness and probable pointlessness of the transaction she was about to enter into…”. The solicitor acting on behalf of the wife did not recall the meeting with her and therefore was not able to give any real evidence that the advice provided was satisfactory for the purposes of his duty to the client. All the solicitor was able to offer was that of what his usual practice with clients would be. The court founds that, had the wife been properly advised, the wife would not have signed the documents to the transaction.

Conclusion

The requirements listed within the table above were considered to bet he core minimum to be obliged by the lender and solicitor in their relationship and capacity to the third party, to ensure they enter into the transaction with realistic understanding of the implications and risks involved. Equally allowing the lender the comfort to make the necessary loan without fear that the transaction will be set-aside in the future. The solicitor must exercise their due skill and judgment in every individual case of such a nature and whether to act on the matter. It is a modern day requirement of a solicitors firm, acting in this capacity, to check their insurer’s conditions that they may even be covered to proceed in doing so.

Tuesday 22 April 2014

Can a conveyancer act for both a buyer and seller?

Conflicts of interest, as outlined within the SRA handbook is an important issue that we as conveyancers must consider at the forefront of every undertaking of instruction by potential clients to a transaction. The SRA handbook outlines two different types of conflict which shall be detailed below. 

Georgie Harrington, trainee solicitor with MJP Conveyancing will seek to discuss the contentious topic of acting for both the buyer and seller to a conveyancing transaction, a matter that holds a very high risk of conflict within a firm. Investigating the potential difficulties and whether it is ever considered good practice.

‘Conflict’ for the purposes of our understanding, is something that compromises your, or your firm’s, ability to act in the best interests of each of the clients. For example, one is not able to recommend the best course of action for one client if it in turn prejudices, or has the potential to, affect the interests of the other client to the firm.

The two types of Conflicts of Interests:

The first type of conflict is that of an ‘Own Interest Conflict’. The nature of this conflict arises where your duty to act in the best interests of any client conflicts with your own interests. This could include a financial or personal interest for example. The second type of conflict arising more commonly in the practice of conveyancing is the ‘Client Conflict’ held in Outcome 3.5. 

This is whereby the solicitor owes separate duties to act in the best interests of two or more client’s in relation to the same or related matters and these duties conflict or there is a significant risk of the duties conflicting.


Acting for the Buyer and Seller:

A common client conflict within the conveyancing field occurs from the scenario where a conveyancer to the firm takes instruction to act for both the buyer and the seller of a property.

The SRA does not make these circumstances impossible under the rules; we know this because of the existing exceptions contained in Outcomes 3.6 and 7.

Examples include where the transfer of land is a gift between the parties or it is between family members or such like. There may be such a close connection between the parties to enable their interests to so closely relate it would be disproportionate to instruct a further solicitor on the matter. Chapter 14 of the Code explains that a ‘substantial common interest’ between the clients must be clear and the achievable outcome evident, with the conflict being secondary to the common interest. Of course here, the clients must first be agreeable and aware of the risks involved. Furthermore, a situation may exist where the parties know the solicitor well and do not want for anyone else to act on their behalf. With all this in mind, it is ultimately down to the acting solicitor to decide whether a client conflict is likely to arise, the significance of the common interest if any, and whether it is reasonable in taking the risk. This in turn raises the question ‘at what point is it reasonable to undertake the risk based purely on the understanding that the client’s share a common interest?’

In light of making this decision, the solicitor must take into consideration certain factors such as the likelihood of making negotiations between the two parties and whether this would create an imbalance between the interests. For example, where negotiation of price comes into question, there is a significant risk that negotiation will not benefit the best financial interests of at least one of the client’s. As we well know, negotiations are simply not limited to that of monetary requirements. The parties to a transaction are often faced with the discussion of insurance policies, what fixtures and fittings are to be included in the sale price, agreeable completion dates and so on. Moreover, the solicitor must consider any situations, necessary action or advice that would put one of the parties in a vulnerable position. For example where there is an existing exchange or completion deadline or where a survey flags up an important issue, the solicitor is obliged to advise on what is most beneficial under such circumstances. This advice may not be effective as it is simply conflicting or may in turn expose one client to vulnerability.

A firm, in compliance with the Outcomes to the SRA must consider and put in place such behaviours that will limit the risks of a conflict arising. Adhering to these behaviours will evidence that a solicitor has complied with the overlying Principles to the Code of Conduct. If subsequent to entering into the client-solicitor relationship with both the parties, a conflict or risk of such arises or even where the existing conflict becomes relevant, the acting solicitor is obliged to cease to act for one of the parties. He may continue to act for the other party to the transaction if this does not affect the confidentiality of the former party.

In consideration of the above, whilst the SRA Code of Conduct enables the possibility to act for the buyer and seller of a property, the practice is not one to be recommended. In circumstances it may be considered desirable for the practicality of the prospective clients, however in balance of this against the capability of a conflict to arise, I determine it trifling. Be it better for a firm to comply with behaviours and practices to avoid these conflicts than to enter into an agreement where the risk is so dependent upon matters out of our hands

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

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