The practical implications of P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).

What should you do, and what exposure do you have when you act for a seller only to find after the transaction has completed that the seller is not the owner of the property but a fraudster?  

This was the very situation which a seller’s solicitor and estate agent faced in P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).

Facts

An impostor posing as the real owner of the property instructed Winkworth to market the property and the First Defendant (‘OWC’) to undertake the conveyancing.  The impostor claimed he was living in Dubai and was looking for a speedy sale.   OWC carried out the usual identity checks (in robotic form only) and the sale proceeded with the purchaser P&P Property paying 1.03 million for the unoccupied property.

Upon completion the net sale proceeds were passed on to the purchaser. Subsequently the true owner when walking past his property was alerted when he saw builders ripping out the kitchen of the property. By this time the impostor had vanished with all of the net sale proceeds (£927,000).

The Claim

The purchaser who purchased from the impostor was not of course happy and decided after the fraud came to light to bring a claim against the seller’s solicitors and also the estate agent for breach of warranty of authority and breach of duty.

There was a separate claim brought against the seller’s solicitors for breach of trust relying on the fact the misappropriated funds passed through the hands of the seller’s solicitors.

Breach of warranty claim

The judge found that if a client appoints a solicitor the only warranty that a third party dealing with that solicitor can rely on is that the solicitor has authority to act on behalf of the client.  There is no implied warranty that the solicitor can vouch for the client’s authenticity as the owner of the property to be sold. 

The judge found:

‘The basic representation is only that the agent has authority to act for another, a matter which arises between him and his principal and is something which is usually peculiarly within his own knowledge. An agent does not, simply by acting as agent, represent that his principal will perform the contract or is solvent or make any other representation as to the principal's attributes or characteristics. The court should not imply a warranty of authority which has an effect going beyond the basic representation, save where it is clear that the necessary promise is properly to be implied. This is particularly so in relation to professionals, including solicitors, who do not normally undertake an unqualified obligation.’

To extend the warranty to this level would in the view of the Judge Robert Dicker QC constitute a guarantee that the client was the registered proprietor of the property and essentially create a strict liability for any loss arising if as in the present case the client was found to be an impostor. The judge found that such warranty was also entirely inconsistent with the practice adopted amongst conveyancing solicitors and out of line with the Law Society Code for Completion by Post (2011).

The judge also found on the facts of this case that there was not in breach of warranty on the part of the estate agent but did not rule out the possibility that in certain circumstances a claim could be well founded.

Breach of Duty of Care

Again the Judge found in favour of both Defendants.

On the facts (and more particularly in the absence of evidence to show a breach of warranty of authority) there was no evidence that the Defendants had accepted responsibility to ensure that the client was the true owner or that the impostor was not who he claimed to be.  

The judge also found:

‘The imposition of such a duty of care on the part of Owen White to take reasonable care to ensure that Mr Harper was the true owner of the Property, would also, in my view, be inconsistent with the detailed rights and obligations set out in the Law Society's Code for Completion by Post, which I consider further later in this judgment’.

In terms of the claim against Winkworth the judge found:

‘I accept Mr Polycarpou's evidence [purchaser’s solicitors]  that he expected Winkworth to have carried out their client due diligence and anti-money laundering checks and relied on them to have done so. However, reliance on its own is not sufficient to establish a duty of care on the part of Winkworth.

On the basis of the test derived from Hedley Byrne v Heller, it is also necessary to establish, amongst other things, the necessary objective assumption of responsibility by Winkworth and, in this respect, the primary focus is on statements or conduct which crossed the line between them.

Nothing was said by Winkworth about the steps taken in relation to its client due diligence and anti-money laundering obligations. Mr Polycarpou did not ask and Mr Hunt did not volunteer anything in this respect. The furthest that the evidence went was that Mr Hunt appreciated that Mr Polycarpou would have expected both Winkworth and Owen White to have carried out their respective money laundering checks before marketing the property.

Assessing the relevant evidence as a whole, there was, in my view, no communication or conduct which crossed the line such that, in this particular case, objectively Winkworth are to be taken also to have assumed responsibility to P&P Property for taking reasonable care when carrying out their client due diligence to ensure that their client was the true owner’.

Breach of Trust

The Claimant claimed that OWC held the funds that it received from the purchaser on trust, that no valid completion took place and that the completion monies were therefore paid out in breach of trust.

The judge found in favour of OWC relying on paragraph 3 of the Law Society Code for Completion by Post (2011 edition) (the "Code")

This provides:

‘’In complying with the terms of the code, the seller's solicitor acts on completion as the buyer's solicitor's agent without fee or disbursement but this obligation does not require the seller's solicitor to investigate or take responsibility for any breach of the seller's contractual obligations and is expressly limited to completion pursuant to paragraphs 10 to 12".

The Judge found:

‘….that the fact that paragraph 3 provides that the seller's solicitor is not required "to investigate or take responsibility for any breach of the seller's contractual obligations" is, in substance, inconsistent with the vendor's solicitor being liable, as the purchaser's agent, for breach of trust in releasing the money in the event that completion does not occur because the seller does not have title. One of the seller's obligations is to provide a genuine transfer of title. If the vendor's solicitor is liable for breach of trust merely because no genuine transfer is provided it would effectively be taking responsibility for what paragraph 3 says it is not. The extent of the vendor's solicitor's obligations on completion are governed by the express undertakings that it provides in accordance with the Code. In my view, in the light of the guidance in cases such as Mothew [Bristol and West Building Society v Mothew [1998] Ch 1] , in these circumstances it would be wrong to construe the Code so as to give rise to a breach of trust or, as a result, as an effective guarantee of title.

In short the judge found that it would be inconsistent with the terms of the code to hold that a breach of trust occurred by reason of the seller releasing the completion funds to the purchaser when it was argued that the seller was not in a position to provide a genuine transfer of title.  Essentially the judge took the view that paragraph 3 specifically excludes the sellers solicitor from liability for any breach of contract on the part of the seller.

Sellers Solicitors Conduct

Helpfully the judge took the time to consider whether the sellers solicitors would have been able to avail themselves of the Section 61 of the Trustee Act 1925 relief had he found that a breach of trust had occurred.

Section 61 provides:

"If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust … but has acted honestly and reasonably and ought fairly to be excused for the breach of trust … then the court may relieve him either wholly or partly from personal liability for the same."

The judge it is safe to say was not impressed with the seller’s solicitors and found that if there had been a breach Section 61 relief would not have been available.

In short the judge found there were sufficient ‘red flags’ to alert the seller’s solicitors and to cause at the very least the seller’s solicitors to raise further questions.

The ‘red flags’ (and there were many) in this case included:

Unoccupied property

‘Seller’ living abroad

No legal charge

Relatively high value

Impatient client

Discrepancies between signatures

Lack of a correspondence address or evidence as to where the ‘seller’ was in fact living and working or how long he had been there.

Failure to pick up form the ‘seller’s’ bank statements when presented the fact that most of the items within it appeared to be London based.

Failed electronic identity check.

The judge concluded:

‘The fraud was plainly a sophisticated one which appears to have carried out with some expertise. However, in my view, it is plainly possible that, despite the obvious sophistication of the fraud, further questions would have revealed the true position or discouraged Mr Harper from proceeding further and, even if they did not, they would have increased the prospect of that occurring’.

Practical Implications

This case is unremarkable and should not lead in my opinion to any significant change in practice.

Upon acting for a seller it is important to keep in mind both statutory and professional obligations particularly the widely known obligation a conveyancer has to be alert to indicators of money laundering and/or fraud and to identify and action ‘red flags’ as and when these arise.  To simply ignore and do nothing is not advisable and could leave you exposed to liability.

It is clear that a responsible and alert practitioner given these circumstances should have spotted that there was something not quite right about the transaction.  It should be clear by now that if you are acting on a sale where there is no mortgage, the property is empty and the ‘seller’ purports to be living abroad, further inquiries should be made.  In this case the seller’s solicitors should have never allowed this transaction to proceed.  There were clear warnings and to argue as the seller’s solicitors did that she did not consider it was appropriate to raise a large number of questions with her client simply is not an acceptable argument.  If in doubt the seller’s solicitors should have terminated the retainer. 

What more you might ask could the seller’s solicitors have done? In this case I do take the view that further evidence to link the seller to this property could have been sought.  I do not consider it is unreasonable given the large number of red flags to have asked the client to provide details of who acted for the ‘seller’ on the purchase of the property and to contact those solicitors to seek verification of identity.  I know some may argue this is a step too far and probably in the majority of cases it is but as I say the alarm bells were constantly ringing in this case.

If acting for a purchaser and it is noted from the Seller Information Form that the property is empty and there is an alternative address for the seller shown (which in this case the seller’s solicitors failed to investigate) then I do consider that the seller’s solicitors should be asked about the checks undertaken to ensure the seller is in fact the registered owner.  In other words to ask for a warranty.  If this is refused then perhaps insurance should be considered or the buyer should be warned of the risk of fraud.  

Summary

In this case the I am of the view OWC was lucky to have come away untouched.  The prominence given to the Law Society Code surprised me and was clearly and cleverly used by the judge to find for the sellers solicitors which overall I agree was the most just decision to reach.

The underlying message however is that a conveyancer whether acting for a seller or purchaser needs to be alert at all times and if there are red flags of the type which appeared in this case, and which do not disappear on further investigation, not to be reluctant to report these matters to the National Crime Agency, and ultimately to pull out of a retainer.  

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Conveyancing Panels - Marketing heaven or unwanted slavery?

Love them or hate them conveyancing panels continue to remain a predominant feature within the conveyancing industry.   The majority of these work on a model whereby a company operates and manages an electronic platform on which it allows third party associates such as a broker or an estate agent or lender to introduce a client to a solicitor who has become a member of the conveyancing panel.

The panel manager allows the broker or agent or lender to access a national network of conveyancers and provides the broker or agent to make a financial gain from steering the client to one of the panel’s chosen conveyancing firms.  This means that in addition to raising a commission for the work the broker or agent has undertaken, the third party is able to make some extra money through making the referral.  In many cases the client is oblivious to such an arrangement often following the agents/brokers recommendation  blindly.

In addition to this the panel manager is also able to secure a slice of the cake for managing and allowing the third party to access via online software a network of preferred conveyancers.

So what does this mean for the consumer?

For the consumer it will normally mean higher prices since when receiving a quote for conveyancing services from the agent or broker it is in the majority of cases probable that the consumer will be paying a higher price than that had the consumer gone direct to the conveyancer.  The consumer is in these cases paying the broker’s commission, the panel’s management fee and also a higher fee for searches and other incidentals. 

Here is how it works.  The consumer is encouraged to use a solicitor which the broker is able to access through the panel.  The consumer is quoted a fee of say £800 plus VAT.  The consumer accepts and the panel solicitor who invariably will not be local, is instructed.  On completion the client pays the £800  to the panel solicitor.  Out of the £800 paid by the client the solicitor will be required to pay the panel manager company £500, which the panel manager will then share with the broker/agent/lender for making the referral.   The net effect of this is that the consumer has paid 100% more than he or she would have paid if she had gone to the solicitor direct.

On top of this the consumer will also be paying more for identity checks and searches.  This is because the panel manager has arrangements with the third party suppliers of these services under which the panel manager will receive a cut of the fee paid bu the consumer for those services.

In addition to higher prices, the consumer is often introduced to a conveyancing company out of the area and one which may not have the best of reputation.   It must be kept in mind that many of the panel solicitors will be forced due to the low amount of the fee it retains to facilitate the work with the minimum of resources.  The client is expecting a £800 service whereas the conveyancer may be only due to the low return be able to offer a service more commensurate  with the low legal fee retained.

The question to which this gives rise is whether the broker or agent is acting in the best interests of the consumer in not in some cases making it clear that the client may be paying more for their conveyancing services.  Don’t get me wrong as there are some brokers and agents are up front about the arrangement  and do offer to set off the commission received against their fees.

So how does this work for the conveyancer.

The upside is that the conveyancer receives work on a regular basis and has no direct marketing costs to pay.  The conveyancer only pays for the ‘lead’ on completion so this helps with cash flow.  Providing the conveyancer discloses the introduction fee there is no professional objection to the arrangement per se.  The problem lies more with the restraints the Panel Manager may apply.   Most Panel Managers have ‘pet’ suppliers such as search companies and insist that as a condition of panel membership the panel solicitor must purchase the searches from that supplier.  This extends to money laundering checks, indemnity insurance and solicitor account checkers.  This means the conveyancer is deprived of the freedom to choose and work with his or her own preferred supplier.  It also means that the client is often paying more for these items given the Panel Manager is receiving a slice of the charge from the suppliers of these services. At the end of the day the conveyancer is left with a small fee for the work and left with no opportunity to share in the financial benefits of third party arrangements.

Panel work for some conveyancers clearly works and provides savings on marketing costs.  Balancing this however with the shortcomings of the arrangement one is forced to raise questions about the economics of undertaking 'Panel' work.  There is also the question of whether the sharing of fees both legal and those hidden in the supply of third party searches has now reached a level whereby the panel solicitor may be so compromised that a conflict of interest should be considered and indeed acted upon.

So what has gone wrong? 

The decision of accepting and working for a client on a reduced fee was when considering the high cost of marketing is per se a reasonable one to take.  The problem now is that the some panel mangers have become too greedy by looking to reduce fees further ( so as to increase their slice of the cake ) and to also prevent the conveyancer from operating any commercial third party relationships other than those permitted by the panel manager.   There is now a major imbalance between looking after the interests of the client and the panel conveyancer and meeting the financial demands of the panel manager’s shareholders. To the extent some panel managers are witnessing a mass drop in the number of conveyancing firms willing to participate in their schemes.

So what can conveyancing firms do?

The model operated is not unique, nor difficult to establish. Its open to conveyancers to look to set up their own networks and third party relationships.  Surely this must be a more preferable option to the slavery some panel managers now expect from their panel solicitors.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Impact of Brexit on conveyancing and the need for a strategy

Love it or hate it we are now destined to leave the European Union.  

Personally I consider this to be a reckless move and one which will impact on the lives of not only those close to retirement like myself but also our children and grandchildren.  There is much talk of democracy and of how the people have spoken and made their voice known.  

I do get that but if every major decision in the governing of our country was left to the lottery of a referendum I am not sure we would still be living in a democracy. The risk of anarchy through ill-informed and disconnected decision making would be heightened.  Isn’t this why we elect people to Parliament to take these major decisions on our behalf?  Surely when the leader (former) of the Government (which the majority of the country voted in) is saying its best to stay in Europe and the people decide its best to leave, does this not in itself undermine the whole democratic process and the sovereignty of Parliament?

Notwithstanding some tricky and so far unanswered constitutional questions, the fact is we are leaving and as I have been told so many times recently – I need to accept it and get on with planning my business accordingly.

Even though I initially pushed back when being told this, the fact is, it is when looking at the situation rationally, good advice.  The time for moping and reflecting on what might have been should be viewed as over.  As business people we need to look at this as yet another hurdle in life and one which needs a strategy to make sure we are able to survive, continue to grow and more importantly preserve jobs of those who work for us.

So what’s going to happen to the property market?  Who knows! Not even the experts are able to speculate on what might and might not happen.  So what do we know for certain?  The pound is weak and continues to fall in the currency market.  The Stock Exchange is experiencing sever fluctuations in prices.  The Country has been stripped of its AAA credit rating. The Government is split on Brexit and the Prime Minister ducking his responsibilities to the Country has decided to resign.  The opposition is not effective and is in melt down.  The long period of stability and certainty stemming from a severe recession has vanished overnight. Clearly given all of this you don’t need to be an economist to know that we are now facing a financial crisis which will inevitably impact on consumer confidence.

As a consumer looking to buy or sale a property there is no longer any short to medium term certainty that interest rates will not increase, property values will not fall and job security will prevail.   Not knowing what will happen in this respect will clearly cause the property market to stall.  For how long who knows but most economists are looking at a 25% fall in transaction numbers over the next 12 months.

So what do we do?  Bury our heads in the sand or as I say look to form and implement a strategy? The conveyancing market will contract this is inevitable so as a business there is a need to make sure a larger share of the market is secured.  This can only be achieved through reducing prices and looking to reduce outgoings.  Regrettably this could lead in some places to job losses.

The only upside to all of this is that the cost of borrowing could become cheaper and with property prices in some parts of the country falling this could stimulate some activity.  Those who have job security may be well placed to make a move in the property market to grab a ‘bargain’ with low cost borrowing. As a seller or buyer or both this may very well be the time to enter or re-enter the property ladder.

Furthermore, the property market in London is unlikely to be impacted due to demand outstripping supply.  The fall in the pound is also likely to attract more foreign investors looking for long term investment in property.

Those who supported our departure from Europe played down the impact of Brexit and in my view misled voters on the recessionary consequences which are inevitable when as is the case the Country is currently operating in a state of uncertainty.

David Pett Solicitor 

The views expressed herein are the personal views of the writer. 

Volume Conveyancers have not lost the plot - just plotting for the future

The Law Society Gazette under an emotive heading of ‘Ombudsman warns of dangers from ‘conveyancing factories’ recently reported in response to the release of a report from the Legal Ombudsman entitled ‘Losing the Plot – residential conveyancing complaints and their causes’ that ‘conveyancing factories’ pose a potential risk for house buyers.

In the article Adam Sampson, the ombudsman, says:

‘increasingly commoditised automated and competitive’ conveyancing market has resulted in traditional high street firms evolving or being displaced into ‘conveyancing factories’.

The report acknowledges that such innovative services can be helpful, but warns they are ‘not without risk’. It voices concern that by focusing exclusively on volume, some firms risk failing to provide a reasonable service.

A very general ( and perhaps unfair and misleading) finding, and one which it would be unreasonable for a consumer to rely on without further investigation.

To begin with there is an issue of definition. What constitutes a 'volume conveyancer'? Presumably, by definition, it is a conveyancer that conducts over a certain number of transactions each year?  If this correct what is the number of transactions an organisation should be handling before it falls into this category and becomes condemned without sentencing?

The biggest mistake critics make when judging a ‘volume conveyancer’ is to jump to the conclusion that due to the size of the organisation it is inevitable that client service will be poor and or that the quality of work produced will be inferior.

In life and in so many different areas of the service industry there are small and large organisations and with both there are good and bad businesses. It is disingenuous and slightly condescending for some professionals to view all large conveyancing providers with the same label.  

I accept there are some poor examples of how conveyancing services should be delivered but it is clearly not the case that these are in the main tied solely to the larger organisations.  The fact is that there are a large number of the smaller providers who quite simply should not be allowed anywhere near a contract for sale.

Equally just because a larger conveyancer is able due to efficiencies of scale and the use of technology  charge the consumer less for the service, it does not follow that the service delivered will be any less inferior than the service provided by a smaller and more traditional organisation.  

Many larger providers have both the resources and expertise to invest in staff training and the establishment of technology to make sure that the consumer experience is enhanced.  These are organisations that depend on consistent and positive consumer feedback to survive and grow.  

They also specialise in conveyancing and are probably a far better and indeed safer choice for the consumer than the small firm who might only do the occasional conveyance. 

It is wrong and perhaps small minded to criticise these businesses ( many of which receive awards for outstanding client services ) solely on the basis of size and the drive many possess to use technology to deliver a cost effective and highly satisfactory service to the end user.

My message to the consumer is not to attach too much weight to this report.  Instead consumers should undertake research.  Look for reviews and testimonials and remember do not be suspicious per se about an organisation that offers a competitive price and the facility to interact and experience an enhanced level of communication through the use of cutting edge technology.  Just because a business has a non-traditional approach to conveyancing does not mean that it should be viewed differently or less favourably.

Remember also that the scare mongers out there would like consumers to believe that all large conveyance providers  are bad because it suits their interests.  They are worried about the forward looking businesses and how they are using technology and processes to introduce efficiencies to reduce fees for the consumer but to still operate with a healthy profit. It is the large providers out there who are leading the way to improve what is a very archaic system for the purchase and sale of property.

Finally it is worth keeping in mind the words of Law Society chief executive Desmond Hudson when he says the volume of complaints should be put in perspective. 'There are, on average, more than 675,000 property transactions a year. We are talking about 1,300 complaints on conveyancing to the LeO in a year. My point is that the vast majority of solicitors do a good job when it comes to conveyancing'.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Conflict - Do I need to report to my lender client or not?

The scope for conflict in a conveyancing transaction when acting for a buyer and the buyer’s lender is extensive and is often overlooked by busy practitioners.

It is clear from the Court of Appeal decision in Mortgage Express Limited v Bowerman & Partners [1995] The Times, 1 August that in circumstances where a conveyancer acts for both the borrower and lender in the course of a residential conveyancing transaction, although the conveyancer’s implied duty extends beyond referring matters of title to the lender, the duty only extends to disclosing information that might have a material bearing on the lender's potential security or its decision to lend

In other words, matters which could lead to the lender’s surveyor/valuer reconsidering the adequacy or otherwise of the value of the security to be taken from the client to secure the mortgage, or the ability of the lender to sell the property quickly should the mortgage be foreclosed, or the clients affordability to repay the loan.

Examples include:

The potential contamination of the land

Serious flood risk

Boundary issues

Client’s disclosure of redundancy or dismissal

Close proximity to HS2 route

Sub-sales or where the current owner has owned the property for less than 6 months.

So what happens should information come to a conveyancer’s knowledge which gives rise to a conflict of the interests between those of the client and those of the lender?

In these circumstances where the information is of a confidential nature, the conveyancer must either obtain the client’s consent to disclose the information, or decline to act for both parties.

The conveyancers ( defendant ) in  Mortgage Express Limited v Bowerman & Partners [1995] The Times, 1 August, were instructed to act for Mortgage Express Ltd and the prospective purchaser of a flat at Queensway, London, for the sum of £220,000.  Prior to exchange of contracts, the conveyancers discovered that the property was the subject of a sub-sale to the vendor which was to be completed contemporaneously with the purchase for £150,000. The lender had agreed to make a loan of £180,150 based on a valuation of £199,000.The conveyancers reported the sub-sale to the client who confirmed that he was prepared to accept the price as he wished to purchase this particular property.

The Conveyancers were satisfied with this response but did not inform the lender of the existence of the sub-sale. The lender satisfied the court that if it had been informed of the sub-sale, it would not have lent the purchase money to the purchaser, and alleged breach of duty and/or negligence on the part of the conveyancers.

At first instance, Mrs Justice Arden held that a conveyancer’s duty to his respective clients is to protect their respective interests when carrying out their instructions, and found that the conveyancer owed a duty of care to report to the lender the information he had about the sale price.

The Court went so far as to find that the solicitor is bound to take some action in relation to 'any information which puts him on enquiry as to the accuracy of the valuation' and that the failure to disclose any such information amounted to negligence.

On appeal, he Court of Appeal held that the information concerning the price and the existence of the sub-sale was not confidential to the client and was of equal importance to both clients, albeit for different reasons.

On the facts, the court held that the information might have led a reasonably competent solicitor to form the view that the information might have caused the lender to doubt the accuracy of its valuation and, as a consequence, the information ought to have been passed on to the lender. During the course of its judgment, the Court of Appeal re-affirmed the duties of a solicitor in circumstances where the information is of a confidential nature to the borrower.

The Court of Appeal added that it was not the solicitor's duty to comment on value, but to disclose information which might cause the lender to doubt the accuracy of the valuation.

Interestingly the suggestion was that if the difference between the sub sale price and valuation was not significant then there would not have been a duty on the conveyancer to report.  In my view and with reference to the requirements of the CML Handbook I consider it would be dangerous not to report even if there difference was only small.

Practical Implications

It is clear that a practitioner will need to make a judgment call to determine what information it receives could be regarded as confidential to the client and which is not.  If it is confidential ( e.g. loss of job) then the client’s consent will be required before reporting the information to the lender. If as in the above case it is not then there is no need to seek consent, though in practice the client should be alerted and warned that the reporting could lead to the withdrawal of the mortgage offer.

The situation can be helped through the inclusion of a provision in the conveyancer’s terms and conditions which gives the conveyancer express authority ( without further recourse to the client ) to disclose matters to a lender when a possible conflict arises. Even with the existence of such a clause it would still be advisable to make the client aware.

If in a conflict situation there is a clear instruction by the client not to disclose then the practitioner should decline to act for both clients straight away.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Unfair constraint on free choice of legal regulator

Changing from one regulator to another should not be difficult and should not be restricted due to the exclusive and unnecessarily stringent arrangements operating between one regulator and the insurance industry. 

How on the one hand can you introduce the flexibility of choosing a regulator that suits your business, and which will benefit the client, and then with the other hand have a rule which places a financial burden of such a magnitude that the cost of switching becomes totally prohibitive.  It simply does not make sense and makes a mockery of not only the role of the Legal Services Board but also the legal profession as a whole.

So, you wish for example to switch regulator from the Solicitors Regulation Authority ( SRA) to the Council of Licensed Conveyancers (CLC). A logical move if you are a conveyancer because  you wish to be regulated by a regulator who understands conveyancing and who has a focused interest in how the conveyancing profession should be allowed to be developed.   You make the choice with business interest in mind and with the knowledge that you clients will benefit because of the Council’s insight into and knowledge of the conveyancing industry.  A regulator that is niche and which does not at least for now wish to be all things to all people.

A perfectly logical decision therefore and one which should be easy to implement.

To be fair the process of applying to the CLC is straight forward and unless there are major issues in the way you run your business, the application should be approved without too much difficulty.   The problem however is with the SRA and its agreement with the insurance industry.   Under  Participating Insurers Agreement (PIA) when one changes regulator this acts an automatic  trigger for ‘run off’ indemnity insurance.   The so called logic is that because PII policies are written on a “claims made” basis rather than the “losses occurring” basis used in general insurance, responsibility for the claim rests with the insurer in place at the time of the negligence.  If therefore at the time the claim is made there is no longer an insurance policy  in place which accords with the PIA the client may find him or herself uninsured.  

The theory behind this is that the PIA minimum term insurance is superior in terms of coverage to the insurance which is required by the CLC.  I say in theory  because having had some brokers to interrogate the differences they do not seem to  be that significant and far reaching.   To begin with, the minimum term insurance will still pay out on a claim if the solicitor does not pay the premium or where there has been bad faith on the part of the solicitor which has led to the claim.    Interestingly when the Insurance Act 2015 is introduced later this year the latter of these two difference will offer little comfort as the insurer will be able to void the claim in the event of fraud and or deliberate or reckless failure to disclose relevant facts.  It’s not clear at this stage how this will operate with within he PIA.

Essentially therefore, there is very little difference although when one looks at the cost of insurance there is a substantial and a totally unfair difference in annual premiums.   The cost of minimum term insurance and non-minimum term is staggering and does gives rise to the question of whether as a profession we have and continue to be been mugged when it comes to the extortionately high PII premiums charged.   A conveyancing business with a million pound turnover and a clean claims record would with the CLC be looking to pay a premium of around £15,000 compared to a premium of £80,000  for minimum term cover.   How can this be justified?   The same risks apply irrespective of regulator. The only conclusion is that you are paying £65,000 for the added consumer protection provided by the minimum terms.  The fact that the claim will be paid in the event of the wrongdoing of the conveyancer or the failure of the solicitor to pay the premium.  One in reply may ask with good reason why should an insurer pay out in these circumstance in any event.  More importantly why as a profession should we paying higher premiums to address the risk presented by the less honest members.  Why should we be deprived of the opportunity to choose the type and scope of cover we consider as a professional outfit will address the risk of a client raising a claim?

So the SRA as the situation currently stands will not allow a SRA regulated firm to choose its regulator unless it is satisfied that there will be adequate minimum term insurance in place to cover past claims ( for six years)  The practical consequence of this is that although with the CLC, you current year’s insurance could for example be   as low as £15K,  to make the switch and obtain the SRA waiver you would need to put into place a run off minimum term insurance policy which sticking with the present example, could cost as much as  £200,00 plus!

A nonsense and a major barrier to the freedom and benefits of choosing your regulator.

To be fair to the SRA the above unfairness and restriction on competitiveness has been identified and the SRA has began a consultation process with the view to removing the ‘run of’f requirement on change of regulator (http://www.sra.org.uk/sra/consultations/removing-barriers-switching-regulators.page).

Crispin Passmore, Executive Director for Policy at the SRA, commenting on the process stated:

"Firms should be able to switch to the regulator they feel is right for their business more easily than is currently the case. Legal businesses are increasingly owned by, and employ, a range of lawyers and non-lawyers, so choosing a regulator is an important business decision. Facilitating choice is a good way to encourage a modern, competitive market that provides affordable and accessible services.

"The Legal Services Board ensures minimum standards of client protection are maintained by all legal services regulators. Nonetheless, we have to be careful that removing unnecessary bureaucratic obstacles for firms does not create potential risks for the clients of firms wanting to switch. We want to get the right balance between encouraging a competitive market and ensuring the interests of those using legal services continue to be protected, so we are keen to hear views on how best to do this.

"If there are options that we have not thought of that should be considered, we are very open to ideas.”

I agree the client has to be protected but if as is available insurers are prepared to offer conveyancers looking to switch cover for past claims and which will meet claims providing the conveyancers have not failed to provide full disclosure and paid the premium then I am not sure how it can said the client will not be protected.   To claim otherwise would suggest that CLC conveyancer clients are at more risk than SRA conveyancing clients.  If this  so shouldn’t the public be made aware of this ?

It seems to me that the insurance industry has been able with the full acquiesce of the SRA to hide behind the PIA and charge inflated PII rates making it more expensive for SRA insured back conveyancers to compete with other regulated conveyancers.   This cannot be allowed to continue and as a profession we need to stand up and support the SRA with the proposed changes which could if implemented lead to reduction in the level of PII insurance premiums across the board.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Are conveyancers over charging on ‘mum and dad’ assisted property transactions?

Introduction

The principle behind the insurance is that it protects the mortgagee’s (i.e. bank lending the money) title in the property if the donor of a gift or informal family loan goes bankrupt and  the donor’s creditors make a claim to the money as part of the donor’s assets.

But is it necessary?  Do all conveyancers actually understand the applicable law?

Background

The conveyancer is under a duty to both client and the client’s lender to ensure they obtain “a good and marketable title to the property and free from prior mortgages or charges and from onerous encumbrances which title will be registered with absolute title” (Solicitors’ Regulation Authority Handbook).

If there is a gift from a family member ( or a discounted purchase price when purchasing from a family member) or an informal loan the donor on the face of it will acquire an interest in the property. Gifted deposit insurance provides protection if the donor becomes insolvent and creditors of the donor make a claim putting the property at risk as well as the lender’s security.

The Law

The law behinds this is S339 of the Insolvency Act 1986 provides that if a bankrupt has within the previous five years “entered into a transaction with any person at an undervalue,” then “the trustee of the bankrupt’s estate may apply to the court for an order” to restore  the gift to the donor for the benefit of the creditors.

However S342(2)(a) offers the lender with protection stating that if an order is made under S339  this will not …. prejudice any interest in property which was acquired from a person other than that individual and was acquired in good faith and for value, or prejudice any interest deriving from such an interest”. Essentially the bank is protected from a Section 339 order by S.342 as long as it acts honestly and doesn't knowingly aid dishonesty. Its title in the property is therefore protected and in no way placed at risk .

The only time a  lender may not avail itself of this protection if the lender knew both that there was a gift/transaction at an undervalue and that the donor was already insolvent or a petition of bankruptcy had been presented when the gift was made. Hence the need for the conveyancer to carry our ID and bankruptcy checks against the donor.

Interestingly if this situation was allowed to arise then gifted deposit insurance would not assist in any event.

If the gift was specially made to put it beyond the reach of creditors, an order could be made under  Sections 423–425 of the Insolvency Act to restore the position to that before the transaction at an undervalue. Section 425 however would protect the lender if its interest was “acquired in good faith, for value and without notice of the relevant circumstances”.  Again unless the lender was aware of what was going on the lender would not be affected by the insolvency.

Council for Mortgage Lenders Handbook

This states:

‘If you are aware that the title to the property is subject to a deed of gift or a transaction at an apparent undervalue completed within five years of the proposed mortgage then you must be satisfied that we will acquire our interest in good faith and will be protected under the provisions of the Insolvency (No 2) Act 1994 against our security being set aside. If you are unable to give an unqualified certificate of title, you must arrange indemnity insurance (see section 9)

‘You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion’.

Practical Implications

Providing the checks on identification and bankruptcy come back all clear,  it would seem from this analysis that an unqualified certificate of title could be given to the lender where there is a gifted deposit.

Is there a need to obtain a letter of postponement from the donor, that is a ‘gift letter’.  Probably yes in terms of good practice though the Land Registration Act 2002 does provide that a mortgagee has priority over any claim that the donor may have for the return of the gift,

Conclusion

By blindly insisting on indemnity insurance which appears on the above analysis of the law to be wholly unnecessary it seems conveyancers are not acting in their clients best interests.   

At the time the Insolvency ( No2) Act 1994 ( which made amendments to S342 (2) (a)  was passing through the then House of Lords Lord Coleraine said:

“the saving in that section [of the Insolvency Act] for a third party purchaser for value and in good faith will no longer be negatived merely by the purchaser’s knowledge of an earlier transaction at an undervalue or preference … the effect of the clause should be to speed conveyancing and greatly reduce the need for insurance in the cases where problems arise” (Hansard 1994 vol 554 at para 348).

Clearly the insurance industry is also very much guilty in terms of selling and promoting an insurance which seems to offer no purpose other than as a comforter to conveyancers.

There should also be a call made on the Council for Mortgage Lenders to review and to amend the Handbook to make the requirements  for seeking indemnity insurance on a gifted deposit clear and more in line with the Insolvency legislation.

Source :   *Gifted deposits and indemnity insurance: a risk assessment, Nick Piška, Conv. 2015, 2, 133-147  (Subscription required)

 MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com