Allyson Colby assesses the solicitor’s duty when a buyer is faced with the risks of paying a deposit to a seller’s agent
Key points
- The risks of paying deposits to agents must be properly explained and understood
- Solicitors should tailor their explanations to suit their clients
- Buyers’ solicitors are not under a general duty to make credit checks against a seller, unless they are instructed to do so
Solicitors have a duty to make such searches and enquiries as are appropriate in conveyancing transactions and to ensure that their clients are properly informed before proceeding. Different searches are available, which bear not just on the title to the land that is being sold, but on its value, and on the costs and risks of ownership. As a result, the types of searches that should be made will depend on the nature of the property and its location, as well as on the buyer’s instructions.
Most searches are made before exchange of contracts. However, some essential searches are made just before completion. The results of such searches will indicate whether there are any new encumbrances that affect the property and will protect the buyer for a limited period, giving it time to register itself as the new proprietor of the land. The search results will also indicate whether there are any bankruptcy entries against the seller, which might cause the transaction to unravel.
Two questions arose in Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch); [2015] PLSCS 70. Had a buyer been properly advised about the risks involved in paying a deposit to the seller’s solicitors as agents for the seller? And should the existence of such risks have prompted the buyer’s solicitor to make a bankruptcy search against the seller before exchanging contracts, especially as the deposit represented more than 20% of the purchase price? The results of such a search would have revealed a bankruptcy petition against the seller, and the buyer claimed that, had he known about it, he would have negotiated terms that would have protected him against the loss of his deposit when the seller failed to complete and was subsequently made bankrupt.
Comprehensible advice
The buyer’s solicitor explained that he had advised that the deposit might not be recoverable if the seller did not complete. He had drawn the buyer’s attention to the charges registered against the property, which secured business debts. He had informed his client that they did not know if the purchase price would suffice to redeem them and that the seller would be unable to complete unless all the charges were released. However, the buyer had been determined to proceed, and had signed a letter acknowledging that he had been advised not to do so and not to release the deposit to the seller, because he might lose it if the seller could not complete.
Judge David Cooke, sitting as a High Court judge, rejected the buyer’s claim that the advice was unclear, noted that the buyer was a sophisticated businessman and property investor, and decided that he had understood the advice given. Even if this were not the case, the judge considered that the risks had been adequately explained to the buyer, who had given the impression that he understood them, and this too would have been fatal to the buyer’s claim.
The judge stated that solicitors must tailor their explanations to suit their clients. They need not explain things that should be obvious to a person with the client’s background, and they are not guarantors of a client’s subjective understanding. Therefore, it will suffice if solicitors provide an explanation in terms that the client reasonably appears to them to be able to understand, and to have understood, even if the client later claims that he failed to comprehend the advice given.
Bankruptcy search
Should the buyer’s solicitor have taken additional steps to evaluate the risk that the buyer was running by paying the deposit to an agent, as opposed to a stakeholder, and made a bankruptcy search against the seller before contracts were exchanged?
Judge Cooke noted that this would have been unusual and that the Law Society’s Conveyancing Handbook does not recommend such searches before exchange, either generally or if the deposit is to be released to the seller. In such cases, the Handbook suggests only that the client should be fully advised of the risks, and the buyer’s solicitor had gone further than this by positively advising his client against proceeding.
The judge accepted that there may be circumstances in which practitioners should check specifically for the commencement of bankruptcy proceedings, since this may affect a party’s ability to complete a transaction or to give a good title. However, solicitors are not under a general duty to check the credit status of a seller just because the circumstances are unusual and involve a solvency risk: for example, because a deposit is being paid to an agent. In such cases, solicitors must advise on the risk, but are not required to evaluate it unless specifically instructed to do so. Nor can such a duty arise merely because a client might lose money if the other party were to become insolvent, since this will be true in most, if not all, transactions. The decision in whom to place one’s trust in business is a commercial decision for clients, not their solicitors.
Judge Cooke observed that the position would have been different if established practice had been different. However, he accepted that conveyancers do not usually make bankruptcy searches before exchange of contracts and that the buyer would have been equally at risk if the seller’s bankruptcy had commenced after contracts were exchanged. No search could have prevented that – and this was an additional factor against deciding that bankruptcy checks should have been made at an earlier stage of the transaction.
Allyson Colby is a property law consultant
