by Robin Chapman
All successful property dealers are experienced in negotiating a price on the land which they are buying or selling but how many actually bring those same skills to bear on the incidental costs associated with that transaction? With VAT, stamp duty, survey fees and legal costs the expenses of acquisition can be up to 5% of the purchase price. Worse, many of those costs can be incurred before a deal is completed and still have to be paid even if the transaction proves to be abortive. On a completed deal the purchaser may also find that he is paying those costs out of his own pocket and is not able to finance those amounts out of any loan or mortgage proceeds.
Obviously anyone stretched too thinly on a deal, in today’s market, ought to be re-assessing whether they should be doing it at all. Nevertheless any dealer should be seeking to get good value for money on the services which they are buying in and seeking ways to reduce incidental costs.
This article explores the way in which a client may more effectively manage his lawyer. The following article looks at other professionals and how a transaction may be structured to mitigate costs or to have more control over expenditure.
Sometimes even the most hardbitten dealer is loath to discuss money and fees with professional legal advisers. There is also a reluctance in the legal profession to explain quite how a legal bill is constructed — and few people are aware of their rights to challenge a bill. In 15 years of practice I have never had a bill in a non-litigation matter formally challenged, but I doubt that this means that all my clients have thought those costs were eminently reasonable.
Calculating legal bills
Solicitors’ charges are governed by the Solicitors Remuneration Order 1972 which provides that for non-contentious business the fees must be fair and reasonable having regard to all the circumstances of the case. The difficulty is in deciding what circumstances are “relevant” and what is “fair and reasonable” and to whom. However, the order does provide some assistance.
Eight particular factors apply:
(1)the complexity or difficulty of the matter or the novelty of the questions raised;
(2)the skill, labour, specialised knowledge and responsibility involved;
(3)the time spent on the work;
(4)the number and importance of the documents prepared or reviewed without regard to length;
(5)the place where and the circumstances in which the business is transacted;
(6)the amount or value of the property involved;
(7)whether the land is registered or unregistered;
(8)the importance of the matter to the client.
The layman may be forgiven for thinking the latter to be irrelevant. It is not for the lawyer to assess the importance that the client attaches to the deal and many of the factors are in fact repetitious. Some of the tests seem to be just as adequately dealt with by simply placing the file on a set of scales and putting a price to each ounce. However, as an exhaustive list of all the ingredients to be stewed together in cooking the bill it is accurate. The different weight that should be attached to those factors in a transaction — particularly a property transaction — is still a question of artistic judgment rather than an exact science.
The time spent on the deal and the value of the property involved are the factors most easily assessed. Skill can be taken for granted, but one hour of an expert’s time to say “don’t” is more difficult in a client’s mind to justify at the time than several hours of inexperience to say “do” for which a client pays in other ways later. Nobody enjoys paying for advice which is not agreeable, but often that can be the best value advice ever received, however unpalatable it may be at the time.
Nearly every law firm today records the time spent on a matter and has a set scale for its different fee earners. The expense of time is worked out by reference to those factors, plus the question of how much time ought reasonably to be spent. But a solicitor’s time record may not always be accurate:
Time spent in thought may not have been noted on the time sheets and that allowance must be made for any possible omission.
That does make a very effective get-out for preventing a client catching a solicitor out on his arithmetic when multiplying his fee scale by his recorded time.
The value factor remains the most important element in a property transaction — and so it should. It is obviously unrealistic to expect a senior partner with a charge-out rate of £200 per hour to spend 20 hours on a £1,000 deal. A multi-million-pound transaction dealt with in the same time frame would certainly justify a higher charge than £4,000.
It has been judicially pointed out that the burden of responsibility for a lawyer does not increase in direct proportion to the value. In fact “the effect of increased value is regressive and the rate of regression increases with the value”.
In line with this attitude the Law Society yardstick is as follows:
In establishing the capital value in a lease the recommended convention is to take one half of the yearly rent, multiply that by the term (up to a maximum of 20 years) and then add any premium paid by the purchaser or, conversely, deduct any reverse premium. Then the above yardstick should be applied to that sum.
What is also worth remembering in these cases is that there is another convention that the ingoing tenant pays the vendor’s or landlord’s legal fees. If that is what is agreed so be it, but there is no reason why any purchaser should pick up those costs just because the property happens to be leasehold rather than freehold, where the convention does not normally so apply.
With regard to mortgages the Law Society has agreed scale charges with the Building Societies Association for residential conveyancing. In other cases, unless the institution has its own scale, the yardstick suggests a scale of 0.25% for acting for the purchaser/mortgagor and the mortgagee and 0.5% when acting for either of those parties alone. In the case of options the value element is slightly more complex because not only is a price paid for the option but there is a further consideration paid if the option is exercised.
An option may be granted without the lawyer doing a detailed title investigation, but based purely on the vendor contracting to deliver property without title being deduced at that time. In other cases (and obviously the safest course of action for a purchaser) the title work may be done in depth before the option is granted. The Law Society’s view is that where a value element is appropriate it should rarely exceed one half of that applicable to a direct sale or purchase. In addition, if the value element is included in the bill where an option agreement is made, it should also be taken into account when considering the element included in any subsequent bill delivered in respect of the exercise of that option.
It is also recommended that the value element is not normally appropriate in respect of an option to purchase contained in a lease because the value element applicable in the lease itself is sufficient to satisfy the factors of value and responsibility in relation to the option portion of that agreement.
The layman who has read so far might now be relaxing in the thought that the value element has determined the size of the bill applicable on the property transaction. Fortunately for the solicitor, the client is not so lucky. Once you have ascertained the value of the transaction it is then the common practice to apply what is called the “mark-up”. The mark-up is a simple device for expressing the weight to be attached to the other factors in the Order apart from value and time. It is admitted that this is not the only method which should be appropriate for valuing these points, nor is it always the most suitable, but to the Law Society this is now a widely accepted practice. For property transactions the mark-up which is recommended to solicitors to apply is in the region of 25% to 33%.
Having done that the bill is nearly finished, but we have yet to assess the final figure. The simplistic approach is then for the solicitor to take the value element, apply the mark-up and add his time costs. But the factors which produce this figure must be read in conjunction with the overall need that the bill be fair and reasonable, and it is essential for the solicitor, in making the final assessment, to take into account the client’s ability to pay, any estimate that has been given for the work, the quality of the work, and local property market forces. The review that should then be carried out might require adjustment to the figure up or down.
So, how would these complex formulae work in practice?
Take a simple example of what the charge might be for the purchase of a £2m development site with planning permission for the development of B1 units. The solicitor’s role will be to carry out a title check, inspect the planning consents, exchange contracts, deal with the completion and provide information to the client’s mortgagee’s solicitors for the purpose of them assessing the property as being good security for the lender. How much can the client expect to pay by way of legal charges?
If the property is a registered single title with no undue complexities by way of restrictive covenants etc, with a helpful client and cooperative vendor, the overall time costs for an experienced commercial conveyancing solicitor in London to carry out such a job would be approximately £2,000. The value element assessed in accordance with the yardsticks described above would be £6,750. The mark-up would be at least another £1,687.50, giving a total of £10,437.50, to which must be added the additional costs for acting in respect of the mortgage arrangements. The purchaser’s solicitor would be entitled to charge another 0.5% on the mortgage value, giving rise to an additional fee of £7,000. The bank’s solicitor would charge a fee based upon the same transaction value. That would give another base cost of £14,000 before either side applied the mark-up. It would, of course, be hoped that the purchaser’s solicitor would not realistically charge quite such a large amount in relation for reporting directly to the mortgagee’s solicitors. Much of the work should have already been taken care of by the proper carrying out of his functions for the purchaser.
It is conceivable, however, that in dealing with the loan arrangements a lot more information would be required and there could be more negotiations on the loan terms. But assuming there are no additional complexities arising from such matters the solicitor would probably discount that value element in determining his bill. If the mortgagee’s solicitor charged a 25% mark-up and spent some five hours reviewing the information provided by the purchaser’s solicitor at the same hourly rate, his charges on these calculations would come to £9,750.
Then there are the disbursements to be added to the bill. The fees that have thus been calculated simply relate to the solicitor’s time and skill and do not cover the cost of his telephone calls, photocopying, travel, fax or telex charges. The client is therefore looking at a cost of £10,500 for his solicitor plus VAT and disbursements and a charge of some £9,750 for the mortgagee’s expenses. The total cost therefore on this transaction is approximately £23,500 or some 1.175% of the total transaction value.
What can a client do to reduce these costs?
Keeping legal costs down
Clearly several factors go to make up a bill. But there is nothing to prevent any client from agreeing a different scale in relation to his particular work or to obtaining estimates on the work involved. It is always worthwhile, too, ascertaining exactly what method of charge the solicitor is going to be applying to your particular transaction before matters start out and even agreeing the different ingredients of the above formulae to be used or simply negotiating a different scale charge.
In particular the degree of work and responsibility factor will be different for a purchase as compared with a sale transaction. The solicitor always has in mind his insurance premium and a normal sale transaction can often extinguish a potential risk. It is also worth agreeing the basis of charge if work proves abortive. Some solicitors will agree a “swings and roundabouts” approach of writing off abortive time and adding it to the next successful deal. Others may just be willing to charge on a pure time-cost basis. But it is in your interests to reward a solicitor fairly for an abortive transaction. Advice not to do something is just as important as advice on how to do a deal, but too often clients resent paying when their transaction fails. Solicitors’ advice should always be impartial but they are only human, and the incentive for completing a deal should not be made too great.
Most solicitors are more than willing to provide written estimates for work, setting out the basis upon which they are to charge and negotiating reductions if clients are doing a certain volume of transactions with them. For instance, for one of our clients for whom my firm does a large volume of business each year, our agreed scale is 0.5% on the first £1m and 0.25% on all subsequent £1ms. There is no time-charge or mark-up to be applied. If our client were buying the property described in the above illustration our charges would then have been £7,500. Larger clients with smaller firms may be able to strike even cheaper deals and small clients with bigger firms of solicitors may fare much worse. But no client should be embarrassed about discussing these matters and agreeing remuneration for non-contentious work. For both sides there are advantages in that there can then be less likelihood for uncertainty, but the client’s rights to dispute costs is then limited.
It should also be remembered that a formal contract between a solicitor and a client as to remuneration can be enforced only if it is in writing and signed by the client or his agent. If, on complaint by the client, the court, after inquiring into the facts, finds such a contract to be unfair or unreasonable then it can still set aside such arrangements and order costs to be taxed.
A great deal of a solicitor’s time can be wasted by a client where instructions are not sufficiently clear. Obviously it is also the solicitor’s duty to ensure that he is given sufficient instructions for him to be able to carry out his functions properly. But if a solicitor is chasing around trying to find a client to obtain instructions on important points or to obtain information from the client, then bills can be unnecessarily run up when information can be easily provided.
It is always worth making sure that the solicitor has a full description of the property which he is meant to be conveying, and much time and effort can be saved if copies of survey reports are supplied and photographs provided. If the client has a particular purpose in mind for the property then the solicitor should be appraised of this, so that any investigation he is doing can be made in relation to the proposed use of the property. This is particularly important in development sites where a client may be calculating his development value by reference to the available space and building close to a boundary, so that a solicitor can look into such matters as a neighbour’s rights of light and factors which may affect the carrying out of the building works.
Time can also be saved by ensuring that the solicitor makes a physical inspection of the site. For many smaller transactions where property is being conveyed some distance from the solicitor’s office this may not be feasible, but for a client to walk a site with his solicitor can often save considerable wasted effort as a solicitor reviews title documents looking for things which he would know from a physical inspection are not relevant. He can also more effectively assess other matters which might not be revealed from an inspection of title information.
Using a solicitor’s firm as a photocopy bureau is perhaps one of the bigger examples of wasted money. There is a tendency for everybody to photocopy documents too much. Many clients request bibles giving full details of all documents in a transaction — and indeed they are very useful. It must be borne in mind that the cost of assembling such bibles by a solicitor plus the costs of photocopying and binding make these tomes some of the more expensive books likely to grace one’s library.
A client should also ascertain who within the firm is going to be doing his work. This may sound a little silly, but often it will be the case that the client will build a relationship with a partner of the firm, not knowing that much of the donkey work is being carried out by an assistant solicitor or some other junior. If the client accepts this, such an arrangement can be used to his considerable advantage to make sure that the more mundane chores are carried out by the junior. It will be no good expecting a cheap service, but ringing the partner with a high charge-out rate asking him to arrange for you to receive a coloured plan of the site showing the exact location of the footpath when such a request could be carried out more economically by an assistant solicitor or even a secretary would be foolish.
A great deal of time can also be saved by establishing a good relationship with your solicitor and by making sure that your work is channelled to them through one person within your business who can ensure there is no duplication of requests for work. It is best for everyone to have one person who has overall responsibility for monitoring what is taking place. They will then be used to the different ways in which a solicitor will be charging and will also have a responsibility in managing the solicitors’ services properly.
It seems to be an all-pervading feature of today’s life that expressions such as “ASAP” and “Urgent” are being abused. If a solicitor believes that he is having to drop everything to deal with a client’s specific transaction, that client will be charged higher for it. Obviously every client considers that his affairs are of the utmost importance, but a successful solicitor will have many clients with exactly that feeling. Solicitors are often subject to the criticism of being too slow, but it does no good to try to chase up unnecessarily or to want immediate attention at all times. Quite often where that degree of urgency is required it is because a client has not properly thought through his own requirements and has failed to consult in good time.
Try to commit everything to writing and confirm requests by letter. Not only does this avoid any misunderstanding as to what is required but it also means that you will have no doubts as to what your solicitor should be doing on your behalf.
Disputing a bill
What happens if you wish to dispute a bill?
A solicitor’s bill will come either in a detailed format or by reference to a gross sum. A gross sum bill for non-contentious work must contain a summarised statement of the work done, sufficient to be able to tell you what has been done by the solicitor on your behalf. The client may demand a detailed bill within three months from its delivery and such a bill can recite in great length, and often in a somewhat peculiar style, everything the solicitor did for the client by way of telephone calls, correspondence etc. Unless you really require such a bill it is probably best to ensure that the solicitor only sends you a gross-sum bill until you should ask for further information. A detailed bill in itself would take some time to prepare and of course you will be charged for that also.
If you do ask for a detailed bill from your solicitor, state precisely what it is that you wish to know. You are entitled to know exactly what amounts of time were expended on your matter by the solicitor and what hourly rate was charged. If you are given the hourly rate you should ascertain whether or not in his calculations the solicitor has already taken into account the overheads of the firm, including office stationery, postage, telephone rental and calls. Some bills will separate these minor disbursement charges and obviously you need to ensure that you are not double charged.
A solicitor cannot just sue you for a bill that he has presented. In the event of a dispute a solicitor is obliged to inform his client in writing of his right to require the solicitor to obtain a remuneration certificate from the Law Society. The remuneration certificate is the Law Society’s statement of what it thinks is fair and reasonable for the work carried out. Even after this certificate has been obtained, it is possible for the client to have the bill reviewed by the courts. This latter process is called “taxing”.
A client has a month to request a remuneration certificate from the date on which he is informed of this right. Some solicitors’ bills will automatically inform a client of this right on the bill when it is sent. It can be found on occasions printed in very small type on the back of the bill and you ought therefore to check most carefully whether you have been so automatically advised of your rights. However, if once you have paid the bill or if a court has ordered it to be taxed, a client loses his right to obtain a remuneration certificate. In order to obtain a remuneration certificate a solicitor must submit all his files and other records to the Law Society, which examines them to see if the charges are fair and reasonable. Such a certificate cannot increase the bill, for the Law Society is entitled to certify only whether or not the amount charged or some lesser figure is fair and reasonable.
If as a client you decide to have the bill taxed you will have to issue an “originating summons” in the High Court or a county court. A taxing master or registrar will then consider the bill and make an order specifying what is fair and reasonable. If one-fifth or more of the bill is taxed off, then the solicitor must pay the costs of the taxation otherwise the client will have to pay the costs of the whole procedure. Having a bill taxed, then, can be expensive because you may want to have separate legal representation on this or to obtain somebody else’s opinion. However, the remuneration certificate procedure from the Law Society is a free service. Such a procedure is not available if you have a written agreement on costs with your solicitor.
In a future issue we will look at ways in which other costs can be controlled.
