UK: To Be Or Not To Be Insolvent?

Last Updated: 12 March 2015
Article by Adrian Giles and Richard Hayes

Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch)

A recent decision of HHJ Cooke in the Chancery Division of the High Court in Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch) has provided some useful guidance on solicitors' duties to advise as to the risk of insolvency of the vendor when acting for purchasers in property transactions where deposits are held as agents for the vendor. It also provides guidance on solicitors' duties generally when advising on risks in transactions.

The Facts

The claimant was a successful businessman who owned a number of care homes and, at certain points, 20 buy-to-let residential properties. A partner in the property department of the defendant firm of solicitors had acted for the claimant on a number of these property transactions.

In May 2010 the claimant instructed the same partner of the defendant on the purchase of a development property for £425,000. The seller agreed to accept a deposit of 5 %, but was in business with the claimant's nephew, and needed finance for another property transaction. The claimant therefore agreed to pay a deposit of £96,000 (22.6 %) which, unusually, was to be paid to the seller's solicitors as agents for the seller.  That meant the vendor could use the deposit as he wished, and the vendor's solicitors were entitled to accept instructions solely from the vendor as to how the money should be used.  

On 9 June 2010 a meeting was held, at which the defendant advised the claimant that he should not proceed on this basis because:

  1. The property was subject to a number of charges, and the amount secured was unknown. The purchase price may not be sufficient to discharge the charges at completion and might prevent the claimant obtaining good title to the property; and
  2. There was a risk the deposit would be lost if the seller became bankrupt or was unable to complete.

The claimant signed a waiver that he was proceeding with the transaction against the defendant's advice on the above matters. In evidence the claimant stated that he had not understood the terms of the advice or the waiver properly (which was not accepted by the judge). He accepted, however, that he had not informed the defendant that he did not understand the issues, and that he would have given the defendant the impression he had understood what he was being told.

Contracts were exchanged on 10 June 2010, with completion set for 10 August 2010, and the seller's solicitors released the deposit to the seller. On 24 June 2010 a priority search revealed that a bankruptcy petition had been presented against the seller on 1 June 2010, with the result that a notice had been entered on the title on 2 June 2010. This was not apparent from the office copies sent by the seller's solicitors as they had been obtained before 1 June 2010. The charges against the property exceeded the sale price, and the claimant lost his deposit.

The claimant brought the claim against the defendant, alleging that the advice provided by the defendant was not clear enough. He claimed that in the circumstances, the defendant should have taken additional steps to evaluate the risk, by making a bankruptcy search or priority search prior to exchange, either of which would have disclosed the bankruptcy petition.

The Findings

HHJ Cooke concluded that the defendant was not in breach of duty. There was no provision in the Law Society Conveyancing Handbook requiring either search to be carried out pre-exchange, either generally or if the deposit was to be released. The Handbook requires that the client is informed of the risks, and in the present case the defendant had done so, and went further in advising the claimant that he should not proceed.

HHJ Cooke reiterated that a solicitor's duty to explain matters is nuanced and takes into account the experience of his client - the solicitor is not required to explain matters that should be obvious to a person of the client's experience. He is not a guarantor of his client's subjective understanding.  

His duty will be fulfilled if he gives an explanation to the client in terms that reasonably appear to him to be able to be understood by the client, and which the client has understood. In the present case, it was found that the claimant did understand the advice he was given, but, even if he had not, the advice was given in terms suitable for a person of his experience and he gave the defendant the impression at the time that he had understood it.

It was also found that a solicitor is not under a general duty to check on the credit status of his client's counterparty in a transaction unless instructed to do so, despite the fact that the transaction may have taken an unusual form which involves an insolvency risk, where the normal form would not (i.e. if the deposit was held as stakeholder). The duty is to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so. The claimant had not instructed the defendant to evaluate the risk.

Implications

The decision is helpful in clarifying the scope of a solicitor's duties when acting for a buyer paying a deposit as agent for the vendor. The solicitor's duty is to properly explain the risks and the solicitor is not obliged to go further unless explicitly instructed to do so, or if the client is inexperienced.

The decision is also useful in a broader context with regard to transactions where the solicitor provides an explanation of a risk but the client fails to understand it. If the explanation was adequate for someone with the client's experience and understanding, and the solicitor reasonably believes the client has understood it, the duty has been discharged even if the client fails to understand it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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