Property Deposits and Bankrupts

The recent case of Kandola v. Mirza Solicitors LLP [2015] EWHC 460 (Ch) makes clear what obligations a Solicitor owes to a client who is purchasing land regarding deposits held as agents for the Vendor.

Background

The Claimant was an experienced businessman who owned care homes and was involved with residential buy to let properties.  He instructed the Defendants to act for him in the purchase of a development property.  The Vendor agreed to accept a 5% deposit.  However, the Vendor was in business with the Claimant’s nephew and needed a loan for an unconnected property deal.  The Claimant agreed to pay a £96,000 deposit, being a 22.6% deposit to the Vendor’s Solicitors as agent for the Vendors.

The Claimant explained to the Defendants what he had agreed regarding the increased deposit.  The Defendants advised the Claimant against paying the deposit for two reasons:-

  1. The development property was subject to a number of charges, the amount of which was unknown. On completion there was a risk that these charges may not be discharged which would prevent the Claimant from gaining a good title;
  1. The Deposit could be lost if the Vendor became bankrupt or was unable to complete.

The Defendants obtained confirmation in writing from the Claimant that he wanted to proceed against their advice and contracts were exchanged the very next day.

Unfortunately, a Bankruptcy Petition had been presented against the Vendor some 9 days earlier and was registered against the development property.  It had not shown on the searches that were obtained by the Defendants.  The charges on the development property were greater than the sale price and the Claimant lost his deposit.   He then brought proceedings against the Defendants to recover it on the basis that their advice to him should have been firmer and that they should have carried out a bankruptcy search against the Vendor.

Held

The Judge found that the Defendants were not in breach of their duty.  The Law Society’s Conveyancing Handbook advises that Solicitors are to warn buyers of the dangers of paying a deposit as agent for the Vendor.  Here, the Defendants had given such a warning.  There was little reason for the Defendants to carry out a bankruptcy search, because the Vendor could have become bankrupt after exchange of contracts.   The Handbook does not advise Solicitors to carry out such a search and the Judge concluded that it was not ordinary conveyancing practice to do so.  The Defendants had discharged their duty to the Claimant.

The Judge noted that had the Defendants been asked to investigate the solvency of the Vendor, or if the Buyer was inexperienced, the position may have been different.  Here, however, these points did not apply.

The Judge noted that a Solicitor’s duty is to explain matters, in such a way, so that the client can understand them.   However, “the Solicitor is not a guarantor of his clients’ subjective understanding”.  In other words, if the explanation is adequate but the client fails to understand it, the Solicitor has discharged his duty.

Lessons

Clients should note that if they have any concerns about the solvency of the Vendor or anyone else involved, they should expressly instruct their lawyer to advise them on this.

More importantly, perhaps, clients should ensure that they properly understand any explanations given to them by their lawyers.  Provided the lawyer’s explanation is adequate and can be understood objectively, the clients’ subjective failure to grasp the point would likely be seen as their problem and not a failure on the part of their lawyer.

Graham Mead, Partner, is a Commercial Litigator and regularly advises on cases involving professional negligence claims.