The recent case of Kandola v Mirza Solicitors LLP  EWHC 460 (Ch) has provided helpful clarification of the extent to which a solicitor must explain to their client the risks involved in a transaction to avoid being deemed to be negligent. Although the case concerned a property matter, the Court’s guidance applies to the advice of solicitors generally and not just those involved in conveyancing.
Facts of the case
- The claimant was a businessman with experience in property transactions, already holding a portfolio of care homes and buy-to-let properties;
- The claimant had instructed a partner in the defendant firm in relation to a number of the previous property matters and instructed the same partner on the new purchase of a development property;
- The claimant had agreed to pay an unusually large deposit of 22.6% in order to assist the seller of the development property in financing another property transaction, in return for the promise that the claimant would receive a share in the profit of that second property. Also unusually, the deposit was to be paid to the seller’s solicitors as agent for the seller (rather than stakeholder), the effect of which being that the deposit was released to the seller on exchange of contracts;
- The partner advised the claimant that dealing with the deposit in this way was too risky and that if the seller failed to complete on the sale the deposit would be more difficult to recover;
- He also advised that due to a number of charges registered against the property (and with the amount secured by those charges being unknown, there was a possibility that the sale proceeds may not be enough for the seller to discharge those charges;
- The claimant then signed a form of waiver prepared by the partner, referring to the matters on which he had been advised and confirming that he was proceeding with the transaction contrary to the partner’s advice;
- After contracts had been exchanged, and the deposit released to the seller, the partner’s pre-completion priority search revealed that a bankruptcy petition had been presented against the claimant before exchange and a notice entered on the title to the property. This was not revealed by the official copies of the register that the partner had received from the seller in advance of exchange of contracts;
- As the partner had feared, the sale price was not sufficient to redeem the charges registered against the property, the seller failed to complete and the seller was unable to return the deposit sum;
- The claimant brought a claim against the defendant firm, arguing that he should have received better advice about the risks associated with the transaction and that the partner should have made a bankruptcy search or priority search prior to exchange of contracts. He claimed that he had not understood the terms of the advice he was given, nor the waiver letter, and that had he known about the bankruptcy petition he would not have proceeded with the transaction;
- The judge concluded that the defendant firm was not in breach of duty and that the risks were adequately explained to the claimant. A solicitor’s duty to advise a client must take into account the client’s own previous experience. The solicitor is not required to explain issues to a client that should be obvious to them given their level of experience and in this case it was found that the claimant had understood the facts and risks presented to him;
- The judge went on to state that even if the claimant had not understood the advice, the claim would still have failed given that the claimant had intimated to the partner that he had understood it and had signed the waiver;
- The judge also found that a solicitor does not have a duty to make checks on the credit status of other parties involved in a client’s matter unless expressly asked to do so, even if the transaction was unusual or held a particular insolvency risk. The duty of the solicitor is to advise of the risk and not to evaluate it, unless requested to do so. There had been no request in this case;
- Additionally, there is not a provision in the Law Society Conveyancing Handbook requiring either a bankruptcy or an official search to be carried out by a solicitor prior to exchange of contracts regardless of whether the deposit was to be held as stakeholder or released to the seller. There is simply a requirement that the client is made aware of the relevant risks.
What does it mean?
- The case has clarified the extent of solicitors’ duties in the particular circumstance of a deposit being released to a seller on exchange, ie. that the risks must be explained but no further action is required unless the solicitor is instructed to do so or if the particular client is not experienced.
- However, the case also applies to a wider context of advising clients in risky transactions. Essentially, if the advice provided is sufficient for someone of the particular client’s experience then, so long as the solicitor reasonably believes that the client understood the advice, then the duty has been met even if the client did not in fact understand it.
We highlight this case by way of a reminder to you that it is important that your advisors are fully briefed as to the background to your transactions and are asked to clarify or provide further explanation where there are any issues, recommendations or statements in their advice to you which is not clear.