Purchases "Off-Plan": Negligence Time Bomb?

The aftermath of the credit crunch could see a rise in professional negligence claims--especially in the legal property sector

It has become commonplace for developers to appoint firms of solicitors to package their developments for sale. Such firms would then act for the buyer and in that way recover their costs. The idea being that using a solicitor nominated by the developer would save fees and speed up the exchange of contracts to the mutual benefit of the buyer and the seller. Speed being the aim. But, the question now has to be asked whether this model has given buyers all the protection they should expect from a solicitor.

Background:

The credit crunch is slowly bringing to light the lack of due consideration given to the duties solicitors owe to their clients, all, it seems, for the sake of faster, cheaper deals through a one-size-fits-all approach to conveyancing. It is a worrying development and one which can have dire consequences for a buyer. As one person put it: "I'm going to lose everything because of this."

Some of the most recent press is on individuals hit by the downturn in relation to their purchase of "off-plan" residential properties. The buyers, usually first time or amateur purchasers of property, exchanged contracts on the basis of plans and drawings of their property, with the actual sale a number of years down the line once construction of the property had been completed. The buyers' solicitor—as a party familiar with the development and related documentation—was nominated by the developer (in the majority of cases, as a condition of buying a property) as a way of reducing costs and time.

It is imperative in such transactions, however, that buyers make adequate arrangements to finance the purchase and, more specifically, that they understand those arrangements will need to be available between the period of exchange and completion when the purchase price for the property will normally become due.

The reason for this is obvious: no-one can foresee circumstances so far in the future. It is in this area that those solicitors seem to be dramatically failing to discharge their duties to their clients—and where the buyers of off-plan properties have started facing problems.

Inadequate advice on and insufficient consideration given to the key question of financing have put these buyers at risk of personal bankruptcy. With valuers overnight saying their property is now worth 30 percent less, the buyers are unable to find a mortgage to cover the completion payment, mistakenly believing that they would, on the basis that the seller knew a mortgage was needed by them, be able to extract themselves from the sale contract with perhaps only their deposit forfeited. That, in itself, being a significant loss and often representing the buyers' life savings. This could not, however, be further from reality.

Would-be buyers are faced with losing their deposit, having to pay the developer's losses as a result of termination of the sale contract, lengthy and stressful negotiations, and bankruptcy with a real prospect of losing their job.

Solicitor's Duties:

Some solicitors are failing to give clients basic advice and guidance regarding their strict obligations on exchange of contracts—and the consequences of default.

This is surprising as even the simplest textbooks on contract law explain that contracts are matters for strict performance, it having been established nearly four hundred years ago that: "When the law casts a duty upon a man which, through no fault of his, he is unable to perform, he is excused for non-performance; but, if he binds himself by contract absolutely to do a thing, he cannot escape liability...[on proofing that]... performance is futile or even impossible"[1].

Given this feature of English law, legal text routinely reminds us that if there is any question about having matters in place in order to perform a contract, such matters must be conditions precedent: "In practice, parties insert in their contract provisions designed to deal with unforeseen difficulties"[2].

In addition to this, some solicitors do not appear to have recognised they had a duty to ensure their client:

1. has explained to them and fully understands the risks in entering into an unconditional contract;

2. has received and accepted a satisfactory mortgage offer before advising the client to exchange contracts; and,

3. understands the conditions and terms attached to the mortgage offer and will be able to comply with them.

In one case, the buyer's solicitor did none of this. He did not even provide or put together a report on title nor raise any enquiries on behalf of his client, only providing the buyer with a pile of title deeds for her to review, consider and come to a conclusion on by herself.

Purchasers off-plan in the USA would not find themselves in this position as their contract to buy would be conditional on finance being available at the point of sale.

Conclusion:

It is a solicitor's duty to inform his or her client of the risks involved on exchange of contracts. In the off-plan purchases referred to above, the solicitors involved were aware their clients did not have a mortgage offer prior to exchange of contracts or, in some cases, that they had offers but that those offers would expire well before the anticipated completion date.

Despite knowing this, the legal position on strict performance contracts and that the clients had no secured funds, they made no effort to amend the sale contract with the developer, for instance, by making the securing of a mortgage offer a condition of the sale contract. The solicitors might argue that any such effort would have been fruitless, as the developer would have insisted on the sale contract being in the standard form. That is fine. But if that was on their minds, they should have expressly emphasised the risk to their clients in entering into the strict performance contract without a mortgage offer or, if one was obtained, they must have explained the terms of it and the risks in exchanging the contract.

It seems strange that the legal industry, so adverse to the concept of the commoditisation of its services, is so accepting of such commoditisation when dealing with conveyancing transactions, no matter who the client, how large or small the transaction and how complex the transaction.

Solicitors' duties to their clients are extremely onerous and notoriously difficult to commoditise without significant risk of breaching those obligations. These recent cases are an important lesson to be acted upon.