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Focus on commercial property risks

1 January 01

Potential errors and omissions in commercial property transactions giving rise to risk management issues

by Alistair Sim

The following situations have given rise to claims in commercial property transactions, however the alleged errors or omissions could have arisen in other areas of client work and the risk management points are of almost universal application.

An unexpected VAT liability arose

Comments:

What was unexpected about this liability? The amount? Or the fact that there was any liability at all? Was it only the client who had failed to anticipate this liability? Or had the solicitor failed to appreciate that the transaction would give rise to a VAT liability?

Risk management points:

Consider including in your commercial property sale/purchase/lease transaction checklists or aides memoire a suitable prompt so that the potential for VAT implications is flagged up.

Are you to be responsible for advising on the VAT implications? If not, say so. If you are, consider whether you have the expertise in-house or if you need to take expert advice.

The same general issues arise in any area of work where the transaction, litigation etc. has potential taxation implications.

No right of access was obtained

Comments:

Clearly this situation could have arisen because of a failure to examine title/lease documentation properly or because of a drafting error but it could equally well have arisen because of a failure to establish the requirement for a right of access. Had the solicitor failed to act upon explicit instructions from the client to the effect that particular rights would be required for access to/use of the property? If not, should the solicitor have anticipated the requirement for these rights? Did the solicitor fail to ask the right questions to prompt the client to provide appropriate instructions?  

Risk management points:

Some solicitors have devised questionnaires for use when taking instructions from clients to help them ensure that comprehensive instructions are obtained from clients. Variations of the same type of questionnaire are used for different types of property transaction. Use .whatever means you find practical and effective.

There was nothing to prevent the sellers operating in competition with the clients’ business.

Comments:

Had there been a discussion about restricting the sellers from setting up in competition? Were the clients asked for instructions in this regard? Was this a case where restrictions were imposed but proved to be ineffective?

Risk management points:

A checklist or aide memoire in respect of purchases or sales of businesses or business assets might usefully include an item prompting discussion of any restriction to be imposed on the sellers. Where the effectiveness of such restrictions is uncertain, clearly the client needs to be made aware of the risks and that ought to be in writing. Some solicitors require clients to acknowledge that they have been advised of such risks by having the clients sign and return a copy of the relevant letter. These comments apply to any situation in which there are risks involved for a client in a particular course of action.

When the clients came to sell, it was discovered that their title hadn’t been recorded 

Comments:

Clearly there are risks for any client while their title to, or security over, property remains unrecorded. How could this situation arise? What could the explanation(s) be? There could be a defect in the deed that prevented the deed being recorded/registered or presented for recording/registration. If the client failed to produce funds to cover the Stamp Duty, that could also have been an obstacle. In some cases, recording/registration has simply been overlooked following settlement of the transaction. Or the deed has been presented, ‘bounced’ by the Keeper on account of some defect and never re-submitted.

Risk management points:

So that Stamp Duty never becomes an obstacle to getting the client’s title recorded/registered, the client needs to be made aware from an early stage of the amount of the Stamp Duty and when it requires to be paid. It may be that this point can be addressed in an initial letter covering terms of engagement or in an estimate of fees and outlays.       

To minimise the risk of oversight on their part, some solicitors have a checklist for each transaction file which prompts the responsible fee earner (a) to check, following settlement, that the deeds have been properly signed, completed and stamped, then (b) to despatch the deeds for recording or registration promptly thereafter and (c) to diary to check for an acknowledgement from the Keeper. Some practices maintain a log of deeds despatched for stamping and recording or registration and this enables them to track deeds at each stage of the process and to ensure that any deed ‘bounced’ by the Keeper is attended to and re-submitted with minimum delay and that they are alerted to any deed going astray at any stage in the process.

The clients were refused planning permission for development of their new site

Comments:

How could this be a problem for the solicitor? If the clients expected to be able to withdraw from the purchase if planning permission was refused but in the event found they had no right to withdraw or ran out of time to withdraw. That situation could arise if the clients fail to make it clear that obtaining planning permission is an essential condition of their purchase or if the clients fail to understand their rights and obligations in terms of missives and the steps that require to be taken within particular timescales in order to protect their position. These comments apply equally to situations where restrictive title conditions could prevent the client’s intended use of the property being purchased.

Risk management points:

The risk management points are of almost universal application to virtually every area of client work.

Use whatever methods you find practical in eliciting clear and comprehensive instructions from the client and ensuring the client understands the implications of the agreement by which they will be bound. Checklists may be helpful in prompting the appropriate questions. In taking instructions, some solicitors find questionnaires helpful.  

When a time limit is imposed, it needs to be made clear to the client in writing whose responsibility it is to take action within the time limit; the consequences of failure to take that action need to be explained. Some solicitors require clients to acknowledge their responsibilities by signing and returning a copy of the relevant letters.

Critical dates need to be diaried with countdown dates also diaried to prompt and allow time for discussion with the client and appropriate action to be taken. Even where the client has the responsibility for taking appropriate action, some solicitors choose to diary the matter themselves as a back-up to remind/prompt the client.

It makes sense to double check the precise terms of missives conditions when critical dates are diaried and it needs to be borne in mind that it may fall to someone else in the practice to act upon the diary notes in your absence or as your successor.

Alistair Sim is Associate Director in the Professional Liabilities Division at Marsh UK Limited (e-mail : Alistair.J.Sim@marsh.com)

The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law and (b) is necessarily of a generalised nature. It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position.