A simple conveyancing transaction or something far more complex and dangerous?

28 June, 2018

The internet is awash with apparently fantastic and unusual property investments. Who wouldn’t jump at the chance to purchase a fraction of 999 year lease of an off plan plush hotel room?

While it is clearly not the role of a conveyancing solicitor acting on the purchase to advise a client of the suitability of the investment, do any duties exist to highlight the risks?

In June 2017, the SRA issued a warning notice against solicitors who undertake conveyancing transactions that are, against the yardstick of conveyancing normality, highly unusual and not run of the mill.

These are not your everyday conveyancing transactions, and solicitors should be savvy to their obligations and duties when handling such matters.

The SRA states that, where a solicitor is acting for the buyers in these types of transactions, they must advise clients fully about the transaction and how it significantly differs from the simple buying of an existing property, such as:-

  1. Buying a property not yet built or completed i.e. off plan or subject to significant refurbishment;
  2. Promises of substantial returns (and how these are often illusory) – it should be noted that standard warnings about the risk of capital loss are not enough to ensure that a law firm has properly advised a client upon the transaction; and
  3. High “deposits” and how such deposits are often used to finance such transactions (as well as forming part-payment of the price). Further, many of these transactions are unregulated collective investment schemes (particularly those which involve developments) and are not even permitted to be marketed to anyone other than certified high net worth or certified sophisticated investors. The risk of the fraud is also a huge consideration. The SRA has provided a series of practical tips to guide solicitors, which includes:
  4. In short, where a solicitor is instructed to undertake a conveyancing transaction that is outside of the ordinary, and unusual in its nature, a deeper consideration and understanding of the origin, nature and structure of the transaction is absolutely necessary.  The SRA will not find sympathy with a solicitor who attempts to mask the complexity and sophistication of such transactions by adopting the language of a relatively straightforward day-to-day conveyance.  The client must be made aware of the inherent risks of such transactions.
  5. A solicitor must not proceed with the transaction and attempt to mask what is really happening by adopting the language of conveyancing. For example, where a deposit is required that is above the usual 10% (and the SRA note that deposits in such transactions range from 30% to 80%) the client’s money is clearly being used as both pre-payment of the price, and as a means of providing finance to the developer. This carries a substantial risk, and the solicitor must advise on this.
  1. Familiarising yourself with SRA warnings;
  2. Analysing the scheme or supposed transaction carefully and critically, with the SRA warnings in mind;
  3. Refusing to act or, cease to act if you have concerns;
  4. Looking critically at documents to assess what they mean (if anything) and whether they are fair;
  5. Applying the SRA Principles;
  6. Avoiding rationalising suspicious factors – such as by thinking “the warnings do not mention the type of transaction I have been asked to deal with, so it must be safe”;
  7. Now allowing your client account – or any account you control – to be used to receive investment money that could simply be sent by an investor directly to an investment company; and
  8. Not attempting to evade rule 14.5 of the SRA Accounts Rules 2011 by trying to manufacture a process of legal work or advice.
  9. As such, all solicitors will do well to remember that we must advise our clients fully, frankly and in good faith, and that we must act with integrity, independence and in the best interests of our clients, to ensure that we behave in a way that maintains the trust the public places in us and the provision of legal services generally.