Common causes of claims: Conveyancing

Is conveyancing your area of work? We want to help you avoid the pitfalls that commonly lead to conveyancing claims. Forewarned is forearmed and knowing where to tread carefully will definitely help.
 

Conveyancing is the area of practice that is responsible for the most PII claims against the legal profession. The frequency of claims for residential conveyancing is approximately three times higher than commercial conveyancing. But commercial conveyancing claims tend to be more expensive.

Understandably, PII insurers are nervous about conveyancing. That is why they ask so many questions about it on their proposal forms and assign a high rating factor to it when calculating premiums. Some also restrict the percentage of conveyancing work undertaken by a firm when determining their appetite for new business.

Given this backdrop, risk management is essential for firms engaged in conveyancing work. You need to ensure your claims record is the best it can be. Don’t be alarmed, insurers expect and accept that claims will happen from time to time, but we want them to be the exception.

In this article we look at some common causes of the conveyancing claims we deal with. We encourage you to share this with fee earners and support staff in your conveyancing teams. It is useful to understand where things can go wrong and reflect on any changes you can make to prevent these issues arising in your firm. A heightened awareness of common pitfalls might result in a fee earner making that last check on searches received, or adding that extra sentence to a Report on Title, that could see off a future claim.

Health and wellbeing, pressure of work

There is no doubt that there is a link between poor health and wellbeing of fee earners and PII claims. While a matter might initially present itself as being related to one of the issues discussed below, such as an inadequate Report on Title or failure to comply with the requirements of a lender, in many cases stress or poor health and wellbeing will be the “root cause” or catalyst for the error or omission.

When fee earners are tired, stressed or anxious, it can be a challenge to simply get through the day. Short-cuts happen, documents don’t get checked, and it can be difficult to tell clients what they don’t want to hear.

Fee earners must be encouraged to “put their hand up” and ask for help if they are struggling. Those engaged in any management or supervision roles need to be alert to the warning signs that a fee earner is not coping and respond appropriately. That could include providing support, access to external counselling services, allowing time away from the office or adjusting workloads and responsibilities.

Supervision issues

As with health and wellbeing, poor supervision can be the catalyst for claims that initially present as one of the practice-related issues discussed below.

Not only do supervision arrangements need to be put in place, they also need to be effective and reviewed from time to time to ensure they remain appropriate.

Supervisors need to both understand and discharge their regulatory obligations under clause 3.5 of the Code of Conduct for Solicitors and appropriate training and guidance about how to achieve this should be provided.

Those who are being supervised also need to be encouraged to seek help from their supervisor when they are uncertain, and to speak up if they do not feel they are getting adequate supervision and support.

Buyer-funded developments

We have put this issue next on the list as there have been a number of very high quantum claims arising from this work in recent years. It remains firmly on the radar for PII underwriters.

Buyer-funded developments involve a buyer paying a significant percentage of the purchase price for a property up front, with those funds then being used by a developer to fund the build. Some of these have failed spectacularly and the SRA have issued a warning notice about this work. It is available here.

Shortcomings in relation to the conduct of this work have been many and varied. It is high risk and PII insurers have been on the receiving end of claims amounting to multiple millions of pounds. They are understandably asking a number of questions about this work on proposal forms.

Tread very carefully. There are still buyer-funded developments coming to market. In addition to the risk of claims, you also risk PII insurers losing interest in offering cover to your firm.

Imposter vendors

Remember Dreamvar? An unencumbered, vacant property that was the subject of a quick sale at a great price – the vendor was an imposter and made off with over £1m. PII insurers had to pick up the tab.

This was not an isolated case and we continue to see similar claims. Fraudsters rarely get out of bed for anything under £1m these days, so when these claims happen the corresponding figure on a firm’s claims summary makes for grim reading.

Don’t get caught out. Be alert to the red flags such as unencumbered and vacant properties, quick sales and the absence of documents from when the property was bought. You also need to be extra vigilant when it comes to verifying the identity of a vendor. Shortcomings on ID procedures have been a contributing factor in some of these claims.

Cyber-related issues (ransomware attacks, intercepted emails resulting in diversion of funds, Friday afternoon frauds)

We are continuing to see cyber-related issues play out across the legal profession. In the conveyancing world ransomware attacks can bring exchanges and completions to a standstill. Phishing emails that introduce malware allow fraudsters to access information they can then deploy to plunder the client account.

The amount of money that passes through the client account of a firm engaged in conveyancing, and the pressure that fee earners and other staff can be working under, makes them an ideal target.

When a client suffers a loss due to theft of funds from the client account or a delayed or failed transaction, then their claim for redress will fall for cover under your PII policy.

To prevent these losses cyber security must remain a top priority – for everyone in the firm. And remember, while these losses will be covered under your primary (MTC compliant) policy, they might not be covered under your excess layer policy. You need to check.

Lack of file notes or written communication to evidence advice given to clients (including inadequate letters of engagement)

You would be surprised how often the defence of a professional negligence claim is compromised by an inadequate letter of engagement or the lack of attendance notes or emails recording what was discussed in meetings and telephone calls. We cannot over-emphasise the importance of contemporaneous attendance notes or follow-up emails that carefully record discussions that have taken place and the advice sought and given.

If there is no record, courts will generally prefer the evidence of the lay client for whom the transaction was a “one off”, as opposed to the recollection of a busy solicitor handling multiple files.

Inadequate or incomplete Reports on Title

The content of a Report on Title can likewise be critical to the defence of a claim. Firms should regularly review precedents and have systems in place to ensure that the content of a Report on Title is checked before sending.

It is also useful to carry our qualitative audits on Reports on Title to double check that fee earners are achieving the standard required.

Technology can potentially assist here too. For example, a software solution that pulls data from searches and other documents to populate a Report on Title can reduce the opportunity for errors and omissions.

Failure to act in accordance with a lender’s requirements

Always act in accordance with the lender’s requirements. If you cannot do so (for example, because those requirements are too onerous as we have recently seen for some lenders in relation to the Building Safety Act 2022) then you shouldn’t act at all. If you fail to meet a lender’s requirements and the lender suffers loss as a result, then a claim will quickly follow.

To illustrate this point, it is useful to remember the fallout following the failure of the buy-to-let market during the economic turbulence of 2007/8. Some lawyers had routinely ignored the requirement to advise lenders of cashbacks, discounts, incentives and back-to-back transactions in relation to the purchase of buy-to-let properties in particular. When the property market faltered and properties were repossessed and sold at a shortfall, the claims came tumbling in. PII insurers paid out millions.

Failure to recommend/carry out all necessary searches and follow up/advise on the results

A failure in relation to searches can provide a disappointed client with a good platform to bring a claim. It leaves the door open for them to argue that they would not have purchased a property if they had received information contained in a search that their legal advisor either did not recommend or did not advise on.

Always take time to check that you have recommended all appropriate searches. For example, if a property is located in a known mining area, you must recommend a mining search. But don’t stop there. Those obtained must be reviewed and appropriate advice given. Further searches or enquiries must also be recommended where more information or advice is needed.

Failure to make all necessary enquiries and follow up/advise on the results

The issues here are similar to those outlined above with reference to searches. Remember that it is your responsibility to identify issues that might impact your client’s decision to proceed with a purchase.

The following are common scenarios where the failure to make appropriate enquiries can lead to claims:

• Omitting to check the intended use of the property is permitted.
• Failing to spot and advise on lack of legal access to the property.
• Failing to identify and advise on restrictive covenants.
• Failing to advise the client on important lease clauses that might impact their decision to proceed (e.g. onerous ground rent clauses).

Failing to advise on ownership as tenants in common or joint tenants

Arrangements relating to property ownership can be complicated and dependent on issues such as the relationship between the purchasing parties (who might have different expectations), arrangements for funding the deposit and intentions regarding the maintenance of the property and payment of the mortgage. Clients need clear advice so they can make an informed decision. Always ensure your clients understand the difference between tenants in common and a joint tenancy – and the option of executing a declaration of trust where the capital has been contributed by one party alone.

While clients might dismiss the importance of these issues amidst the euphoria of purchasing their dream home, they will undoubtedly take a different view at a later stage in the context of a bitter parting. In that unfortunate scenario it will be important your file evidences the advice that was given.

Missed charges

It is surprising how often repayment of a charge is missed. These matters need to be settled promptly to ensure the transfer to the new owner can be completed. This often means that PII insurers have to pay out the claim in the first instance and take their chances with recovery, which can be time-consuming, costly and in some instances quite impossible.

Always double check the charges that need to be repaid. Where there are multiple charges, make sure that you have asked for, and received, the repayment information for all of them.

Missed time limits

We often think of missed time limits with reference to missing a limitation date in litigation work. But they can be equally problematic when it comes to conveyancing.

Some more common and significant examples are:

• Missing the date to exercise a break clause in a lease. This can lead to quite significant claims. Are you confident you have adequate processes in place to ensure this does not happen?
• Missed time limits for service of documents in relation to leasehold enfranchisement. This is often the result of fee earners not being familiar with the process and requirements for this niche area of work. It can be tricky and in our view it is best left to those who specialise in, or regularly undertake, this work.
• Failing to register charges within the priority period.
• Failing to respond to a Requisition from HMLR resulting in cancellation of the application submitted.

Tax including SDLT liabilities/relief

Tax is a specialist area and firms should not advise on it where they do not have the relevant expertise. In fairness, many firms do ensure that they clearly advise in their terms of engagement that they will not be providing advice in relation to tax issues. That is a good start, but often the issue is buried in a lengthy document and not sufficiently brought to the attention of the client.

The attempt to avoid assuming a duty of care for tax advice can be further compromised when a fee earner nonetheless goes on to give the advice, even if that is by way of a passing comment or view expressed in a phone call.

SDLT can be particularly problematic and PII insurers are aware that it is not always just as simple as using the HMRC calculator. Some common causes of claims in this area have been:

• Not applying for Multiple Dwellings Relief.
• Not advising on additional stamp duty payable on second homes.
• Not realising that an overseas buyer was liable for a surcharge.
• Not identifying that a property was non-residential and so exempt from SDLT as it was below the commercial property threshold.

This discussion is only a snapshot of some of the common causes of conveyancing-related claims that are notified to PII insurers. Training, proper supervision, the use of checklists and robust file audits will go a long way to preventing both these matters and other scenarios that lead to claims in this challenging area of legal practice. As always, risk management is a key priority.

And in the unfortunate event that you do need to notify a claim or circumstance, always ensure you do so promptly. It is also important to take the opportunity to learn from what has gone wrong and communicate to your insurer the changes you have made to address the risk for the future.