Conveyancing – Why Are Underwriters so Troubled?
Ask an underwriter about the area of practice that is responsible for most PII claims and the answer will be 'conveyancing'. If you had asked the question 10 or even 20 years ago……the answer would have been the same.
There has always been a high incidence of claims arising from conveyancing, but there are periods where the losses are worse than usual. We are currently in such a phase. We are also looking down the barrel of potential disruption in the property market that could increase claims against solicitors even further.
It is always useful to understand what the issues are, as this can serve as a prompt to review risk management strategies and mitigate the risk. Here is a summary of the trouble spots.
Buyer-funded developments and other property investment schemes
A buyer-funded development is a property development or project that is funded with substantial initial deposits (up to 80% of the purchase price in some cases) paid by individual buyers as opposed to a commercial lender. The property might be a residential flat, or in some cases can involve more unusual developments, such as storage units or individual rooms in hotels, holiday developments, care homes or student accommodation facilities. “Guaranteed returns” are often an additional feature in these transactions.
In recent years a number of these projects have failed spectacularly. Buyers who have lost their deposit and any prospect of a return on their investment inevitably turn their attention to the advice that was given by their solicitor. Significant losses have been incurred as a result of this issue and it is something that is currently very much on the radar of PII insurers.
Property investment schemes where the client takes a lease of an asset such as a hotel room, care home room, or self- storage unit have also been the source of additional concerns. While many of these transactions have been treated as standard conveyances the reality is quite different. The buyer only purchases a “fractional interest” that does not involve the registration of any title to the property. Many of these schemes are fraudulent, or at best extremely high risk, resulting in considerable claims against solicitors involved.
The SRA have issued warning notices regarding involvement in both buyer funded developments and property-related investment schemes generally. The latest update was published in August 2020 and is available here. Are you and your teams familiar with it?
Acting on multiple transactions in the same development
You will have noticed that PII proposal forms ask for a great deal of detail if you have acted on multiple transactions in the same development and if you are recommended to buyers as a “preferred solicitor” by any developers. Once again, these questions are directly related to the claims that insurers have experienced historically.
Underwriters are concerned about the risk that the “preferred solicitor” might be dependent upon the developer for the referral of work and potentially turn a blind eye to issues that they should be raising with their clients who are purchasing the properties. If they do not apply the due diligence that they should, then this could result in multiple claims at a later date.
Even if a firm is not the developer’s recommended solicitor, there are risk issues associated with acting on multiple transactions (particularly purchases) in a single development. The concern here is whether there are any systemic issues with the sale of the properties that could be a problem. An error in documentation that was repeated across all the sales could result in multiple claims. Whether the claims can be aggregated and treated as a single claim is dependent on the facts. However, even if this is possible and insurers liability is capped at the primary £2m or £3m, uninsured losses above this level could force the firm to insolvency with insurers being left to provide 6 years of run-off cover for which they might not receive any premium.
Fraud including cyber crime
Given that conveyancing involves high value assets and the transfer of significant sums of money, conveyancing practice is a magnet for fraudsters. They come in various guises. There is the imposter seller who dupes the solicitor into acting on the sale of a property they do not own. There are the cyber criminals who access sale and purchase monies by intercepting emails to orchestrate a change of bank details. Phishing emails to install malware, enabling access to your accounting software, is also a common scenario. The fraudster can then obtain information that can be used to persuade accounts staff to release pass codes. The bogus law firm or branch office of an existing firm is yet another example of the lengths that fraudsters will go to in order to access the funds associated with conveyancing transactions.
Over the years insurers have paid out millions in response to these frauds. While solicitors are acutely aware of the risk, undertake relevant training and develop appropriate processes and procedures, constant vigilance and review is needed. Fraudsters are adept at changing their modus operandi and fee-earners and staff can become complacent or overlook issues when they are busy and under pressure. Your insurers want reassurance that your firm is alert to the issue and engaging in regular activity and initiatives to manage the risk.
Potential for a property market crash
While the property market has remained buoyant in recent months, this could change when the current relief from Stamp Duty Land Tax (SDLT) ends. The economic fallout from the pandemic could cause the market to falter. We know from experience that when the property market crashes and repossessions rise, affected parties will look for someone to blame. Solicitors are a target.
Mortgage fraud has been the cause of significant losses to PII insurers in the wake of previous property recessions. The claims activity following the 2007 property crash revealed that some fee-earners had routinely failed to disclose to lenders issues such as incentives, cashbacks, discounts and back to back sales on new-build or refurbished properties in particular. In some cases the explanation given was that they did not realise these were issues that should be disclosed to lenders, or alternatively that it was accepted practice because “everyone was doing it”. This was a source of considerable irritation to insurers given the existence of the Law Society “Green Card” which was a warning about mortgage fraud first published in 1991. While some fee -earners had clearly turned a blind eye to the requirements, it was also apparent that others simply had not received adequate training on the issue.
The Law Society issued a detailed Practice Note on mortgage fraud in March 2008 which has since been updated from time to time. It was last updated in January 2020 and is available here. If you are reading this article then you have probably already reviewed it, but can you say the same of all the fee-earners in your conveyancing team? From a risk perspective there is nothing you can do to prevent the property market crash. However, ensuring that you are able to evidence a strong and robust risk management approach in your conveyancing department will go a long way towards addressing your underwriter’s concern about receiving a flood of notifications from your firm if it happens.
Stamp Duty Land Tax (SDLT) holiday
When lockdown happened on 23 March 2020 conveyancing transactions fell off a cliff. However the subsequent relief package in relation to SDLT completely changed the landscape and the property market has been extremely busy. Insurers concerns are two-fold:
- Has the additional workload, together with added complications of remote working, increased the potential for acts and omissions that will give rise to claims; and
- If the government do not extend the 31 March end date for the SDLT relief, will there be claims arising as a result of transactions not completing in time. It seems inevitable that some buyers will pick over the history of their transaction to see if there were any short-comings or delays on the part of their solicitor. This will open the way for professional negligence claims to recover additional SDLT – or the costs of an aborted transaction. Those acting for sellers will not be immune either. Their clients will also be looking at what recovery they can make if buyers re-negotiate or withdraw from a transaction at the last minute as they are unable to fund the additional SDLT.
Much will depend on whether there is any extension of the relief beyond 31 March 2021, but be prepared. Underwriters will be looking for comfort and it will be important for firms to articulate what they have done to address the risks.
Multiple Dwellings Relief
Multiple Dwellings Relief (MDR) from SDLT was introduced in 2011. Where it applies, considerable savings can be made on the amount of SDLT that is payable. If a solicitor fails to advise a client that relief is available, then this has the potential to result in a claim against them. For more details regarding this issue we refer you to our article “Multiple dwellings relief provides little relief for conveyancers” written in partnership with Womble Bond Dickinson and available here. (https://www.howdengroup.com/uk-en/multiple-dwelling-relief-uk-conveyancers)
PII insurers are dealing with a number of these claims and questions relating to the issue have been introduced in some proposal forms. We encourage all firms to review their procedures and training with regard to MDR prior to their next renewal.
The post-Grenfell cladding and fire safety scandal is all over the press. Thousands of properties in multi-occupancy blocks are impacted and many leaseholders are currently faced with paying significant amounts for interim fire safety measures and remediation.
A certificate, known as the EWS1, was introduced at the end of 2019 to give lenders and purchasers confidence, and home owners’ peace of mind. The certificate addresses the fire-safety of the construction and materials used. It also details any remedial works required. While the EWS1 certificate was developed for buildings over 18 metres, many lenders are now also requiring the certificate for buildings under 18 metres.
Conveyancers need to be alert to this issue and request the certificate when acting for buyers and lenders in relation to the purchase of a property in a multi-occupancy block.
The cladding and fire safety crisis is an evolving issue that should be kept under regular review. Are you confident that your team has been given adequate training on this issue? Many buildings do not yet have the EWS1 certificate. What do you advise your clients when it is not available? What comfort can you give your underwriter regarding the procedures you have put in place to ensure you don’t get caught out?
Escalating ground rents
This issue has been on the agenda for underwriters for some time now and has also been well documented in the press. It emerged as a result of residential developers selling new-build houses on a leasehold (rather than the more traditional freehold) basis. This enabled them to retain the right as landlord to charge ground rent and other charges. In many instances the charges were onerous, with ground rents in particular doubling every 5 or 10 years in some cases.
Conveyancers have faced professional negligence claims for failing to identify escalating ground rent provisions in leases and/or failing to advise prospective buyers on the implications of these provisions. This is the reason why you see questions addressing this issue on PII proposal forms.
There was some good news on this issue in January 2021 when the Housing Secretary announced extensive reforms that will enable leaseholders to both extend leases and reduce ground rents to nil[i]. This builds on the government’s previous commitment to restrict ground rents to zero for new leases following recommendations made in the Law Commission’s consultation on the current leasehold regime in July 2020. New legislation will now be brought before Parliament.
These developments should influence the handling and outcome of existing claims and address this issue for the future. However, for now it remains a risk that conveyancers need to be alive to.
….and the same old issues
The above discussion covers some of the more specific areas of concern for PII insurers. However there are many other issues that are regularly the subject of claims. Failure to obtain searches, failure to advise on searches, incorrect or inadequate reports on title, and missed charges are just some of the routine issues that can go wrong. Insurers accept that from time to time mistakes will happen, but they also know that good risk management and sound processes and procedures go a long way towards ensuring that any issues are kept to an absolute minimum.
Insurers’ appetite for firms that undertake conveyancing has become more and more restricted (see our market report available here). This is a direct result of the concerns regarding the current level of claims activity and the potential for this to deteriorate further due to some of the issues discussed above. Our best advice is to “turn up the volume” on risk management with your conveyancing teams, and when completing your proposal form, give chapter and verse on what you are doing to address the risks.
John has been a broker for over 30 years, specialising in helping UK solicitors find the insurance they need. His team works with law firms large and small to ensure that they are covered for every eventuality.