One step too far - stakeholder solicitors defeat buyer-funded development claim

Insight

Published

17 February 2022

DACB Logo    Guest written by Phil Murrin and Chris Lewis from DAC Beachcroft

First published 10 January 2022

Various North Point Pall Mall Purchasers v 174 Law Solicitors Ltd v Key Manchester Ltd [2022] EWHC 4 (Ch)

Claims against UK solicitors in relation to risky buyer-funded developments, which became more prevalent with the contraction of property development financing following the 2008-9 credit crunch, have in recent years bedevilled the solicitors’ professional indemnity market. Claims by investors against their own solicitors were one thing: investors then attempted to bring claims against the counterparty developer’s solicitors, in the latter’s additional capacity as an appointed stakeholder. In a judgment handed down on 10 January 2022, such claims were resoundingly rejected.

Facts

North Point Pall Mall was an ambitious development, commencing in 2015, of some 426 residential and live-work units at a brown-field city centre site at 70-90 Pall Mall, Liverpool. The development was constructed by North Point (Pall Mall) Liverpool Ltd (NPPM), a special purpose vehicle established by parent company, North Point Global Ltd (NPG). 

The development adopted a fractional sales model, where development works would be funded by unusually large (between 50% - 80%) deposits of investor buyers. Such a model, also often called a buyer-funded development, gained in popularity as lending options dried up following the 2008-9 credit crunch. It was held by the court to be an established, albeit risky, development model.

The Claimants were investor buyers, largely resident in Hong Kong, who had contracted to buy units, but who lost their investments upon the collapse of the development, which was under-funded. Those buyers issued proceedings against their own lawyers, Key Manchester Ltd (KML), as well as against the solicitors who acted for NPG / NPPM, 174 Law Solicitors Ltd (174), on the basis that 174 had also acted in a stakeholder capacity.  

The litigation had been managed with litigation concerning three other related developments. The bulk of such claims had settled by the time of trial, including the settlement by KML of the claims against it, albeit the judgment referenced outstanding professional indemnity insurance coverage issues arising.

The principal issue at trial was therefore whether 174 was liable to the Claimants for wrongly paying out monies held by it in its stakeholder capacity. Solicitors in real estate transactions often agree to act as a stakeholder, where the release of monies is dependent on agreed conditions. It was held here that the litigation was “very significant” for 174, in view of the extent of other transactions where it acted and released monies, and the judgment referenced a second cohort of claimants, represented by the same solicitors, who had very recently issued proceedings against 174, involving “substantial” sums.

The Claimants’ position was that the contractual documentation provided as a pre-condition to 174’s release of the investment monies that a first legal charge was to be registered in favour of a buyer company established to protect the interests of all buyer investors in the development. The Claimants contended that as no such legal charge was ever in place, 174 was liable to the Claimants, in debt or in damages, for the wrongful release of their investment monies to NPPM. It was common ground that there had been some external financing, such that the buyer company charge was only a second legal charge, ranking in priority behind the lender’s charge.

Conversely, 174 contended that not only had the Claimants’ own lawyers accepted liability, but that the releases of investment monies were properly made against professional certification of development works, in circumstances where the Claimants, through their solicitors, had full knowledge of the title position. 174 contended that the release of monies was authorised by the directors of the buyer company, including the Claimants’ own lawyer, such that their release to NPPM was legitimate; and in any event, the Claimants were barred by an estoppel by convention from challenging their release in such circumstances. The Claimants’ position was that such alleged authority had to be ineffective in the circumstances of the contractual documentation.

The stakeholder agreements arose as a matter of law pursuant to the provisions of the agreements for sale. These provided, amongst other things, that the investment monies were to be held by 174 pursuant to the order of the buyer company, and that the Claimants irrevocably authorised the buyer company for that purpose. There were also provisions to the effect that the monies were to be released within 5 working days of receipt of the certification of building works by the appointed building supervisor; that payments were not to be made prior to evidence of the registration of the buyer company’s legal charge as a first legal charge being produced to the buyer or its solicitor / agent; and addressing circumstances in which additional funding could be taken out, having the effect of changing the priority of the buyer’s charge to a second legal charge.

It was found that the directors of the buyer company, including the Claimants’ own solicitor, had agreed to the continued release of buyer monies in a “work-around” involving certain conditions agreed to put the buyers in the equivalent position as if the financing had involved substitution in strict accordance with the contractual terms.

Decision

In a detailed, 51-page judgment, His Honour Judge Hodge QC dismissed the claims against 174, on the basis that on a proper analysis of the facts and construction of the stakeholder agreement, 174 was to be regarded as having released the monies with the authorisation of the directors of the buyer company and the Claimants’ own solicitor. The “work-around” was not to be regarded as an invalid variation of the agreements for sale, as the Claimants contended, but as an expression of the satisfaction of both the buyer company and the Claimants’ own solicitor as to the prior legal charge in favour of the lender, for the purposes of satisfying the contractual provisions. 

Additionally, albeit technically on an obiter basis, the Claimants were, for similar reasons, estopped from challenging the release of monies, applying the principles of the recent Supreme Court decision in Tinkler v Revenue and Customs Commissioners [2021] UKSC 39. The claims against 174 therefore failed in their entirety.

This decision meant that 174’s contribution claim against KML did not need to be decided, but the judge indicated, again obiter, that had that been necessary, he would, assuming for this purpose that he had found 174 liable, apportioned the lion’s share of liability, quantified at a level of 80%, against KML.

Howden Commentary

We all like good news and both law firms and their PII underwriters should be particularly pleased with the outcome in Various North Point Pall Mall Purchasers v 174 Law Solicitors Ltd v Key Manchester Ltd [2022] EWHC 4 (Ch) discussed in this article by DAC Beachcroft.

For some time now there has been a concern about the extent of PII losses that are arising as a result of claims against solicitors relating to failed buyer-funded developments. The current hard market has been challenging enough for law firms and this is an issue that has compounded the position further. Firms will also be familiar with the additional questions that underwriters have been asking about this area of work.

In this case investors were endeavouring to bring an additional claim beyond their own solicitors and seek recovery against the counterparty developer’s solicitors, in their capacity as an appointed stakeholder. A successful outcome would have potentially provided an opportunity for others to consider similar claims. Fortunately the action was unsuccessful and the article provides insight to the basis of the decision. It will be of particular interest those who have been engaged in transactions of this nature.

Jenny Screech LLB (Hons),  Legal Professional Consultant, Professional Indemnity, Howden

Comment

The decision will inevitably be welcomed with some relief by the legal profession, involved professional indemnity insurers and insurance brokers. There has been a large wave of claims against solicitors in relation to failed buyer-funded developments which have caused real difficulties and significant cost to the profession and its insurers. Any suggestion that there could be additional exposure on the part of counter-party developer solicitors would have been extremely worrying. 

Whilst each case will inevitably depend on its own facts, the judgment should represent a firm signal to a clearly-established claimant lawyer market that such claims are likely to be of weak merits and thus to be opposed. The judgment also reflected an understanding that in a large-scale development, a structure had been agreed whereby decision-making as to the release of stakeholder funds had been delegated to one common voice, in the buyer company; the buyer-funded development would have had no prospect of working viably had each buyer of each unit not delegated authority in this manner. 

More generally, the attempt to establish liability on the part of a solicitor acting as a stakeholder, where release of monies had been authorised, threatened to have wider ramifications for property transactions other than buyer-funded developments. The risks of acting as stakeholders might potentially have changed widespread real estate practices. The judge applied established case law in his judgment, the detail of which is beyond the scope of this article, but the outcome of the litigation and the nature of the judgment gives no additional reason for existing practices to be disturbed.

The questions arising in disputes of this nature are of some complexity, given the nature of the stakeholder agreement being an implied agreement based on the express provisions of a separate, written contract. This meant, for example, that the matters in dispute in the action extended to the question of who were the parties to the stakeholder agreement; whereas usually this will be a tripartite agreement, involving the buyer, the seller and the stakeholder, here, the judge found the agreement to be quadripartite in nature, with the buyer company also a party. The involvement of both buyer company and buyers as parties raised issues as to the risk of conflicting instructions, but it was held that although the buyers were parties to the stakeholder agreement, only the buyer company could provide instructions thereunder.

The legal profession and its professional indemnity insurers should accordingly feel encouraged by the decision. The judgment mentions the possibility of an appeal, but it is not yet clear if this will be pursued. Phil Murrin and Chris Lewis of DAC Beachcroft, and Michael Bowmer of 4 New Square, acted for 174 and its professional indemnity insurers in the successful defence in this litigation.

Phil Murrin

London – Wallbrook

+44 (0)20 7894 6900

[email protected]

Phil Murrin DACB

Chris Lewis

London – Wallbrook

+44 (0)20 7894 6054

[email protected]

Chris Lewis DACB

This article has been written by DAC Beachcroft and the opinions and views stated in this article are those of DAC Beachcroft and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to advise on this case. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.