Avoiding negligence claims in commercial property law

Paul Smith is a solicitor and risk consultant who works alongside some 20 lawyers across the Travelers claim, risk and underwriting teams. He helps law firms to identify and avoid professional indemnity insurance risks.

Here he explains some common errors in commercial property work and how to avoid them. (1 June 2020)

Commercial conveyancing work generates high numbers of expensive negligence claims against law firms. In our data, the number and cost of the claims is second only to residential conveyancing.

The largest number of claims involve defects in leases and assignments, followed by issues around completion and registration.

The most expensive claims concern title issues, followed by licences and consents.

A mix of issues – VAT and tax, searches and enquiries, and plans and boundaries – are relatively infrequent and are usually resolved at relatively low cost.

We also see some dishonesty cases. But based on our data, these are infrequent and have limited cost impact.

This article highlights some of the more common issues, and how your firm can reduce the risk of a claim.

1. Agreeing the retainer

Around 40% of commercial property claims are linked to some failure to agree the retainer. Often, the problem starts with a lack of clarity around the facts and what the client wants.

For example:

• not including the requested restrictive covenants in an onward sale of land
• failing to establish the extent of a deed of easement for access granted by the client

1. Get the facts. Understanding exactly what the matter involves reduces the chance of a mismatch between what the client wants and what gets recorded in any document.
2. Be clear on licences, assignments and consents. These are common problem areas.
3. Document the retainer. This helps identify your client’s intentions and manage expectations. It also flags up any assumptions that need to be discussed. Is tax advice included?
4. Schedule any deadlines. Time-limits tend to arise at registration and completion. Schedule key actions such as registrations and serving any notices and highlight them in your planning for each matter.
5. Document any late instructions. Problems often arise when instructions change, so make attendance notes and immediately amend any plans that need to change.

2. Drafting errors

Drafting errors produce over a quarter of the claims we see in commercial property work, mainly in work involving leases and assignments.

For example:

• a rent review formula using the wrong date for identifying the relevant retail price index
• a landlord’s counter-notice alleged to be invalid
• leases granted that were longer than the client’s own superior leasehold interest
• an assignment alleged to be invalid as the attestation page in the licence was from a prior version of the document

Various different causes can drive drafting error. Typical issues include frequent and complex changes to instructions shortly before completion dates; demanding clients; poor record-keeping; and overstretched fee-earners with insufficient time and resource to review documentation.

1. Review draft documents systematically. Use drafting software, or operate the ‘four eyes’ system where one person reads out the document as another follows the text to spot errors. Work through any formulae.
2. Track individual workloads. Avoid overloading people.
3. Recognise that reviewing documents is hard work. Concentration levels fall quickly, especially when no problems are apparent at an early stage. It’s easy to become ‘routine-blind’ to error.

3. Progressing the matter

Once a matter is in progress, it can be easy to miss steps in the process and miss deadlines.

For example:

• the withdrawal of a prospective tenant after a delay in producing a lease
• forfeiture of the deposit when notice to terminate a conditional contract was served out of time
• a lender who ultimately lost priority when Land Registry requisitions on the lender’s charge were ignored

The underlying cause tends to be systems failure – not using the retainer documentation to manage the process, not following the systems that are in place, or simply lacking adequate systems in the first place.

1. Track and review progress. Avoid the last-minute scramble to complete work.
2. Have systems to support legal service delivery. For example: client acceptance; file opening and closure processes; multiple diary systems; checklists for mapping workflow and guiding activity on a matter including any time limits; work handover processes.
3. Supervision. Monitor workloads and identify issues.

4. Not following clear instructions

Some claims reflect a serious mismatch between what the client believes has been agreed and what appears in the documentation.

For example:

• a law firm provided an architect’s certificate which did not comply with the CML Lenders’ Handbook (now the UK Finance Mortgage Lenders’ Handbook), potentially reducing the value of the lender’s security
• the client had wanted to retain a right of way over land being sold off, but the firm failed to obtain consent from the buyer’s mortgagee

1. Check the client’s agreement with the terms of the retainer in the first place. This helps to reveal any errors or omissions.

5. Legal advice

Around a third of claims relate to advice failures. These can be the result of getting the law wrong or getting the facts wrong.

For example:

• not checking the agents’ assurance that an underlease was excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 Part II
• failing to advise that the winding-up of a flat management company would render vacant flats in a development unsaleable
• a discrepancy between the extent of the property and the filed plan
• failure to check that a director of the client company was a director at the time of the sale
• on a clients' transaction to acquire share capital in a company that was purchasing a property, failure to register a charge on that property
• not advising on the tax implications of a transaction – often when the retainer is unclear on the obligation to provide tax advice to the client
• using the lender’s legal charge for residential property rather than commercial property

Advice failure can be caused by the sort of process and systems issues discussed earlier.

Problems also arise when there is a communication breakdown, people lack support or are unsupervised, and the firm’s culture does not encourage discussion and information-sharing.

At least part of the solution is to give people the support they need to give the right advice.

1. Promote an ‘open door’ culture. Encourage discussion of challenging cases and issues.
2. Create ‘knowledge exchanges’. Provide regular opportunities to raise and discuss issues, and to tap into colleagues’ knowledge.
3. Offer mentoring schemes. This can be a structured way for knowledge to be passed on.
4. Set up feedback schemes. These provide opportunities to discuss risk issues, including both claims against the firm and ‘near misses’ – where things have gone wrong without ultimately resulting in a loss or claim.

6. Completion and registration

Time-limits tend to arise at registration and completion. Schedule key actions and highlight them in your planning for each matter.

For example, missed deadlines that we have seen include:

• failing to serve a notice in time to terminate a conditional contract, leading to the forfeiture of the deposit
• failing to register charges over several properties, which secured loans to several people
• serving the notice after the relevant time limit had expired, in a case where a client entered into a conditional contract which should have become unconditional when the client had earlier instructed the law firm to waive a particular planning condition
• failing to apply for a lease extension within time (under the Leasehold Reform and Urban Development Act 1993)
• failing to advise a client of completion of a lease extension, so the client missed the deadline for filing the necessary CGT return

Faulty completions that we have seen include:

• failure to ensure the accuracy of a completion statement prior to distribution of sale proceeds
• failure to ensure that the restriction on a property protecting overage payments was removed by completion

1. Do you capture and review time limits throughout the matter?
2. Do you use a multiple diary system and task planners for each fee-earner and each case?

7. Covid-19

The national lockdown following the Covid-19 outbreak presents many challenges to law firms. Travelers has written a note on the risks to be aware of and the controls to put in place.

One particular issue is ensuring that documents are validly signed. Witnessed and executed properly, electronic signatures are legally binding. The authorities have provided various guidance on this point:

• the Law Commission press release of 04.09.19, following its Report on the electronic execution of documents (see pages 33 to 44)
• the Land Registry guidance on electronic signatures summarised in a helpful Law Society note, or you can read the GOV.UK summary and links

 

There are countless different situations that can lead to a PI insurance claim from a law firm, but hopefully this note has given you helpful ideas about where to focus your risk management efforts and the sort of controls you can use.

See also:

• How to avoid professional negligence claims in residential conveyancing, wills and probate, company and commercial, and commercial litigation.
• PI insurance for law firms FAQs: Part one (50 FAQs)
• A series of podcasts on risk, including: Dishonesty risk in legal service delivery - Podcast 3
• Covid-19 and operational risk