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 residential conveyancing and how to avoid them
For law firms, residential conveyancing generates more negligence claims than any other work area.
This article highlights some of the more common issues, and how your firm can reduce the risk of a claim.
1. Stressed clients
Conveyancing can be stressful at the best of times, and particularly if clients are:
- under unusual personal pressure, such as going through a divorce
- under unusual time or financial pressure
- unfamiliar with the conveyancing process
Stressed clients can be extremely sensitive to perceived lapses in service and are more likely to make a claim. Even if the claim is not justified, it will take time and effort to resolve.
- Do you take the time to check the client’s attitude to the transaction, along with your initial due diligence?
- Do stressed clients receive the extra attention they need?
2. Delays in progressing the transaction
Delays are commonly cited in claims, particularly when sales and purchases have fallen through. Although clients may find it difficult to prove causation, any allegation still needs a response.
- Are instructions (including any time constraints) clearly agreed from the outset?
- Do fee-earners take on excessive workloads?
- Are fee-earners adequately supported?
- Are potential causes of delay identified and communicated to the client as soon as possible?
- Is the potential impact and any way to minimise it explained to the client, and further instruction sought?
3. Issues not followed up
Any issues identified must be resolved. For example, if a property is found not to be on mains drainage, the consequences need to be explained to the client.
- Does your retainer explain what you won’t do, as well as what you will do? How often do you revisit the letter during the transaction?
- Do you maintain an issue log or checklist as a way of keeping track of issues raised and ensuring they are addressed?
- Do you act in accordance with CML guidelines?
4. Inaccurate documentation
Examples of inaccurate documentation we have seen include:
- the wrong completion date in the contract (which was then sent to the wrong buyer’s solicitors), or inserting the wrong purchase price
- arithmetical errors, such as miscalculating service charges, or failing to identify all payments for a consideration payable in instalments
- What systems do you have to ensure that documents accord with your clients’ instructions?
5. Significant misunderstandings
Some claims reflect a serious mismatch between what the client believes has been agreed and what appears in the documentation.
- not spotting that some of the consideration involved the part-exchange of property
- the purchaser being apparently unaware that a developer was selling only part of the leasehold interest and renting the remainder
- Do you have a robust procedure for establishing the facts of the matter, in the initial instructions and thereafter, recorded in correspondence and notes?
- Are records referred to during the transaction?
6. Searches and enquiries
Failing to make all necessary searches and enquiries, and to report the results, is a major cause of claims. Clients may claim that the property is worth less than was paid, or that the transaction would not have gone ahead had they known the facts.
- failing to check that the client’s proposed use of the property was permitted
- failing to carry out a pre-exchange search (which would have revealed a compulsory purchase order)
- failure to follow up on results showing that the property was affected by shale and a mineshaft
- Do you follow a search / enquiry checklist?
- How are issues in searches and enquiries identified and raised with the client?
- Are results added to an issue log or checklist to ensure they are adequately addressed?
7. Deadlines and timing
We have seen cases were firms failed to:
- synchronise exchange, leaving the clients incurring additional accommodation and removal costs when completion was delayed
- send purchase monies in good time, so delaying completion
- check a lender’s early repayment terms, leading to the client incurring an early repayment penalty
- Are details of any property financing checked when instructions are taken?
- Is a proposed completion date identified from an early stage?
- Do you have clear exchange and completion procedures?
- Do you have a process to identify and monitor critical dates and have a system with an early warning flagging process?
8. Completion and post-completion
Examples of errors we have seen include:
- on a remortgage, failing to ensure that an existing charge would be postponed to the new charge
- failing to redeem a second charge
- failing to document an agreement to re-site a boundary
- failure to register a lease
- failure to respond to Land Registry requisitions
- breaches of undertakings
- Do you use completion and post-completion checklists?
- Do you maintain a register of undertakings? And do you have clear rules around who can give undertakings and on what terms?
9. Client lack of knowledge
Problems – and claims – can arise due to the client’s lack of knowledge.
- the client may release the keys to their property before completion, leaving them at risk
- Do you give clients clear guidance on what they should and should not do during the conveyancing process?
The monies passing through conveyancing firms attract criminals, especially those engaged in cybercrime.
- How aware is your firm of the threats posed by cyber-criminals? Do you keep up to date with developments, perhaps via the SRA – its Risk Updates and Scam Alerts – or the Law Society?
- Do you warn your clients about the dangers of communicating by email – the potential for email hacking, with criminals breaking into traffic and masquerading as clients or lawyers?
- Do you advise clients that changes to account details will only be notified in specific ways?
- Do you carry out thorough identity checks on sellers and scrutinise the results when acting for the buyer?
- Following ‘Dreamvar’, do you avoid agreeing to onerous terms that extend the scope of coverage under your PI policy, such as warranting the identity of the seller? Do you flag up concerns with your buyer clients over the bona fides of a seller and advise accordingly?
- Note the new ‘Code for completion by post’ from the Law Society, published in February 2019 and effective from 1st May 2019.
Improving risk management
When taking steps to reduce the risk of having to make a professional negligence claim against your PI insurance, it may be useful to think in terms of these four headings:
- People – whether clients or those within the firm providing the service.
- Process – the steps in delivering the retainer, dealing with the matter to completion.
- Systems – that underlie all the work that the firm does – file opening, client due diligence, IT, HR, communications within the business, diaries and file closure.
- Risk management – the extent to which good practice in risk management is followed in the firm.
Start with a thorough ‘onboarding’ process, to identify the client’s legal needs. Take a statement from the client, setting out the facts of the matter. Use headings such as the ones below to provide clarity and structure to these facts. Adopting this project management approach will help you to plan and control the matter (and its profitability) through to completion.
- Initial business case – the purpose of the matter.
- Scope – the activities to be performed, the resources needed, and the outcome (eg a contract, or a sale).
- Deliverables – specific tangible outcomes that satisfy specific named objectives.
- Assumptions – assumptions that the client can confirm are correct (eg a particular property is owned by X; or a particular document has not been superseded by another document).
- Dependencies – a series of steps to be taken in sequence, including the question of what happens if a step does not take place (what is critical, what is not?).
- Limitations – on the scope of the legal advice, based on the information available and the areas of law to be covered (eg is tax advice covered, or IP law?).
- Unknowns – factors where there is no information, which could affect the outcome.
When progressing a matter, use systems like these to keep control of the various issues:
- Issues log – a straightforward log of things that arise which may have an impact on the project (eg a survey may have been requested on a building).
- Risk control log – any checks or solutions that need to take place (eg if a survey reveals a problem with the building, there will usually be a follow-on action that must be completed).
- Revision history – changes to the matter and why they were made (eg where new information means that the original plan needs tweaking).
- Change control – a way of preventing mission creep, so that if a matter materially changes the firm can then reset the budget, resources, timings and expectations of the outcome (eg if a seemingly straightforward transaction is revealed to be a complex one).
- Earned value – a cost-benefit analysis carried out during the course of the matter to check that the original commercial logic still stacks up in light of any changes (eg in any M&A deal a number of factors can erode the value to one party or another).
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.
Some lawyers on the Travelers team
- Charles Attwell and Paul Smith help law firms to avoid claims in the first place.
- Joseph Arazi heads up Travelers’ in-house law firm, Travelers Legal, which handles legal actions against firms that are insured with Travelers.
- Davis Kessler is head of cyber.
- Another 20 solicitors make up the Travelers claim-handling team.