Considerations for Law Firms
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Developments, Property Investment and Buying Off-plan Law Firm Consideration
Solicitors who represent developers who are seeking investment for their development or clients who are investing into such developments of buying ‘off plan’ are well advised to take additional precautions when representing, advising and guiding clients.
The Professional Indemnity Insurers regard this as higher risk property work and with good reason. Often claims that arise from these scenarios can be considerable in value and too many are ultimately paid by the Insurers, due to errors or omissions by the Solicitors through the handling of the matter.
Law firms must be more alert on these matters and be aware of the full circumstances surrounding their clients, through applying enhanced Due Diligence and ensuring to advise purchasing clients on the risks that are associated with development investments and buying off plan.
At The Strategic Partner, we work with both law firms and insurers in the managing of risk, providing guidance and input into both sectors. We are working with law firms to assess the risks in their firms through their annual risk assessments or through process and file auditing.
Whilst many firms do have more robust processes in place for development investment and off plan sales and purchases, there are firms that fall short.
This note offers firms some guidance on issues and areas they should consider as part of their risk management strategy for their commercial and residential property departments.
To contact us to discuss any issues that you may have arising from property work or other general issues you can call us on 02039119710, email us email@example.com or visit our website and make an online enquiry https://www.thestrategicpartner.co.uk/Contact-Us
As referred to above, the main risk associated with development investment and off plan buying is that the property is not completed or simply never built or intended to be built in the first place.
Fraudulent investors end up disappearing with large deposits across multiple properties, leaving an innocent investor with a sizeable loss and potentially a negligence claim. Individuals who have sought to buy a single property from a developer who has miscalculated build costs and goes into administration through the process, can find themselves with a half built property wondering if and when it is ever likely to be completed and again with substantial losses.
The Solicitors Regulation Authority (SRA) have spoken about this issue and warned firms to be extra vigilant, for example, https://www.sra.org.uk/consumers/problems/fraud-dishonesty/property-schemes/ and our work with Professional Indemnity Insurers echoes the issue and that law firms should elevate such matters to higher risk and apply closer supervision and monitoring.
To help control risks associated with this type of work and to avoid your firm being caught in a claim which may also attract an SRA investigation, firms should consider, in detail, how they are prepared to handle such matters and ensure they undertake additional due diligence on their clients.
Questions to Ask Your Firm
The following questions may be of assistance when risk assessing your own firm and how you approach property development investment schemes and off plan sales purchases.
1. Experience – Consider the handlers of these transactions and if they have experience of new build house sales and purchase or property development investment schemes. What is the experience gained in other law firms or what training have they received. Discuss with them their skill sets and seek information about the issues they have dealt with or understand what the clients face, both as sellers and buyers. If you are bringing someone new into the firm to build on this department or work source, make sure you have fully tested their skill set through a stringent interview process.
2. Training – What training has been provided to your staff (previously and current) and what training have you organised or permitted to ensure your fee earners keep pace with the developments in this work type, to ensure they are fully aware of the latest issues and keep up to date with market information and activity. Put in place a training schedule that is enhanced to ensure your staff remain up to date at all times.
3. Supervision – Who is supervising this work and what is their experience. How detailed is the supervision and do the supervisors have the required experience to spot potential issues before they arise or to actively addresses them if they do? If you do not have the experience to supervise internally, can you seek external assistance through auditing.
4. Updates - How does your firm and the handlers involved in such matters stay up to date with news and information about legalisation or scams surrounding this type of work? Do you have a resource that is able to identify news and information and ensure this is shared with the relevant people in your property department?
5. Risk Exposure – What is the experience of your firm and how many cases have you processed and what is the value of these matters. Review your risk exposure when acting for developers, investors and private clients. Is your firm experienced in these matters and can that be demonstrated through a healthy claims position and general experience of the fee earners involved?
6. Risk Assessments – Do you regard, as standard, property development investment schedules and off plan purchase cases as high risk and through doing so, record them in your high risk register for closer monitoring. If not, should you consider doing so and offer guidance to your staff on what you consider these matters to be high risk and what should happen when a new instruction is received and through the ongoing handling of the case. When should a property development investment scheme or off plan purchase, be regarded as high risk and at what stage can it be downgraded to a lower risk profile.
7. Developer Relationships – What is your firm’s relationship and terms of engagement with the developer including the relationship of the fee earners or partners who are dealing with that client. Do you have a list of developers who regularly use your firm’s services and how well do you know them? If you are a preferred partner on any development or for any developer, are there matters you should disclose to an investor or individual purchaser? For example, do your fees increase for a successful investment or sale?
8. Standard Letters and guidance – Have you ensured that your retainer letters for each party address the risks associated with investing into property developments or purchasing off plan. Have you clearly set out the risk to both parties and made them aware of the consequences of a development not being completed or worse, being fraudulent? Do you ensure that your process is followed for each purchase, whether for single sale or purchase of for multiple properties? Do you evidence the checks you have taken and where is this information stored?
Do you offer any advice to the purchaser around the pitfalls of this type of investment? i.e. do you warn of the potential for the loss of deposits if the developer or phase of development enters administration?
9. Overseas investors - Do you represent overseas investors and if so, what checks do you undertake to identify and verify them? Are they borrowing money for the investment and if so, who is providing the funding? Where a developer has secured largely overseas investors for the property, have you applied any additional checks to ensure the development and investment is secure?
10. Deposits – How are deposits managed and what are the expectations on the clients for provision of deposits. Do you hold deposits on behalf of investors in a development and if so, under what authority and what are your instructions to release the monies?
11. Checks – What checks do you undertake yourselves on a property development to ensure that matters are proceeding on time and as expected, or do you leave this to the client? What evidence do you request and receive before releasing a client’s money? Are these checks standard across your firm when approaching this type of work, so you are actively advising a client on the action they should take before giving you instruction to release their money?
12. Undertakings - Do you provide undertaking as standard and if so, what are they and how are they recorded and monitored?
13. Solicitor Acting for a developer - What checks do you undertake on the Solicitor representing the developer where you act for a purchaser or investor? Have you asked to see their Client Due Diligence and are you satisfied that they have applied the appropriate level of CDD and would they have passed your own requirements? If not, what action should you take and what advice do you provide to your client?
14. Negligence - Has the firm received a notification of a potential negligence claim or have you reported any claims or potential claims to an insurer even if as a precaution? What were the circumstances of the claim(s) and what has your firm learned from the claim and what changes have been implemented? Can you actively demonstrate that you have implemented controls and measures to avoid a repetition?
Considerations About A Developer
When you are instructed by a developer as a one off instruction or you are representing them on an ongoing basis, there are questions you may wish to ask them and investigations your firm should undertake to satisfy yourself that the developer does not pose a risk to your firm. Undertaking your own due diligence on a developer is essential. For example:
1. Which Solicitor did they use to represent them and why have they changed to your firm?
2. Has the developer previously undertaken property developments? If so, of what nature and size and how many?
3. Can the developer provide evidence of the completion of those properties?
4. How many properties have been sold already on the development or is this a new scheme?
5. Have all developments finished on time and on budget? If not provide further information.
6. Has a development ever been completed and were claims made against the developer or the Solicitor?
7. How long has the developer been trading?
8. Have you obtained companies house records?
9. Have you identified all PSC’s and Beneficial Owners?
10. Have you obtained trading accounts for the developer and is the business financially stable?
11. Where have initial funds been raised from or are all funds arising from the investors or purchasers? Is the source of funds traceable?
12. How was the land secured and have you made suitable enquiries into the transaction and title?
Considerations for an Initial Risk Assessment
Each instruction you will receive is different and therefore each new matter must have a risk assessment applied whether you are acting for a developer, investor or private client.
Some of the questions you may wish to consider as part of your initial risk assessment of a new instruction are as follows and form part of your files opening process and to approve acting: -
1. How did the developer find and instruct your firm?
2. What is your contractual relationship with the developer and what legal services are you providing and when?
3. Are the fees you are being paid proportionate to the work you are being asked to undertake?
4. What is the total value of the development and does your PII limit cover you?
5. What is the value of the individual purchases and again, do you have adequate PII cover?
6. Where you are representing the developer, have you completed Due Diligence on the developer, and did you apply Enhanced Due Diligence? What was the outcome and have they passed your criteria?
7. Where you are representing a purchaser, have you carried out your own Due Diligence on the developer or have you requested their Solicitor provides you with their due diligence? Are you satisfied on behalf of your client that the development is not risky and what advice has been provided to the client?
8. Have you seen or requested the marketing of any developments and are you satisfied that the investors have been found through ‘normal’ circumstances particularly where borrowing is involved?
9. Is any person in the firm, or the firm itself or subsidiary or part owned company, involved in any other way other than in a legal capacity on any developments, whether individually or as a corporate body?
10. When acting for a purchase or investor, how are the payments by the client phased, what information is to be provided and do the stages seem logical?
11. What checks are to be applied to confirm the deposit should be released to confirm the project milestones are being met and justify the release of the property. What is your role in this?
12. Are these deposits held in secure escrow accounts and if not why?
13. When is the total developments expected completion date and what update do you or your client receive and what happens if you do not receive these updates?
Considerations for Ongoing Risk Assessment
Risk Assessments should not just occur at the commencement of a case and there is a requirement on obligation to continue risk assessments throughout the duration of a matter. This is particularly the case for property developments and off plan purchases, as the matter may take some time to complete and the longer the property takes to build, the more risks your client may incur.
Some of the issues to consider as part of an ongoing risk assessment are: -
1. Have there been any issues with completion of any phase of the development and what action has been taken or required to minimise risk?
2. Have you assessed each phase of the development and that it is in line with the proposals and if not, what action are you required to take or advice you need to provide to your client?
3. Has the client raised any concerns about the developer or the build?
4. Is the developer or solicitor responding to your enquiries in a timely fashion or are you seeing inappropriate or unnecessary delays in responses or provision of reasonably requested information?
5. Have any issues raised that cause your concern about the stability of the developer or the completion of the scheme? When did you last perform a financial check on the developer?
6. For schemes that run over 12 months, have you updated the financial information on the developer or assessed progress of the scheme against plan?
7. Have you provided any undertakings, that are nonstandard, for this development and how have they been recorded and monitored?
The handling and managing of property development investments and off plan purchases do present higher risks and due to their nature, can involve multiple purchases or sales which increases the value of the risk.
Implementing a process for controlling risk will provide and evidence to your insurer that you are aware of the risk and that you are actively managing those risks to avoid potential errors or omissions that could lead to a negligence claim.
At The Strategic Partner, we work with law firms to review, assess, implement and manage risk and issues associated with risk, compliance and regulation.
To discuss our services or to hear more about our work with law firms and insurers, you can call us on 02039119710, email us firstname.lastname@example.org or visit our website and make an online enquiry https://www.thestrategicpartner.co.uk/Contact-Us