Buyers and bankrupts

A recent decision of His Honour Judge David Cooke in the Chancery Division, Kandola v Mirza Solicitors (2015) provides useful guidance for solicitors advising the purchasers of land about deposits held as agents for the vendor. It also contains helpful observations on solicitors’ duties generally in a transactional context. The case was handled by Claire Roake of our London insurance team.

The facts

The claimant, Mr Kandola, was a successful businessman who owned a number of care homes and, at different times, some 20 buy-to-let residential properties. In 2010 he instructed the defendant solicitors on the purchase of development property for £425,000. The seller, Mr Siddiqui, agreed to accept a deposit of 5 per cent (£21,250). However, Mr Siddiqui was in business with Mr Kandola’s nephew and needed a short term loan for another unconnected property transaction. After negotiations in which the defendants were not involved, Mr Kandola agreed to pay a deposit of £96,000 (roughly 22.6 per cent) which was to be paid to Mr Siddiqui’s solicitors as agents for the vendor or seller. That meant Mr Siddiqui could use the deposit as he wished. He did so and the money left the hands of Mr Siddiqui’s solicitors.

At a meeting on 9 June 2010, Mr Kandola explained these arrangements to the defendants who advised against payment of the deposit on this basis for two reasons:

• The property was subject to a number of charges and the amount secured by them was unknown. There might not be enough equity to discharge the charges at completion and allow Mr Kandola to obtain good title to the property.
• There was a risk that the deposit would be lost if Mr Siddiqui became bankrupt or was unable to complete.

The defendants obtained written confirmation from Mr Kandola that he was proceeding against their advice. Contracts were exchanged the following day, 10 June.

The defendants’ fears were justified. A bankruptcy petition had been presented against Mr Siddiqui on 1 June and was registered against the property the following day (it had not shown on the defendants’ searches). The charges against the property exceeded the sale price. Mr Kandola lost his deposit and sought to recover it from the defendants arguing that their advice should have been firmer and they ought to have carried out a bankruptcy search against Mr Siddiqui which would have revealed the true position.

The decision

HHJ Cooke concluded that the defendants were not in breach of duty. The Law Society’s conveyancing handbook advises solicitors to warn buyer clients of the dangers of paying a deposit as agent for the vendor. The defendants had done just that. There was little point in carrying out a bankruptcy search because Mr Siddiqui might have become bankrupt after exchange of contracts and that would not be revealed by a search carried out beforehand. Probably for that reason, the handbook does not advise solicitors to carry out such a search and the judge concluded that it is not ordinary conveyancing practice to do so. The defendants had discharged their duty and were not liable.

The judge went on to observe that the solicitor’s duty is “nuanced” and would be different if the client had given instructions to investigate the solvency of the seller or if the buyer was inexperienced or unsophisticated. Mr Kandola did not fit in either category.

In a particularly helpful passage, the judge observed that the solicitor’s duty is to explain matters so that they can be understood by the client but “the solicitor is not a guarantor of his client’s subjective understanding”. So if the explanation is adequate but the client fails to understand it, the solicitor has discharged his duty.

Implications

The decision is helpful on the narrow ground of the extent of a solicitor’s duties when acting for a buyer paying a deposit as agent for the vendor – essentially warning against the dangers – but going no further unless explicitly instructed to do so or if the client is naive and inexperienced.

However, the decision is helpful in a much broader context familiar in transactional cases where the solicitor provides an explanation of a risk but the client fails to understand it. Provided the explanation was adequate for someone with the client’s experience and understanding, the solicitor has discharged his duty even if the client fails to understand the explanation.