Development: Funding shortage led to collapse
A law firm was negligent in its advice on one aspect of the purchase of investment property but this was not the cause of the client’s loss when the development failed, the High Court has ruled.
His Honour Judge Hodge KC in Manchester said [1] he reached this conclusion “with regret”.
He described Ruth Nickoll, whose corporate vehicle was the claimant, as “an impressive, and patently honest, witness, and a thoroughly deserving individual, whose company has clearly suffered substantial loss as a result of the failure of this development, for which she is in no way responsible”.
He continued: “She deserves to succeed on this claim. Had it been open to me to do so, I would have wished to compensate the claimant for its loss. Sadly, the law constrains me to dismiss this claim.”
The claim arises out of Niprose Investment’s purchase of eight units in a partly buyer-funded, off-plan residential development scheme in Liverpool.
The development was never completed because the finance company that had been partly funding it fell into administration. Niprose lost its 50% up-front deposits of £300,000 in total.
Lancashire firm Vincents was its conveyancing solicitor, having been introduced by the developer through its marketing agent. Vincents’ fees were £3,796.
HHJ Hodge said it was clear to Vincents that in Mrs Nickoll “they were dealing with a highly intelligent client, who had a remarkable level of understanding, and an ability to pick up on points that would have eluded many lay clients”.
Her claim succeeded only on one point – Vincents’ failure to advise on the “unusual provisions” governing the release of the deposits contained within schedule 2 to the agreement for sale that she said gave the illusion of security but, in reality, offered no effective protection whatsoever.
Deposits were held by the developer’s solicitor, MSB Solicitors, as “stakeholder” for the seller. Schedule 2 provided that MSB “shall not be required to enquire into or verify the accuracy appropriateness or authenticity” of the documents submitted on behalf of the developer when any monies were requested.
Practically all of the deposits were transferred to the developer before it entered into insolvent liquidation. None were recoverable.
HHJ Hodge said the standard-form report on title did not alert buyers to this and was precisely the type of “spurious” condition to which the Solicitors Regulation Authority’s 2017 warning notice on investment schemes referred, and also involved the employment of a law firm “to give an impression of credibility or security”.
The judge said: “In my judgment the schedule 2 provisions gave rise to the sort of risk which might elude even an intelligent lay person, and which… a solicitor is required to draw to the attention of the client, and advise specifically about the nature of the risk and its dangers. This is something that Vincents did not do.”
He went on to hold that, had Mrs Nickoll appreciated the limitations of the deposit protection, she would probably have withdrawn from the purchases.
However, HHJ Hodge continued, the relevant risk against which Vincents failed to advise was that the deposits might be released otherwise than solely for the purposes permitted by schedule 2, namely the marketing, construction, and completion of the development.
But this was not why the money was lost.
“That duty was nothing to do with the risk of the developer’s insolvency, or the failure of the development for any reason otherwise than, or collateral to, the unauthorised and improper release of the deposits.
“Vincents had advised separately, and adequately, in relation to this latter range of risks; and these had been freely assumed by the claimant…
“The claimant has failed to establish that Vincents breached any duty that extends far enough to embrace the losses that the claimant has suffered as a result of the developer’s insolvency and the failure of the development.”
The judge found no other breaches. For example, Vincents’ duties did not extend to highlighting expressly any discrepancies between statements in the marketing materials about the security of deposits and the proposed sale agreement.
“Particularly given the level of fees being charged to prospective purchasers, this would be to impose an undue burden upon conveyancing solicitors.
“Rather, Vincents’ duty was to explain, fully and fairly, the relevant terms of the sale agreement. In discharging this duty, however, Vincents were, in my judgment, required to be alive to any false expectations that may have been created by inaccurate statements in the marketing materials.”
Mrs Nickoll also argued that Vincents failed to advise her not to proceed with the transaction but the judge said the SRA warning notice “created no new duty on the part of conveyancing solicitors; nor did it seek to do so”.
Here there was “nothing known to, or reasonably discoverable by, Vincents to suggest that this was a rash, or unwise, transaction”.
Vincents had “fully alerted” Mrs Nickoll that “buying off-plan properties presents a substantial risk that the developer/seller could fail between exchange and completion”, in which event “any monies you have paid, and will have released to the seller would be lost”.
HHJ Hodge added: “In my judgment there was nothing more that Vincents could have done to ensure that the claimant fully understood the risks of the transaction.”
Niprose was one of an original 94 claimants suing 10 separate law firms over the purchase of more than 100 apartments, for which they paid more than £6m in deposits. There were 35 claimants against Vincents who had bought 50 units.
Last year, HHJ Hodge ordered the trial of three of six potential lead claims but the other five had settled by the time of the hearing. Further claims remain outstanding, however.