Chinks in the armour

It’s often said that buying a home is the most important purchase the majority of people will ever make, yet many solicitors often feel under pressure from clients to race to the bottom in terms of fees. Add to this the fact that, over the past four years, nearly a third of all professional negligence claims have emanated from residential conveyancing, with a further 10% from commercial conveyancing, and the cost and availability of indemnity insurance – there are some firms with more than 25% of fee income from property work that are finding some insurers are closed to them – and it is clear how crucial it is to address risk in real terms and be able to demonstrate this to your insurer.

In the case of unusual requests from the client, a record is vital and can be captured relatively easily with the use of case management software

The downward pressure on fees is leading firms to consider how they best deliver service to their clients, and the role paralegals and apprentices can play in that process. However, using low-cost resources on cases without a robust supervisory process could prove costly to a firm. Accordingly, when looking at the shape of your department, you should consider the relative levels of experience and ensure suitable supervision arrangements are in place. As we look to the major risks in terms of claims, the need for supervision and audit becomes a common theme, and your approach is something which your insurers will want to understand.

Residential property

In residential conveyancing, the main sources of claims are from failure to comply with the CML lenders’ handbook (thereafter called the handbook), late or missed registration of title, and fraud.

The CML lenders’ handbook

In terms of the handbook, claims are often based around obtaining consent to proceed from a lender and failure to flag changes to the transaction to the lender. Many of these risks can be mitigated by effective supervision. Using a CML reporting checklist can be an effective risk management tool. However, care must be taken in adopting a rigid checklist, because each lender will have slightly different requirements. Consultation of the specific lender’s requirements in the handbook is recommended. Given the differing requirements of the lenders and the frequency with which they can change, regular and targeted training should be provided. Regular audits of a sample of pre-completion and closed files will help to identify potential breaches of the handbook, and hopefully will lead to them being rectified before a loss arises.  

Late or missed registration of title

Another major cause of claims is the failure to register title in a timely manner, or when the application is returned from Land Registry, failure to address the outstanding issues and resubmit the application. These issues can be picked up by an audit of post-completion files and reminders regarding completion of registration, which are escalated to a supervisor if they become overdue.

Fraud

Fraud is also a significant source of claims. This includes identity fraud, where someone impersonates the client, mortgage fraud, or loss through sending sale proceeds to a fake law firm.

Robust client ID procedures can help avoid the risk of identity fraud. An approach of seeing documentation combined with electronic verification which includes some fraud detection checks – for example, use of the HALO database of deceased people – and the Royal Mail redirect file will help to mitigate the risk of identity fraud.

Understanding the source of funds used in the transaction can help to identify mortgage fraud, particularly if a client is misrepresenting their income or source of deposit to the lender.

The SRA has published guidance in its Risk Outlook about protecting yourself from bogus law firms, advising that you make checks on the firm, including consulting the Law Society website and possibly making contact with that firm or a firm you know in the area, to validate their existence.

Other issues

As a result of the fixed-fee nature of most residential conveyancing, it is unsurprising that many files lack detailed notes. However, in the case of unusual requests from the client, a record is vital and can be captured relatively easily with the use of case management software. In addition, in high-value cases, consideration should be given to the extension of your usual destruction date period, which would enable the file to be available in the event of a claim arising.

Commcercial property

Commercial property transactions share some of the same risks as residential transactions, such as issues around registering title. In addition, many commercial transaction claims emanate from drafting errors or omissions, failure to reflect the negotiated position, and a variety of issues around break notices.

Drafting errors

Use of incorrect, out-of-date or inappropriate precedents is a risk factor in terms of drafting errors, so regular review of and training on precedents is essential. There can often be issues around incorrect conversion of formulae, for example, payment mechanisms and rent reviews, and simple mistakes like the incorrect party, property details and dates. Again, supervision and audit can manage the risk associated with these issues. While it can be difficult to build the same sort of checklist in commercial transactions as in residential matters, some sort of transaction aide memoire may be useful.

Reflecting the negotiated position

Claims also arise from failure to document the negotiated position correctly, so it is important file notes are kept and confirmation sought from the client as to negotiated changes.

Break notices

Other concerns centre around break notices, where the wrong date is identified, service of the notice is incorrect or late, or there are inaccuracies in the notice. To manage the risks here, a provision in your terms of engagement and your precedent report on lease should state you are not responsible for reminders to the client regarding dates that fall after the conclusion of the matter. In addition, service should be effected at the earliest opportunity and a receipt sought.

Given the value of property transactions, the risk of doing this type of work will always remain high. However, proper supervision and audit, as well as regular training and the use of checklists – even for the most experienced practitioners – will ensure that firms are in the best position to identify the risks and minimise them.