Minimising risks of council house purchases

In last month’s issue, reference was made to claims arising out of council house purchases.  Claims have arisen in particular from cases where the solicitor has acted for both the tenant/purchaser and a family member providing financial assistance in connection with the purchase.

Case study one

The Society’s current “Ensuring Excellence Roadshow” 1999 series features a case study which is intended to identify the various risk issues and to prompt discussion of how best to manage the risks and minimise the scope for client dissatisfaction and claims.  The brief facts of the case study are:

Mrs Black consults you to explain that her mother-in-law Mrs White wants to buy her council house and Mrs Black is going to put up the funds.  What arrangements do you make?  There follows an excerpt from the Risk Management book “Ensuring Excellence, Even Better Practice in Practice”.

Risks to be considered

Many risk issues arise for the solicitor in this situation:

Can you act for both Mrs Black and Mrs White?  Should you act for both?  The Conflict of Interest Rules make it permissible to act for both but there are distinct risks if the best interests of both parties are to be represented.  Can you be certain that the best interests of both parties coincide entirely?

Whose instructions do you require?  Of course you require the instructions of all parties whom you are representing.  Clearly you cannot rely on instructions from Mrs Black alone.  You will require clear instructions from Mrs White to establish that she does indeed want to buy the house.  You will need to establish what else, in addition to acquiring the house, she wants to achieve for herself and/or her family.

Mrs White may regard the matter as simple and straightforward.  This presents a challenge.  You require to explain to her that there are certain complexities and that there are potential risks.  Quite apart from the events which could trigger clawback of discount, if Mrs Black is to have a security over the property, that might involve a risk of calling up of the security.  You need to be satisfied that Mrs White has properly understood the risks.  You certainly need to have a reliable record that the risks have been explained.

What about Mrs Black?  If you are representing her, you need to establish what security she expects for her investment and what else she expects out of the arrangement.  If she is expecting to inherit the house on her mother in law’s death, she needs to understand that she can have no guarantee of this.  Mrs White could of course change the terms of her will.  Changes in Mrs White’s circumstances could have a major impact - if, for instance, Mrs White requires to go into local authority care.

Case study two

The following excerpt from the Risk Management book “Ensuring Excellence, Even Better Practice In Practice” (p16) demonstrates how these issues arise:

Mrs Tennant decided to buy the council house in which she had lived for many years.  Her son and daughter-in-law encouraged her, saying that they could provide funds to meet the heavily discounted purchase price.  The daughter- in-law contacted the local solicitors who addressed most of the correspondence to her.  When the son and daughter-in- law fell out some years later, the daughter-in-law contended that the solicitors had been acting for her, and that her instructions were to procure a situation whereby she would become owner of the house.  She denied all knowledge of a Personal Bond by Mrs Tennant in her favour.  An action against the solicitor was eventually successfully defended despite the lack of a clear record of the instructions given.

Understandably, the families of a council house tenant often become involved in arrangements to purchase the house.  It is important for the solicitor to identify for whom he is acting and to record the precise arrangement, for example, whether the funds to enable the tenant to purchase are being provided by way of loan or gift or some other basis.  If the solicitor is also acting for the family member who is providing the funds, then it must be made clear to that family member that his rights are limited to repayment of the loan, if that be the arrangement.  Any informal understanding that the house will ultimately come to that family member can be no more than that.  The solicitor should always be aware of the power available to the council to require repayment of the discount in the event of a sale or disposal within the statutory three-year period.

Even where the transaction seems straightforward, confirmation of instructions by letter is always prudent and will minimise the risk of misunderstandings.  Even where permitted by the rules on conflict of interest, the risks which may be involved need to be carefully considered before processing to act for both the tenant and the family member who is providing the funds.

Risk Management points

In order to minimise the risks of claims, it may be prudent to devise a checklist of issues which need to be addressed.  Such a checklist should feature prominently consideration of conflict of interest.  Conflict can of course arise not just at the point of taking instructions but at any time during the course of the transaction.

Comprehensive file notes and explanatory/confirmatory letters will be essential in order that you are able to demonstrate convincingly that the risk issues were very fully explained and that the clients confirmed their acknowledgment and acceptance thereof.

Where there are complexities and potential conflicts, it will be well worth while asking a client to review the instructions you have received and the proposed structure of the arrangements before you proceed.

Alistair Sim is Associate Director at Sedgwick Professions.

The information/advice in this page is (a) advice on practical Risk Management and not on legal issues and (b) is necessarily of a generalised nature.  It is not specific to any practice or to any individual, nor should it be relied on as stating the correct legal position.