For the high jump

The potential size of claims in commercial property-related work is such that particular care needs to be taken in all aspects of handling the work

16th April 2007 | Alistair Sim

The potential for substantial claims to arise in commercial property work, whether purchase/sale, leasing or security work, justifies restating the importance of risk management controls from the initial vetting of the client/transaction through to file closure and sign-off.

Vetting/acceptance criteria. Consider carefully whether the practice has the expertise and capacity to undertake the work, and establish that there is no conflict of interest. Consider whether the practice has adequate professional indemnity insurance for the level of exposure involved.

Terms of engagement. Ensure complete clarity as regards the scope of the work to be undertaken and matters which will not be the practice’s responsibility. It is vital that sufficient time is taken at the outset of matters to define exactly what work will be carried out by the practice and what the client requires to do to assist in the achievement of their own objectives.

Delegation and supervision. Where inexperienced colleagues are involved in complex or high value transactions, it is clearly particularly important to ensure that they are adequately supervised. Delegation should be of work, not responsibility.

Workloads. In order to avoid fee earners becoming overburdened, considered allocation of work and monitoring of workloads is appropriate.

Control of documentation. Avoid the use of out-of-date or otherwise inappropriate style/proforma documentation. Rigorous document control is even more important where word processing applications allow the creation of multiple versions of large, similar-looking documents.

Communication. In transactions involving negotiation/drafting of complex documentation, there is increased risk of misunderstandings between solicitor and client, and particular care therefore needs to be taken to ensure that both are clear as regards advice imparted and instructions received. Regardless of the speed at which commercial property transactions can progress (particularly in the run-up to completion), and the frequency with which deals adapt and develop as a result of external factors, it remains vitally important for solicitors to record advice given/instructions received.

Critical dates. Effective diarying arrangements include setting up a series of reminders in advance of final deadlines.

Options-related claims

The experience of commercial property-related claims has included claims arising out of options relating to development land. The case studies illustrate the sort of misunderstanding and alleged errors/omissions that can arise. Typically the result is that the clients concerned find that their option is ineffective or fails to operate in the way they intended.

Although there is very often scope for argument about where responsibility for this unintended outcome lies, to minimise the risk of such unintended outcomes and reduce the scope for the solicitors having to defend such claims, particular care is called for in addressing the following risk management issues:

Engagement criteria – as well as considering properly whether the practice has the necessary expertise and capacity to undertake the work, the size of the potential claim should anything go wrong means that the most careful consideration should also be given to the adequacy of the practice’s professional indemnity insurance relative to the exposure to significant claims.

The current Master Policy cover is £1.5 million per claim. That may appear to be more than adequate in the context of an instruction to revise a draft option agreement for which there is an up-front option payment of £75,000. However what if planning permission is granted and the developers want to proceed? How much is at stake then? How much is then riding on the effectiveness of the option agreement?

Terms of engagement – in defining the scope of work to be undertaken and matters which will not be the practice’s responsibility, be clear about whose responsibility it will be to diarise and flag up the critical date for taking action to exercise the option. Will this be the firm’s responsibility or not? If not, consider putting this beyond doubt in a letter concluding the initial engagement and, in doing so, reminding the client of the critical date(s) and the consequences of missing the date(s). Make the point to the client that the firm will have no responsibility for diarising/flagging the critical date(s). If you adopt this approach, be sure your actings don’t then contradict your clearly documented allocation of responsibility.

Critical dates – careful attention needs to be given to getting critical dates correct in signing off with the client and, of course, in the event the firm assumes responsibility for diarising/flagging the critical date. In these matters, there is no provision for petitioning the court to exercise discretion to excuse a missed critical date. This is a “sudden death” situation. If the critical date is missed then the option is almost always going to be at an end.

Acting upon the client’s instructions – if instructed by clients in relation to the exercise of their option, the sums involved and therefore the level of the firm’s potential exposure may well justify a “belt and braces” approach to ensuring that the client’s instructions are implemented timeously. If you put in writing to the client the last date by which you will be willing to accept instructions, you reduce the risk of the client instructing you too close to the deadline. Considering the risks, it may be appropriate to address with the client whether instructions by email are acceptable and, if so, to remind the client that email cannot necessarily be relied on and that the client ought to make a point of checking that time-critical instructions have been received.

The checklist on the right will provide one means of reviewing the effectiveness of the controls you have in place to address the risks associated with transactions involving options for the purchase/sale of development land. Marsh may be able to provide guidance or training to address any identified gaps.

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) Practice at Marsh, the world’s number one risk specialist. To contact Alistair, email: alistair.j.sim@marsh.com. The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues. Marsh Ltd is authorised and regulated by the Financial Services Authority.

CASE STUDY: 1

The firm advised a local builder in relation to an option for ground on which the builder hoped to get permission to build a small number of high spec detached houses.

In the face of strong local objections, planning permission was ultimately granted and the builder instructed the firm to “do the necessary” to exercise the option.

When the builder was advised by the firm that the date for exercising the option had passed and the option had already expired, his immediate response was to hold the firm responsible and to demand compensation for the substantial profits he would have earned from developing the site.

How would you ensure you had a complete answer and defence to such a claim?

CASE STUDY: 2

The firm acted for Andco Ltd in taking a lease of premises belonging to Landco Ltd. It was agreed between the parties that Andco would have an option to purchase the property during a defined period at a fixed price of £500,000. This option agreement was fully documented in a back letter.

Shortly after the commencement of Andco’s tenancy, Landco sold the property to Zedco.

Shortly after that, Andco intimated that they wished to exercise the option to purchase the property. Unfortunately for Andco, (a) Zedco wasn’t bound by the terms of the option agreement, and (b) Landco had gone into liquidation by the time Andco got round to going after Landco for breach of the agreement.

Andco’s only available remedy was against their solicitors.

How would you avoid exposing yourselves to the risk of this sort of claim?

CASE STUDY: 3

An experienced assistant had been handling an option transaction for a developer client. Following instructions from the client, the supervising partner had asked the assistant to prepare a formal letter exercising the option and had been assured that this was being attended to. In actual fact, the deadline for exercising the option passed without the formal letter ever being prepared and the client had to negotiate to purchase the site without the benefit of the option.

Could this situation have arisen in your firm? How could you be confident of avoiding this sort of situation?

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