Should Bankruptcy Be Checked in Conveyancing?

Disputes in property and conveyancing do not often find their way into the Law Reports, but there are two areas of conveyancing practice — one recent (2015 in the High Court, Chancery Division) and the other not so recent (November 2013, which went to the Court of Appeal) — which apply to common aspects of pre-contract searches and enquiries and which are therefore worth looking at. I’ll deal with the former in this article and the latter next month.

The first is the case of Karmjeet Singh Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch). The claim was in negligence against the defendant solicitors who, Mr. Kandola claimed, had wrongly advised him or failed to advise him regarding the financial stability of the seller of the property which he was in the process of purchasing. Briefly, the facts were these: The claimant was an experienced property “investor” and had instructed the defendants in some 23 previous property transactions. The relevant transaction was in respect of the purchase of three adjoining building plots for the total sum of £420,000. The claimant knew the seller of the property in question (who was also in the property investment/development business and was in partnership with his nephew), and a lot of things went on behind the scenes, which resulted in the claimant agreeing to pay a vastly increased deposit of £96,800 on exchange of contract to the seller’s solicitors. (The solicitors’ practice was subsequently investigated by the SRA, and the partners struck off — but this had nothing particularly to do with this particular transaction. It just gives you a “flavour” of the whole case.) The deposit was to be held by the solicitors as agents for the seller. (For those of you who are studying the Legal Secretaries Diploma course, do you remember the difference between a stakeholder and an agent for the seller? If not, look it up in your course notes.)

Contracts were exchanged by telephone on 10 June with an agreed completion date of 10 August. As this was an unusually long period, the claimants decided to register the contract with the Land Registry by way of a Notice in the Charges Register of the title. (If the title had been unregistered it would, of course, have been done by registering a Class (iv) Land Charge against the seller at the Land Charges Registry.) The claimants made a priority search at the Land Registry to safeguard this before the actual Notice could be filed. On 25 June they received the search back from the Land Registry which revealed that a Bankruptcy Petition had been presented against the seller of the property on 1 June. From then onwards, of course, it all went pear-shaped: The transaction collapsed and the claimant lost the £96,800 he had paid as a deposit. What was he to do? Obviously, sue his solicitors in negligence! The pessimistic side of me has always said, “Never trust a client,” leaning on the old Yorkshire saying, “There’s nowt so queer as folk” (the English translation being “There is nothing so difficult, strange, shifty and diverse as people”).

Well, luckily for the defendants, all was not lost. His Honour Judge David Cooke found in their favour, after a 12-page, 58-paragraph judgment. In para. 51, he stated, “It is not, in general, a solicitor’s duty (this would also be implied to mean “conveyancer’s duty”) to check on the credit status of his client’s counterpart (i.e. the “other party” in the conveyancing transaction) unless instructed to do so. There may be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that may affect a party’s ability to complete a transaction or give a good title. But this is not the same as a general duty to make checks about risks of future insolvency … [para. 53] [T]he position would be different if there was an established practice of obtaining particular types of information in the course of a particular type of transaction (such as the usual Local Authority and Bankruptcy searches against a purchaser for mortgage requirements) but there is no established procedure to make either of the suggested searches at the time of exchange of contracts.”

An interesting point in this respect is that, according to the defendants, no Land Registry search was made prior to exchange because it would have affected his priority regarding registration of the sale, and secondly (as their counsel submitted) it was not a recommendation in the Law Society’s Conveyancing Handbook to make either a Land Registry or a Land Charges search in bankruptcy prior to exchange. All that was necessary was for the solicitors to advise their client of any potential risk.

Now, those of you who are studying the Legal Secretaries Diploma course or our Single Subject course in Land Law and Conveyancing will remember that the former states, under “Bankruptcy Search”: “The purpose of this search is to ascertain whether either the seller or the buyer has a bankruptcy order made against him. If either of them has, then the sale may not be able to proceed.” The latter states: “If the purchaser is financing the purchase by means of a mortgage, the purchaser’s solicitor will also have to make a ‘Bankruptcy Only’ search at the Land Charges Department. This search is made against the purchaser on behalf of the mortgagee. It will let the mortgagee know whether there is a potential risk in advancing money to the mortgagor (i.e. the purchaser).”

Traditionally, this process is completed at this stage. Personally, I think it should also be done before contracts are exchanged. If the purchaser (or the vendor, for that matter) should be facing bankruptcy, then it is better to know this before contracts are exchanged! If the vendor is bankrupt, then the property is not his to sell — it vests in his trustee in bankruptcy, who would have to agree. If the purchaser is bankrupt, then where is the money coming from to buy the property? Any money he possesses vests in his trustee in bankruptcy, and no lender would advance him money because he is insolvent!

“This does not accord with Singh v Mirza!” I hear you cry. Well, no, it doesn’t, and who am I to disagree with His Honour Judge David Cooke, a Circuit Judge (County Court Judge). But I do, in any case!

Alright, the case was a complex one — but very interesting. Why not read the whole transcript? You can get it on, and it will do you good to have a read of a judgment. Some blogs harp on with the fact that the claimants discharged their duty owing to the fact that they advised their client upon the dangers of paying an inflated deposit and, particularly, in paying it to the seller’s solicitors as “agents for the seller”. That may be so, and it does fit it into the Court’s judgment. Had the judge limited his judgment to this, it might not have been so bad. But to leave it open to all conveyancing transactions, purely on the basis that it isn’t in the Law Society’s Conveyancing Handbook?

How easy it would have been if the defendants had made a Bankruptcy search against the seller of the property! He could have made an enquiry to the Land Charges Registry on Form K16 for £1 with a very quick turnaround, or indeed could have made one to the Insolvency Service Department online at entirely free of charge. It would not have affected the Land Registry search priority, the defendants would not have been sued, and the claimant would not have lost £96,800 plus enormous litigation costs.

Don’t tempt fate! Conveyancing is not a game. According to statistics, it is the most traumatic event in one’s life second only to divorce, so don’t make it even more traumatic. Learn your course notes thoroughly.