Solicitors should not give undertakings lightly.
A firm of solicitors has been found liable to the purchasers of a property to pay off a Charge secured thereon notwithstanding the amount required to do so is twice the value of the property.
It is standard practice for solicitors acting for a vendor of a property to undertake to the purchaser that any Charges secured on the property will be discharged on completion. However, as this and other recent cases have shown, this practice can lead to substantial liabilities for solicitors where they fail to ensure that the proceeds of sale are sufficient to clear the Charges on the property.
In March 2007, Mr and Mrs Clark agreed to buy a property in Monmouthshire from Gainsborough Homes for £560,000. The property was part of a development site and there were 2 Charges secured on the site in favour of, firstly, National Westminster Bank and, secondly, a Mr Kenny who had helped finance the development.
Lucas Solicitors were acting for Gainsborough and they gave an undertaking in the usual form to the Clarks’ solicitors that they would redeem the Charges on completion. They mistakenly thought that there was some agreement or arrangement between the Bank and Mr Kenny whereby they would apportion the proceeds of sale between them and both agree to release their Charges. They did not contact Mr Kenny at all prior to the sale completing and did not appreciate that Gainsborough were in financial difficulty and the Bank was owed £2.7 million and Mr Kenny just over £1 million.
Fortunately for the Solicitors, the Bank agreed to discharge its Charge on receipt of the sum of £560,000 but Mr Kenny was, naturally, unwilling to do likewise as he was to receive nothing from the sale. The Clarks were, therefore, left in a position where they could not obtain title to the property as Mr Kenny’s Charge had priority.
The Solicitors accepted they were in breach of their undertaking but sought to avoid having to pay over £1 million to secure good title to a property worth half of this amount. They argued that compliance with the undertaking was impossible and they should only be held liable for damages (which could not exceed the value of the property).
The Clarks argued there was nothing unusual, unforeseeable or impossible in a solicitor having to pay large sums where it negligently gives an undertaking in relation to a large property development. They relied on various previous cases where the Courts have enforced undertakings unless performance was impossible. They said that the fact that the Solicitors had to pay out more than the property was worth was irrelevant and the Solicitors’ Code of Conduct made it clear that a solicitor was expected to comply with an undertaking even if the proceeds of sale were insufficient.
The Solicitors claimed it would be punitive to make them pay out twice the value of the property and would unduly enrich Mr Kenny who would have received nothing if the sale had not proceeded as the Bank would have foreclosed on the property.
The Judge relied on previous authorities to hold that, firstly, there was no impossibility involved in solicitors having to write out a cheque for more than they had ever received from the purchaser and, secondly, that a Bank or third party with a Charge could not be required to only accept a sum which would have been acceptable had they been properly approached at the time of the sale. He noted the lack of any investigation by the Solicitors prior to giving the undertaking and that they should have contemplated that substantial sums would be secured under both Charges.
Accordingly, the Judge was not prepared to exercise his discretion not to require compliance with the undertaking. Whilst he appreciated that this would have seriously adverse consequences for the Solicitors, he clearly thought they were the authors of their own misfortune and that the Clarks should not be limited to a claim for damages as this may have to force them to sell their home to limit their loss.
It may well be the case that some agreement can now be reached between the parties to avoid Mr Kenny receiving a windfall but the Solicitors and their insurers will have to pay a very substantial sum due to the fundamental failure of the Solicitors to check before giving any undertaking what had to be paid under the Charges to secure their discharge.