No duty on buyer’s solicitor to investigate a seller’s credit staus

Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch)

On exchange of contracts a deposit of £96,000 was paid.  This was approximately 22% of the purchase price when it was previously agreed to be 5%.  Mr Kandola wanted this deposit to be released to the seller on exchange rather than being held by the solicitor as stakeholder. The solicitors queried this as it was not normal practice. Mr Kandola explained he was doing this to help his nephew and his nephew’s business partner (the seller was the nephew’s business partner and the nephew had been acting as a middleman). The solicitors confirmed this was too risky as, if the seller went bankrupt and was unable to complete, especially as there were a number of charges on the register which needed to be dealt with prior to completion, it was possible / likely that the deposit would be lost.

Mr Kandola was satisfied he was taking a risk. The solicitor explained he would need a signed authority to proceed.  Mr Kandola signed a waiver prepared by the solicitors which stated:

‘I confirm that I have been advised by Mirza Solicitors not to exchange contracts in this matter without having sight of the replies to pre-contract enquiries. I have also been advised not to exchange contracts without having evidence of the total outstanding charges over the properties. I have also been advised against releasing the deposit of £96,000 to the seller. I am also aware that I risk losing my £96,000 deposit if the seller is unable to complete the sale…’

The seller did not complete and the deposit was lost. The seller was then made bankrupt and the solicitors who acted for him disappeared.

Mr Kandola’s central complaint was that he should have received better advice about the risks involved, in which case he would not have proceeded with the transaction on those terms. The solicitors’ case was that Mr Kandola was fully and properly advised throughout, including specific advice—which he acknowledged in writing—not to exchange contracts on that basis. However, he elected not to follow that advice.

Mr Kandola accepted that the solicitors had given the advice but argued that the advice was not sufficient. It was not clear enough, and in the circumstances a solicitor should have taken additional steps to evaluate the extent of the risk the client was running by agreeing to release the deposit to the seller. Mr Kandola argued that having advised of the risk of insolvency, it was the solicitors’ duty to take steps to explore the extent of that risk, by making searches that would have revealed the existence of the bankruptcy petition. It was accepted that if they had made either a bankruptcy search or a Land Registry priority search prior to exchange the petition would have been revealed.

The court confirmed that is was not, in general, a solicitor’s duty to check on the credit status of a seller unless instructed to do so. This was because:

1. the decision whom to trust in business was a commercial decision for the client to take and not the solicitor
2. just because a solicitor (or other professional) could take a particular step did not mean that it was his duty to do so. His duty was always defined by his retainer.

If he advised his client of a risk, it was a matter for the client to decide whether he wished to take that risk, or to obtain further information or security before doing so.

The solicitor was not, in general, obliged to seek out such further information unless instructed to do so

There was no established procedure to make either of the suggested searches at the time of exchange of contracts.

The court confirmed that it was clear from the advice and waiver that Mr Kandola was aware that the deposit would be released to the seller, that if the transaction did not complete he would be at risk if the seller failed to repay it.

This highlights the importance for clients to heed the advice of their solicitors and, to provide instructions to make further enquiries / carry out further investigations where there is a significant risk in proceeding with a transaction. 

In this case, it was clear that Mr Kandola was fully advised that there was a risk in proceeding and that his solicitor considered it inadvisable to take the risk.  He chose to do so in any event and, in those circumstances, the solicitor was found not to have been negligent.