Lawyers Covered - October 2021

Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.

Solicitors need clear instructions
Escalate Law Ltd & Bermans (2012) Ltd v Mr & Mrs Kennedy [2021]
 
This case looked at the circumstances in which a solicitor, Bermans (2012) Ltd, and funder, Escalate Law, could terminate a retainer and recover fees for work carried out under a CFA.

Mr and Mrs Kennedy bought a plot of land in the leafy green area of Tofts Hill from the Leicester Diocesan Board of Finance (the Diocese) in June 2013. As part of the deal, the Diocese required an overage agreement under which an additional payment was due if the land was developed or sold undeveloped. The Kennedys instructed a firm of solicitors, Peter Marsh & Co (the Solicitors), in relation to the purchase including the overage agreement.

Four years after acquiring the plot, the Kennedys obtained planning permission to build a house, under which they had to make "a material start" within three years. Starting the development would then trigger payment under the overage agreement.

The Kennedys became concerned about the effect of the overage agreement and the claimants were subsequently instructed, under a CFA, to pursue a professional negligence claim against the Solicitors. The claimants negotiated a variation in respect of one of the issues and agreed to pay the Diocese £70,000.

The claimants sought to terminate the retainer and recover their fees because the Kennedys failed to provide clear instructions, misled them and instructed them to act in an inappropriate or unreasonable way.

Failing to provide clear instructions

The CFA required the Kennedys to give "clear instructions which allow us to do our work properly" and to not deliberately mislead. On 15 April 2020, Mr Kennedy confirmed to the claimants in an email that the planning condition had been met, constituting a material start (which would trigger the £70,000 payment). It was clear from the email Mr Kennedy did not want to make payment, "it is not in our interests to trigger any obligations with the Diocese". Two days later, Mr Kennedy emailed the claimants to say he had not made a material start so that the payment clause was not triggered.

The Judge concluded that these were not clear instructions and therefore the Kennedys were in breach of their CFA obligations.

The claimants also raised an issue in respect of the Kennedys' ability to pay the £70,000 with the Judge concluding that Mr Kennedy's instructions were less than clear, "if they were not positively misleading".

Misleading the claimants on the development size

In respect of the second obligation to not deliberately mislead, the Judge concluded that the Kennedys' position on "maxing out" the site development, to try to build at least five houses, was a further breach of the CFA. The Kennedys never had the financial means to build such a development.

Asking the claimants to work in an inappropriate or unreasonable way

Mr Kennedy instructed the claimants in April 2020 to finalise the variation agreement with the Diocese in full knowledge he did not have the necessary funding in place nor a means to obtain it. The Judge found these were improper and unreasonable instructions and amounted to a breach of the CFA.

Scope of the CFA

The Judge rejected the Kennedys' argument that the work involved in resolving the dispute with the Diocese was outside of the ambit of the CFA. Instead, he confirmed that the "scope of a claim may often change over time while remaining identifiably the same claim". That meant the claimants were entitled to terminate for the breaches identified and bill for their fees, disbursements and interest. The Judge did not accept a counterclaim of £80,000 (which the Kennedys claimed they should have been advised to accept at mediation), as Mr Kennedy would not have accepted it in any event, the Judge concluding that he did not agree the claimants' work was worthless.

Comment

The short judgment, finding for the claimants, provides a number of helpful insights, in particular for firms who do a lot of CFA work. The first claimant, Escalate Law Limited, is an ABS owned by the second claimant, Bermans (2012) Limited. The first claimant's business model is to attempt settlement within three months and refer to the second claimant to pursue litigation if unable to settle.

Given the type of claim, the recommendation was to pursue litigation from the outset and cap the success fee at 30%. The Kennedys attempted, but failed, to show this amounted to an unenforceable DBA. The Judge concluded that it was simply a reinforcement of the original CFA. He added that, if he had to, he would have removed the offending provision, leaving the Kennedys liable to pay the base charges and disbursements.

By contrast to the Kennedys, the claimants had kept clear records of the communications which formed their evidence at trial. This contradicted the Kennedys' evidence and Mr Kennedy was found to be an unreliable witness due to uncorroborated evidence, his evasive manner and seemingly calculated responses.
 
Exaggeration not fundamentally dishonest in personal injury claim

In Marwan Elgamal v Westminster City Council [2021] EWCH 2510, the Defendant appealed the Court's award to the Claimant for personal injury plus costs on indemnity basis, after the Defendant had rejected the Claimant's Part 36 offer.

The appeal was advanced on the basis that the Judge had found the Claimant to have exaggerated the impact of his injury and therefore should have found he was fundamentally dishonest. Consequently, section 57 of the Criminal Justice and Courts Act 2015 should have applied, and the claim should have been automatically dismissed, unless the Court is satisfied the Claimant would suffer substantial injustice.

The Claimant was a trainee stuntman, having previously competed in the World Championship for free-running, who suffered an injury in the Defendant's gym. Liability was agreed at 65% but quantum was disputed. During the claim, the Defendant adduced video surveillance of the Claimant to refute the alleged ongoing effects of his injury, namely his limp.

The underlying decision determined there was no doubt the Claimant's career as a stuntman was over as a result of the injury suffered. However, in respect of the injury and its ongoing effects it stated "the claimant clearly in his evidence believes that he is disabled to a greater extent than I have found. He gave clear evidence that he was making adjustments to get into the car that were not visible to me. From his perspective he was not lying. However objectively he was exaggerating and so as a fact was lying". The Court however did not agree that this represented fundamental dishonesty and made the award for damages.

In assessing whether to overturn that decision, the appeal court deemed it inappropriate to reject the view that had been formed by the Judge on the Claimant's subjective belief as the Judge had heard the Claimant's evidence over two days. Whilst the Claimant had been exaggerating, this was held not to have had an impact (either actual or potential) on the claims that he had advanced and therefore did not go to the root of the claim. This meant any dishonesty could not be fundamental.

On the issue of costs, the appeal Court held the Judge was entitled to use his discretion in making the award he did and found "the Claimant had made a reasonable Part 36 offer, had established his case at trial and had defeated the 'fundamental dishonesty' argument'. There was therefore no basis for overturning the decision.

For an argument on fundamental dishonesty, the dishonesty must go to the root of the claim and this must be considered on the specific facts of the case. Here, it was important that the Claimant's own views were based on his own abilities prior to the injury in comparison to where the injury had left him.

Homebuilder promises to scrap doubling ground rents
 
The homebuilder Countryside Properties has announced that it is removing all doubling ground rent clauses from its leases. For affected leaseholders, the ground rent will now be fixed at the amount charged when they first bought their home. The move follows enforcement action taken by the Competition and Markets Authority (CMA) against four housing developers, including Countryside. The CMA wrote to Countryside and Taylor Wimpey in March 2021 requiring them to remove ground rent terms that double every 10 or 15 years. The CMA's view is that such clauses breach consumer protection law. Countryside has now given a voluntary commitment to remove doubling ground rent terms. Taylor Wimpey is yet to respond.

Meanwhile, the government has prepared draft legislation that would effectively ban such clauses in new leases (although the legislation would not affect existing leases). The government has also promised further reform to make it easier and cheaper for leaseholders to obtain lease extensions (which has the effect of replacing the ground rent terms with a nominal ground rent). Further details of these reforms are awaited.

There has been a sharp rise in recent years of claims against solicitors by leasehold purchasers, who claim they were not aware of the effect of escalating ground rent clauses in their leases. Regular readers of this newsletter will know that we are tracking these developments closely.

No kitchen, No MDR! First Tier Tribunal denies SDLT MDR for annexes that do not have kitchens
 
Multiple Dwelling Relief (MDR) is a tax relief that can be applied to SDLT payable on a purchase of at least two properties. It means SDLT is applied to the average value rather than the total purchase price and can therefore result in a significant tax saving. Over recent years, solicitors have seen many claims brought against them by purchasers of properties, alleging they should have identified that MDR applied to their transaction and seeking recovery for the excess SDLT they paid as a result. Amendments to SDLT forms are time limited and often it is too late for a purchaser to apply for an amendment to the form following the transaction.

The First Tier Tribunal has, this month, refused three appeals to HMRC for MDR on the basis that none of the 'annexes' had food preparation facilities. Following Fiander and Brower v HMRC [2021 ukut 156, (the leading authority that sets out the test for determining the availability of the relief), the annexes were not deemed separate dwellings and so the claim for the relief failed.

The cases are: Morse and another v HMRC [2021] UKFTT 292 TC; Lovell v HMRC [2021] UKFTT 291 (TC) and George and another v HMRC [2021] UKFTT 305.

These decisions will no doubt be welcome guidance for determining whether MDR is applicable.

We will shortly be publishing further in-depth analysis on this issue so please watch our professional risks blog for our next update.

High Court approves first distribution in largest ever law firm intervention in Hong Kong
 
As reported in the March 2021 edition of this newsletter, the Law Society of Hong Kong undertook the largest ever intervention in the practice of a law firm in December 2020. The intervention amounts to a closure of the firm's practice. Recently, the High Court approved the Law Society's application to make a first distribution of monies to clients of the former firm.

The intervention and distribution are remarkable for several reasons. For example:

• The former firm had one of the largest conveyancing practices in Hong Kong – a city in which commercial and residential property dominates;
• as a result of the intervention the monies in the former firm's client accounts became vested in the Council of the Law Society as trustee, to be held for distribution to persons beneficially entitled to the monies. According to the court's most recent judgment dated 7 July 2021, some HK$379 million became available for distribution to clients of the former firm – which is slightly more than the aggregate of total claims accepted or partially accepted at the time of the Law Society's application to the court on 18 June 2021;
• the Law Society's application and the judgment were dealt with in record time for an intervention, with the court's fully reasoned judgment being handed down on the same day as the hearing (7 July 2021). This confirms the importance of the intervention to different stakeholders and explains why the court ordered that the client monies held by the Law Society be available for distribution within four weeks – specifically, by 4 August 2021; and
• the court has allowed a further twelve months for "late claims" to be made – therefore, as things stand, it is unclear whether there will be enough money to satisfy all legitimate claims.

Disclaimer: The information in this publication is for guidance purposes only and does not constitute legal advice. We attempt to ensure that the content is current as at the date of publication, but we do not guarantee that it remains up to date. You should seek legal or other professional advice before acting or relying on any of the content