CMA warns of risk to leasehold buyers' solicitors' duties
Residential solicitors have been warned by the competition watchdog that they risk compromising their professional duty when acting for leasehold buyers.
The warning is buried in a report just published by the Competition and Market Authority (CMA) following a two-year investigation into the leasehold housing sector.
The CMA identified significant evidence of potential mis-selling and unfair contract terms and found that buyers were “being taken advantage of”.
The regulator said that housing developers “often recommend their panel solicitors to purchasers on the basis of the panellist’s familiarity with the developer’s sales processes and the legal aspects of the development in question”, a practice which it noted has attracted criticism.
Though allowed under the solicitors’ professional conduct rules, solicitors are under a regulatory duty to act in the best interests of their client, with independence, honesty and integrity.
The CMA warned: “There is a risk that this may be compromised if solicitors are concerned to avoid losing the recommendation that comes from the developer.
“This is a matter of concern and goes together with concerns about the effect of some inducements offered to purchasers to move to speedy exchange of contracts.”
However, conveyancing sole practitioner Sarah Dwight said that in her many years in practice, she has come to understand that buying a property is not always a commercial decision for the client – but an emotional one.
Dwight, who sits on the Law Society’s conveyancing and land law committee, added: “It is the largest purchase an individual will make; and clients do not have a lot of actual knowledge about the process.
“Therefore, they rely on those they see as being experienced in the process.”
She added: “This CMA statement is made, knowing all too well that the client is then emotionally involved in the process and has mentally moved into their new home and is holding a house-warming party.”
Even with a solicitor acting in the client’s best interests, she said there is the pressure from the site office to achieve an early exchange of contracts. There is also the client’s emotional investment.
She noted that the CMA investigation found that many buyers are not told of all of the circumstances in which they will find themselves.
But she said: “In my experience, clients have been told that matters will be explained to them later in the transaction by the solicitor.”
Dwight led the working group that re-wrote the latest edition of the Conveyancing Quality Scheme Protocol.
“When the Protocol was rewritten during the course of last year, one of the seventeen general obligations we included was that of managing expectations of the clients”, she said.
Step 8 of the Protocol has been amended to include, as Dwight explains, “an entirely new section requiring conveyancing solicitors to highlight the importance of explaining the implications of leasehold to the clients”.
She added: “It is important to remember that clients do not always know the difference between freehold and leasehold; and there is now a specific requirement to ensure that the client is aware of the difference between freehold and leasehold ownership.”
She warned against assuming that the agent or site office in the case of the new build market has made this clear to the client, because “it is apparent from the CMA investigation that many buyers have complained that they were not given sufficient information at the start of a transaction so as to be able to make an informed decision as to whether they wanted to proceed”.
But Dwight added: “It is reassuring that the investigation has recommended to the government that there will be more information available to clients earlier in the process.
“This was a matter which we wanted to address in the Protocol.”
The CMA is to take enforcement action against residential developers responsible for serious leasehold mis-selling.