Beware of buyer-funded developments

Beware of buyer-funded developments

There has been a recent uptake in activity in the courts illustrating difficulties that solicitors may face when involved in buyer-funded developments. James Robins and Ivan Roots of Womble Bond Dickinson, who are specialists in defending professional negligence claims, look at some recent activity in the courts and advise solicitors to proceed with caution. 

Buyer-funded developments 

Buyer-funded developments, which rely on individual buyers’ purchase deposits rather than commercial lenders have gained popularity. However, they come with significant risks: 

• Deposit Risk: buyers pay substantial upfront deposits to finance the project. If the developer faces financial difficulties, these deposits may be lost.

• Construction delays: construction often begins before full funding is secured. Slow sales can lead to project delays. 

• Failed projects: some buyer-funded developments fail due to unforeseen costs, planning permission issues or fraud. 

The Solicitor’s Regulation Authority (SRA)

The SRA have provided a warning relating to buyer-funded developments on their website. They have observed risky practices, including using law firms for credibility without legal work being done, transferring funds through law firms’ client accounts unrelated to legal matters and generating unnecessary legal fees. 

The SRA has made it clear that they expect law firms and solicitors to act with integrity and protect consumers by analysing the risks of any investment scheme in which they are involved. The obligation rests on the law firm to carry out all necessary checks and you should not rely on the word of the seller or other promoters of a scheme. 

Recent activity 

Recent court activity highlights some challenges as a result of buyer-funded developments: 

Class actions: in Ryan Morris & 131 others v Williams & Co [2024] EWCA Civ 376, the Court of Appeal allowed 134 claimants to pursue a law firm collectively. The judge did not accept that in this case it was inconvenient or unfair for the claimants’ claims to be grouped together in one form. The Court found significant common issues in these cases, including the scope of the solicitors’ duties, questions of breach, what losses were recoverable in principle, and whether the investments were unlawful as collective investment schemes. 

Consolidation concerns: in Niprose Investments Ltd & 34 others v Vincent Solicitors Ltd [2024] EWHC 801 (Ch), a High Court judge cautioned against consolidating claims against different conveyancers, citing potential abuse of court rules regarding court fees. Here are the key points:

• Background: The case involved ninety-four claimants who collectively sued ten different conveyancing firms. The claimants sought damages for losses resulting from alleged breaches of duty related to a failed property development.

• Court Fees: A single court fee of £10,000 was paid for the larger claim, which exceeded £6 million. However, the judge expressed concern that joining claims against different conveyancers who used varying forms of documentation might stretch the limits of convenience.

• Losses: The claimants had lost substantial up-front payments due to the development’s failure. 

• Allegations: The claimants alleged that their respective conveyancers failed to properly advise them on the risks of investing in the development. They sought compensation for their losses.

On a preliminary basis, the claimants have raised valid concerns against the law firms. They argue that the firms had a duty to provide proper advice regarding the deposit-holding mechanism, cautioning against purchase contracts, and ensuring a clear understanding of legal advice. The judge has allowed the claimants to amend their pleadings after adjourning a strike-out application. 

Challenges on causation: a High Court judge, in Afan Valley Ltd (in Administration) and Ors v Lupton Fawcett & 2 others [2024] EWHC 909 (KB), dismissed a £68 million negligence claim against a Yorkshire law firm. The claimants, forty-three companies in liquidation, described themselves as “vehicles for, and thereby the victims of a Ponzi fraud”. Although there is no suggestion that the law firm was complicit in the fraud, the claimants alleged that proper advice would have prevented them from promoting investment schemes, accepting funds, and incurring substantial losses. However, the judge held that the claimants failed to prove any loss due to the firm’s alleged negligence. 

Conclusion 

While we await the outcome of some of the above proceedings, the dangers associated with such schemes are significant. The recent proceedings mentioned above should remind law firms to be wary and to ensure that they are advising their clients carefully. 

Law firms involved in these schemes may find themselves in turbulent times, with increased insurance premiums and have their insurers reconsidering their excess structures. Solicitors handling such matters should remain vigilant and proceed with caution. 

James Robins

Partner Insurance

Ivan Roots

Associate Professional Risks