Buyer-funded development: buyers’ claim against developer’s solicitors denied

Since the 2008 financial crisis, developers have found it increasingly difficult to secure project finance from commercial lenders, meaning they had to turn to alternative finance methods. Once such method is buyer-funded developments.  Three words that strike fear into the heart of all solicitors PII insurers…

A buyer-funded development is a property development which is funded by the deposit payments from individual buyers, as opposed to a commercial lender. The properties are sold to buyers off-plan, and buyers put down a substantial deposit which is used to fund the project in its entirety. This can include construction costs, marketing costs and sales commissions. Buyers, who are often overseas investors, are attracted to these schemes with the promise of high returns in rental income after completion.

Unfortunately, many buyer-funded development schemes have failed to complete, either through fraud (i.e. the entire scheme was a scam) or through unforeseen costs exceeding the funds available and building grinding to an irretrievable halt.  In both scenarios, buyers are left having paid considerable sums but with no discernible product to show for it.  Claims against the solicitors that were involved in operating these schemes have become prominent in recent years and, in the vast majority of cases, solicitors have been found liable to the investors.  Insurers have paid out many tens of millions of pounds to resolve huge swathes of claims, to the point where most insurers now refuse to insure any firm with any sort of track record in these kinds of developments.

However, enter the case of Various North Point Pall Mall Purchasers v 174 Law Solicitors Ltd v Key Manchester Ltd [2022] EWHC 4 (Ch).  In this case, following the usual sorry tale of a failed development, a group of buyer investors brought proceedings against both their own solicitors and the developer’s solicitors (who acted as stakeholders holding their deposits). The claims against the buyers’ own solicitors were settled in what has become the usual way.  But the claims against the developer’s solicitors were dismissed.

The investors appealed the decision, and this has now also been rejected by the Court of Appeal in Yee & Ors v 174 Law Solicitors Limited [2023] EWCA Civ 13. Might this give solicitors some hope in defending any remaining buyer-funded development cases?

Background

The North Point Pall Mall development was undertaken by North Point (Pall Mall) Limited (“the Developer”) which was a special purpose vehicle established by its parent company, North Point Global Ltd (“NPG”). The development adopted a model under which buyers would pay larger than usual deposits (between 50% – 80% of the purchase price) and these would be used to fund the project.

The Claimants were investor buyers who had contracted to buy units. They lost their investments upon the collapse of the development. The Claimants issued proceedings against their own solicitors as well as against the solicitors who acted for the Developer/ NPG, 174 Law Solicitors Ltd (“174”), as 174 had also acted in the capacity of a stakeholder.

The Claimants’ position was that the agreements for sale provided that a first legal charge was to be registered in favour of a buyer company, established to protect the interests of all buyer investors, as a pre-condition to 174’s release of the investment monies.  The Claimants argued 174 was liable to the Claimants for the wrongful release of their investment monies to the Developer given that no such legal charge was in place. The parties were aware that the buyer company charge was only a second legal charge as there had been external financing.

174 argued that the release of the deposit monies was properly made in circumstances where the Claimants, through their solicitors, had full knowledge of the title position. 174 argued that the release of monies was authorised by the directors of the buyer company, including the Claimants’ own solicitor, such that their release to the Developer was permissible.

It was found that a ‘work- around’ had been agreed by the directors of the buyer company, including the Claimants’ own solicitor. The ‘work-around’ expressly provided for buyer money to be released “[n]otwithstanding the fact that the Buyer Company Charge will sit on the register as a second charge”.

His Honour Judge Hodge KC, sitting as a High Court judge, held that 174 acted in accordance with the authority of the directors of the buyer company and the Claimants’ own solicitor. The ‘work-around’ was not to be regarded as a purported variation of the agreements for sale but as an expression of the satisfaction of both the buyer company and the Claimants’ own solicitor as to the prior legal charge in favour of the lender, for the purposes of satisfying the agreements for sale.

Lord Justice Newey disagreed with HHJ Hodge KC by holding that the proviso to clause 5.2 of the agreement for sale – which said that no deposit payments should be made without evidence of the registration of a first legal charge in favour of the buyers – was not satisfied. However, clause 5.1 provided for deposits paid to the seller’s solicitors “to be held as Stakeholder to the order of the Company”. The buyer company could, pursuant to clause 5.1, authorise the release of the deposits even where clause 5.2 had not been satisfied. It was agreed that there was no breach of contract, and the appeal was therefore dismissed.

Comment

So, this case was fact specific and, to that extent, may not be the ground-breaking law changer that solicitors (and their insurers) around the country might have hoped for. The dangers of acting on any deposit-funded schemes are still very much in evidence, and solicitor involvement should still be avoided wherever possible. That said, the decision will still be welcomed by solicitors and their professional indemnity insurers.