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One step too far - stakeholder solicitors defeat buyer-funded development claim

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By Phil Murrin

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Published 25 March 2022

Overview

North Point Pall Mall was a development of 426 residential and live-work units at a site in Liverpool. The development adopted a fractional sales model, where development works would be funded by unusually large (between 50% - 80%) deposits of investor buyers. Such a model, also often called a buyer-funded development, gained in popularity as lending options dried up following the 2008-9 credit crunch. It was held by the court to be an established, albeit risky, development model.

The Claimants were investor buyers who had contracted to buy units, but who lost their investments upon the collapse of the development, which was under-funded. Those buyers issued proceedings against their own lawyers, Key Manchester Ltd (KML), as well as against the solicitors who acted for the developer and its parent company, 174 Law Solicitors Ltd (174), on the basis that 174 had also acted in a stakeholder capacity.

The litigation had been managed with litigation concerning three other related developments. The bulk of such claims had settled by the time of trial, including the settlement by KML of the claims against it, albeit the judgment referenced outstanding professional indemnity insurance coverage issues arising.

The principal issue at trial was whether 174 was liable to the Claimants for wrongly paying out the investment monies held by it in its stakeholder capacity.

The Claimants argued the contractual documentation provided as a pre-condition to 174’s release of the monies that a first legal charge was to be registered in favour of a buyer company established to protect the interests of all buyer investors in the development. The Claimants contended that as no such charge was ever in place, 174 was liable to the Claimants, for the wrongful release of their monies to the developer.

Conversely, 174 contended that not only had the Claimants’ own lawyers accepted liability, but that the releases of investment monies were properly made against professional certification of development works, in circumstances where the Claimants, through their solicitors, had full knowledge of the title position. 174 argued the release of monies was authorised by the directors of the buyer company, including the Claimants’ own lawyer, such that their release was legitimate; and in any event, the Claimants were barred by an estoppel by convention from challenging their release in such circumstances.

The stakeholder agreements arose as a matter of law pursuant to the agreements for sale. These provided that the investment monies were to be held by 174 pursuant to the order of the buyer company, and that the Claimants irrevocably authorised the buyer company for that purpose. There were also provisions to the effect that the monies were to be released within 5 working days of receipt of the certification of building works by the appointed building supervisor; that payments were not to be made prior to evidence of the registration of the buyer company’s legal charge as a first legal charge being produced to the buyer or its solicitor/agent; and addressing circumstances in which additional funding could be taken out, having the effect of changing the priority of the buyer’s charge to a second legal charge.

The claims were resoundingly rejected. It was found that the directors of the buyer company, including the Claimants’ own solicitor, had agreed to the continued release of buyer monies in a “work-around” involving certain conditions agreed to put the buyers in the equivalent position as if the financing had involved substitution in strict accordance with the contractual terms.

 

Various North Point Pall Mall Purchasers v 174 Law Solicitors Ltd v Key Manchester Ltd [2022] EWHC 4 (Ch)

 

 

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