Dr Johnson famously said that the prospect of hanging concentrates a man’s mind wonderfully. It can equally be said that the prospect of an economic recession concentrates the legal adviser’s mind wonderfully. Or at least it should do. So how should property lawyers approach their work in the current climate?
To answer this question, one needs to look at the general background first. Those of us who can recall the harsh conditions of the early 1990s, if not the early 1980s – and not forgetting the banking and economic crisis of the early 1970s – will remember that the key was to keep your head while all around you others were losing theirs.
The irony in the current era of declining property values is that nothing has changed in terms of fundamentals. Land is a finite commodity and will continue to be – in real terms – expensive. What has changed is the market, and in particular the ability of the market to acquire finance for acquisition and development. What has not changed is the law of real property. This law encompasses everything from the effect of pre-contract representations, through to the contract, through to completion, and finally the legal and equitable rights and obligations that rest with the title to that land.
In this part of the analysis one must not forget the taking of security, its enforcement and the general principles applicable to the enforcement of rights and obligation. These factors may arise under the contract for sale or may affect the land itself – eg covenants and easements. What the current economic climate has done is to bring into sharp focus rights and obligations that in earlier times might have been overlooked, or not thought to be of sufficient importance or value.
Thus the key approach now is to take care in any transaction that all possible angles are covered. In addition there is and will be a greater prevalence of “recession-led” events, such as the service or receipt of notices to complete (usually caused by a lack of funds), or arguments about the failure to satisfy conditions precedent in conditional contracts (often due to the lack of funds or willingness to complete in the buyer), or disputes over adverse rights (usually caused by a need to escape from a bad deal reached in the higher market conditions last year).
It has been noticeable during the early part of this year (from the author’s own perspective) that specific performance claims, claims to forfeit deposits and claims to determine whether or not conditions precedent have been satisfied have been far more prevalent. In addition, there is also the prospect of claims by receivers and liquidators on the discovery of problems caused by negligent work done on the acquisition of properties at the height of the market, and which are now in a distress sale.
So, how should one approach the current real property climate? What follows are some tips to enable us to weather the storm.
Check your drafting
Ask the “what if” questions. For example, doubts over the satisfaction of conditions in conditional contracts can be exploited by unwilling or impecunious purchasers. Do these conditions work and will they work if, for example, a planning consent or third party consent is less than 100 per cent perfect? What if the purchaser fails to complete? Will the purchaser be good for any judgment – whether for specific performance or damages? Is the potential defendant a £100 special purchase vehicle (SPV)?
Have you got security, or any cover for losses if the other side defaults?
The recent decision in MIDLL (97 PL) v Parker HomesEstates(2008) shows the value of the right to forfeit the deposit under Section 49(2) of the Law of Property Act 1925 – and how important the size of that deposit will be against a falling market.
If the purchaser seeks to wriggle out of the deal, do you want to seek specific performance or will you accept the breach and seek damages in lieu?
In a falling market the latter may be a reasonable option even after allowing for the forfeited deposit. What is the standing of the purchaser? A £100 SPV or a man of straw is going to be a worthless defendant. So one comes back to the point mentioned above – do you want to do a deal at all with a potentially worthless purchaser?
Are you taking enough care?
In a recession there is a temptation to take on jobs for the sake of it in order to keep the order books full and then be pressurised by the client or – if there are any – the funders. Work done under pressure a result of being outside your comfort zone often produces a negligence claim. So basic checks at each stage on title, the documentations, the terms agreed and any security are all vital and will be more so in a difficult market.
As a contrast to the paragraph above, be aware of the potential benefit to the client if there is a sustainable professional negligence claim against an insured professional. This is not meant to be a cynical remark, but a recession will often lead clients and their advisers to look at work that has been done in the boom time in order to see if there is a negligent failure that can be picked up. It is often the case that the receiver or liquidator will pick up on negligent work.
Finally, as the old wartime poster said: “Keep calm and carry on.”
Andrew Francis is a barrister at Serle Court