No. 1 – March, 2004

Risk management in real estate conveyancing practice

Lawyers who act in real estate transactions should be alert to the most common causes of reports of claims and potential claims in conveyancing practice:

Title search inadequacies

The failure of lawyers to properly manage issues arising from title searches is the single greatest cause of real estate claims in BC. On these matters, a title search is done, but the lawyer:

• assumes, without reading the search, that it doesn't raise any issues for the client (therefore missing, for example, a judgment registered on title or a bylaw contravention notice);
• fails to read the search carefully or thoroughly (therefore missing, for example, a "flag" such as a notation of "miscellaneous notes" that indicates further searching is required);
• reads the search but doesn't report the results to the client, assuming that whatever is noted on title will not be an issue for the client; or
• waits until the last minute to read the search and report to the client, leaving the client with insufficient time to deal with any issues that might arise.

Troubleshooting failures

If a problem arises after the contract of purchase and sale is entered into but before the completion date, the lawyer sometimes fails to advise the client about the problem and seek instructions. For example: A purchaser discovers a driveway is partially located on municipal property, and the purchaser's lawyer advises the vendor's lawyer that the purchaser won't complete unless the price is reduced. The vendor's lawyer, rather than advising the vendor of the options (e.g. reduce price, insist on specific performance on the basis that the purchaser is bound by the contract of purchase and sale) and seeking instructions on those options, assumes that the vendor will want to reduce the price. The lawyer either recommends this option (without giving alternatives) or fails to seek any instructions. The vendor, unhappy with the results, makes a claim.

Inappropriate reliance on support staff

Some lawyers rely too heavily, or even completely, on their paralegals or conveyancers to read and appreciate the consequences of all documents and to manage those consequences appropriately. The lawyer is ultimately responsible for ensuring the conveyance is properly managed, and even highly experienced staff cannot be relied on or expected to bring a lawyer's expertise to every issue. At an absolute minimum, the lawyer should review the contract of purchase and sale, correspondence, title search and statement of adjustments to ensure that all is in order.

Staff should also be trained to "red flag" issues for the lawyer, rather than simply dealing with the issues themselves. For example, a purchaser's conveyancer may notice tax arrears and believe that he's dealt with them satisfactorily, but in fact he has not. If this issue is not flagged for the lawyer, and the lawyer does not fully review the file, the purchaser may end up with property on which back taxes are still outstanding and any opportunity to hold back funds is gone.

Conflicts

Lawyers may find themselves caught in a conflict involving members of the same family or lenders and borrowers, and facing potential claims as a result. Chapter 6 of the Professional Conduct Handbook deals with conflicts of interest between clients, and Rule 10 of that Chapter requires lawyers acting in real property transactions for parties with different interests to comply with both Chapter 6 and Appendix 3 of the Handbook. Appendix 3 sets out the circumstances in which a lawyer can act in a conflict, but these exceptions are quite narrow.

Lawyers may find that they have acted in a situation in contravention of the Handbook requirements, either from the outset or as the matter has developed. The liability exposure arises from the fact that a lawyer cannot serve two masters. For example, information received from one client might prejudice another, but neither client's interests can be preferred over the other's.

In a family situation (such as when a lawyer acts for both parties on the transfer of property from an elderly person to a young relative) conflicts can give rise to claims that the lawyer ought to have recognized undue influence by one party. Further, for a lawyer to advise a client in these circumstances that, "I'm required to tell you to get independent legal advice but, if you do not want to, I'll still witness your signature," may not be sufficient if there are other red flags to suggest that something inappropriate is going on.

Separate from any liability exposure arising from acting in a conflict, a lawyer's breach of the Handbook may result in the Law Society taking disciplinary action.

Inadequate review of documents

Even when a lawyer reviews the file documents, errors can arise if that review is not done thoroughly or carefully. As a result, the lawyer does not consider or investigate issues. The importance of doing so would have been apparent if the lawyer had thoroughly read the documents in the file. For example, a lender may end up with insufficient security if, after giving mortgage instructions to a lawyer to take security on five lots, the lawyer takes security on only two because he or she did not read - or read carefully - the mortgage instructions.

Other mistakes that occur as a result of an inadequate document review include failing to deal with issues arising from section 116 of the Income Tax Act or outstanding municipal taxes, forgetting to hold back funds and failing to determine the correct amount of the mortgage payout or ensure that the payout statement relates to the subject property.

More tips for real estate practice

Here are three additional risk management tips:

• On each conveyance file you open, remember to review the specific terms of the contract of purchase and sale to ensure compliance and avoid a collapsed deal (particularly troublesome in an active real estate market). Even if the contract is in the standard form approved for use by the BCREA and CBA, be sure to review the terms, especially as this contract is revised from time to time. The most recent revisions, effective January 1, 2004, included changes to sections 13 and 14 to help clarify the obligations of the parties and the requirement to use the CBA standard undertakings in certain circumstances. This revised standard form contract is in use throughout BC.
  
  
• We still encounter claims involving impersonators and fraudsters in the real estate field. Although such claims are generally successfully defended, do make sure that you obtain identification from the client and, to try to avoid being drawn into litigation at all, insist on photo ID and remember to keep a copy. If you're dealing with more than one client, insist that each produce separate photo ID.
  
  
• If you are involved in solicitor property sales - acting for buyers or sellers in the purchase or sale of property or goods - remember that the highest risk you likely face is exposure to a claim for negligent misrepresentation, so exercise caution with respect to all representations concerning a property.

For further information on the causes of claims in real estate, or how to avoid them, please contact Megan Swail, Edna Ritchie or Lenore Rowntree at the Lawyers Insurance Fund.