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LPLC: lessons from the last recession

Every Issue

Cite as: (2008) 82(12) LIJ, p.79


The possibility of recession stemming from the current global economic crisis may generate claims against practitioners.

Many lawyers have never practised in times of recession, but more experienced practitioners may recall the turmoil that ensued from the share market and then property crash in the late 1980s and early 1990s.

As asset prices fell sharply, the Legal Practitioners’ Liability Committee (LPLC) saw a surge of property related claims. The possibility of a recession and consequent falling asset prices should put all practitioners, especially those practising in property, on high alert.

In the early ’90s some things were different:

  • interest rates were excessively high (19 per cent); and
  • practitioners had much less of an understanding of issues involving third party mortgages and certification.

Claims arose from various areas and included the following:

Mortgagees’ consents

In the late ’80s there seemed to be a practice of not obtaining mortgagees’ consent to a new or transferred lease, particularly in relation to the sale of a business. The issue was often overlooked or never followed up before settlement. When an economic downturn occurs, the risk is that the landlord will go broke and the mortgagee will want to sell the property with vacant possession. LPLC had a surge of claims on just this point in the early ’90s.

Defective rescission notices

Purchasers who wanted to avoid contracts when they perceived the property market had dropped prevailed on their solicitors to issue rescission notices. Unfortunately, many of the rescission notices were defective and the purchaser was saddled with paying the shortfall in the further sale of the property, as well as losing their deposit. In a buoyant market, the defective rescission notice may not have been scrutinised as closely for defects and the purchaser would not have paid a shortfall, as the property would have sold for more.

Purchasers looking for any loopholes

When property prices dropped, purchasers were looking for any loophole to get out of their contracts. Practitioners scrutinised the contracts and s32 statements and came up with reasons to get their clients out.

Caveats and check searches

There was a practice in the late ’80s and early ’90s of purchasers’ solicitors not placing caveats on title after the contract of sale was signed and not doing a check search before settlement. This caught out many practitioners as second or third mortgages were lodged on title before settlement as a result of desperate financially-strapped vendors. The recent case of Black v Garnock [2007] HCA 31 emphasised the importance of caveats (see LPLC’s In Check issue 37).

Amadio style claims

Third party guarantor or mortgagor claims in the style of Amadio became popular in the early ’90s. LPLC’s risk management campaign proved an effective tool over the past 15 years and most practitioners are now wise to the tricks of borrowers and security providers. But it is important for practitioners to maintain their vigilance in ensuring that:

their note taking and letters of advice to third party guarantors are fulsome;

they do not act for the borrower and the third party guarantor; and

they use only the LIV/ABA approved form of Australian Legal Practitioners Certificate.

See LPLC’s booklet Learning from Amadio, April 2006 edition, at http://www.lplc.com.au for more advice about how to avoid these claims.

Failing or delay in lodging

Another mistake that comes home to roost during an economic downturn is the failure or delay in lodging charges or mortgages. In some cases the original documents were left on files and sent to storage without anyone realising they had not been lodged.

Risk management strategies

While some things may have been different in the early ’90s, practitioners are urged to be vigilant in the current economic climate and take nothing for granted. In particular:

  • regularly review your firm’s precedents, especially rescission notices, to ensure that they are up to date and that mistakes have not crept into them over recent years;
  • update your checklists for sale of businesses and leases to ensure that mortgagees’ consents are always obtained. Does your standard contract of sale of business adequately set out who is responsible for this and by when?;
  • be rigorous in the preparation of s32 statements. Take clear instructions from your client and read all certificates carefully;
  • see In Check issue 37 on caveats and always ensure you do a check search before settlement;
  • ensure your office practices are Amadio proof. See our comments in relation to Amadio style claims above; and
  • review your office systems for the prompt lodging of charges and mortgages.

This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information ph 9670 2001 or visit the website http://www.lplc.com.au.

The possibility of a recession and consequent falling asset prices should put all practitioners, especially those practising in property, on high alert.

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