Ms Tsang acted for a large number of clients who invested in “fractional” property development schemes; where a single unit in a larger property is purchased (e.g. one room of a hotel). Instead of traditional lending agreements, these schemes were funded through the deposits and stage payments made by the buyers (i.e. Ms Tsang’s clients). The staged payments made up 30-80% of the overall purchase price for a unit, instead of the usual 10% deposit. The payments were, in the most part, paid to the seller’s solicitor as stakeholder and buyers irrevocably authorised the release of the funds to the developer.
The most obvious risk in such schemes is that the monies paid over by the buyers was being used to build the properties (in some, similar cases, the funds were used to carry out significant repairs or development) along with paying marketing commission, repaying loans etc. As such, until the property was complete and was being successfully rented out, the buyers had nothing to show for the investment. In this matter, none of the developments were successfully completed, despite over £27 million passing through Ms Tsang’s firm’s client account to developers.
Recoverability of the sums paid to the developers appears unlikely. Many of the purchase agreements provided that the buyers would obtain a legal charge over the development site, a site worth considerably less than the off-plan property they had intended to invest in, and which was never built. Furthermore, the developers had the ability to secure a first legal charge against the development site if further, more traditional, funding options were necessary.
The above facts are not unusual, in fact, they were so frequent that the SRA issued a warning regarding Investment Schemes on 23 June 2017. The warning notice stated that they were concerned that solicitors were “being used to give credibility to a scheme”. The warning specifically referenced “buyer-led financing of a development”.
The SRA took action against Ms Tsang for her involvement in such schemes. They alleged that, whilst in practice at her firm, Amie Tsang & Company Limited, between around 2015 and 2018, she failed to advise her clients about the high risks inherent in the schemes.
It was alleged that Ms Tsang should have advised her clients of the limited legal protection afforded to them with this type of development scheme. Furthermore, it was alleged that she ought to have warned her clients that the charge was likely to be inadequate and became less protective by the ability of other charges taking priority.
The Solicitors Disciplinary Tribunal (“SDT”) held that the SRA’s case was not proven to the civil standard (i.e. on the balance of probability). They found that the SRA’s case was based “on nothing more than (i) extracts from Thomson Reuters Practical Law which postdated the relevant transactions by 7 or 8 years, (ii) unsubstantiated suppositions as to sophistication or otherwise of the Applicant’s clients; (iii) an unsubstantiated assumption that foreigners, who, it was alleged were Ms Tsang’s clients, required greater protection merely because of the fact that they were foreign; and (iv) reliance upon its Warning Notice on investment schemes, a document which post-dated the events with which the Tribunal was concerned”.
The SDT found that there was no evidence that Ms Tsang had not ensured that her clients understood the risks they were taking. She had physically met with her clients to discuss the risks in a language they understood. This was then set out in the client care documentation which included: (i) “we do not advise on… the commercial viability of any transactions…”; (ii) “the Seller may not finish the development and deliver the Unit”; and, (iii) “there are risks in all speculative property investment transactions” amongst other warnings.
The SDT found that the SRA adduced no evidence that Ms Tsang’s clients were unsophisticated and not commercially minded individuals who were prepared to take the risks for a potentially significant gain. The warnings by Ms Tsang were sufficient to highlights the risks in what was a developing time of commercial activity.
There is no rule that the unsuccessful party pays the other side’s costs in SDT cases and, in fact, it is usual practice for there to be no order as to costs. Given that the SRA, when bringing proceedings, is doing so “in exercise of its regulatory responsibility, in the public interest and the maintenance of proper professional standards”, costs should not be awarded against it unless there is good reason.
Despite that approach, the SDT awarded costs of £74,950 to Ms Tsang. The SDT thought this was appropriate given that: (i) the SRA had not presented any compelling evidence in favour of the alleged failure to advise; (ii) there had been an ‘inordinate delay’ in prosecuting the case (nearly 2.5 years between requesting information and beginning its investigation); and, (iii) the SRA had caused considerable anxiety and stress to Ms Tsang as well as damage to her reputation. The SDT went so far as to describe the SRA’s case as “speculative”.
Whilst the outcome of the matter is fact specific, we have seen a large number of claims against solicitors arising from purchases in these types of buyer funded developments. There is no doubt that the case may be of assistance for solicitors defending similar civil claims by former clients. As noted in the judgment, the standard of evidential proof to be applied by the Tribunal is the same as the civil standard (i.e. balance of probabilities). However, that has not always been the case; the civil standard of proof was introduced by the Solicitors (Disciplinary Proceedings) Rules 2019 and only applies for all first instance cases certified as showing a case to answer on or after 25 November 2019. For cases certified prior to that date, the standard of proof applied by the Tribunal remains ‘beyond reasonable doubt’. Additionally, the case serves as a useful reminder that costs awards are still made in SDT proceedings and should be considered.
CMS regularly advise clients facing regulatory complaints, investigations and proceedings. Should you require any assistance in this respect, then please do contact us.