The SRA Code of Conduct 2011 forms part of the Solicitors Regulation Authority Handbook. The Code is to be adhered to by all lawyers – both in-house and in private practice. Sometimes it's good to have a timely reminder of aspects of the Code which you don't necessarily come across that often. Of particular interest to investors and developers is the duty that a seller's legal team must inform potential buyers of a seller's "intention to deal" with more than one party. Understanding this duty may help when structuring the transaction.
Mandatory Code Principles
There are 10 mandatory Code Principles which underpin the fundamental ethical and professional standards which firms and individuals are to adhere to when delivering legal services. Accompanying the Principles are "outcomes" which describe what firms and individuals are expected to do in order to comply. These outcomes are focused conduct requirements, which enable solicitors to consider how best to achieve compliance with the Code and the correct outcome for clients.
Relations with third parties
Chapter 11 of the Code deals with "Relations with third parties" which is about ensuring that lawyers do not take unfair advantage of those they deal with and that they act in a manner which promotes the proper operation of the legal system in relation to sales and purchases of property by their clients. Outcome 11.3, which is the focus of this blog post, is "where you act for a seller of land, you inform all buyers immediately of the intention to deal with more than one buyer".
Firstly, for this outcome to arise there has to be "more than one buyer". Historically, this outcome related to "contract races" where you have competing buyers in one transaction for a property asset; however, competing interests can also arise in other guises. For example, if a seller is looking to dispose of its leasehold interest, by either assigning its lease to a third party, or liaising with a landlord to surrender its lease, both the assignee and the landlord would be prospective 'buyers' of the lease with competing interests.
Secondly, there has to be an "intention to deal". It can be difficult to sometimes ascertain once a real intention to deal has arisen. If the seller is simply entertaining the idea and is contemplative rather than having the intention to transact, then arguably this would not be enough to trigger the requirement to inform the buyers; however, a contemplation can quickly turn into an intention. If you draw analogies with an "intention to redevelop" in Landlord and Tenant legislation, then there would need to be some decisive action on the part of the seller, rather than the seller just assessing its options. Therefore, some active steps would need to be taken for this step to be satisfied, such as, negotiation of price between the seller and buyer.
Thirdly, the obligation is to "inform all buyers immediately". Once the seller's lawyer (in-house or in private practice) becomes aware of the seller's intention to deal with more than one buyer, then they have a duty under the Code to inform the buyers (more commonly the buyers' lawyers) straightaway. This may be contrary to what your client, the seller, had intended in the commercial transaction, but nevertheless is required by the Code and therefore it is important that real estate investor clients are aware of their lawyers' duties.
Team structures
It is important that in-house solicitors acting for sellers are also aware of these duties under the Code. In such situations it is likely that the commercial team of the seller will be going to the market, assessing the proposed transaction and intending to deal, and the in-house legal team will be under an obligation to comply with the Code of Conduct. There may be a conflict, particularly for in-house lawyers, between making sure the seller has acted in accordance with its fiduciary duties and obtained the 'best deal' for the business, which may include progressing deals with more than one buyer, and disclosing the seller's strategy of entertaining competing interests.
Future developments
Watch this space though: the contract race rule is not currently contained in the proposed new Code which is out for circulation, so changes may be afoot! However, for now it is important to be aware of this Code of Conduct point which may impact real estate transactions.
Author: Ruth Benfield, Senior Associate, Real Estate, London
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The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.