Chain reaction

Law firms are more affected by changes in the property market than any other area of the economy. Around 60% of law firms regulated by the Solicitors Regulation Authority are involved in conveyancing – and this area of law is going through a prolonged period of disruption. Economic uncertainty – caused by a delayed Brexit and the prospect of ‘no deal’– and a raft of tax and regulatory changes weigh heavily.

Across the country, firms of all sizes deliver a similar assessment: there are fewer transactions and they are taking much longer to complete.

Sarah Dwight, a sole practitioner based in Birmingham, notes that the market there has dipped, with ‘very few new properties coming on to the market’. She says this is ‘part of the bigger picture of uncertainty within the country [due to Brexit]. London has probably been in that uncertainty well before us because anything like that hits London first’.

BDB Pitmans London-based partner Hema Anand advises on all aspects of high-net-worth residential property, which includes London’s prime properties and stately homes in England. Prices in the capital’s most expensive postcodes have fallen by 19.4% since a June 2014 peak, according to Savills.

"Everyone is waiting for the market to bottom out so they can feel they have paid the right price"

Hema Anand, BDB Pitmans

Unsurprisingly so, given the Bank of England’s November 2018 projection that house prices could fall 30% under a ‘disorderly’ Brexit.  

‘There is a lot of price chipping going on,’ Anand adds. It is not uncommon for buyers to pull out only to come back a few months later to ask for a lower price; and for transactions to be agreed after successive price reductions, or for ‘considerably less than the asking price’.

But there is also a lack of supply. ‘The difficulty we have at the moment is that there aren’t enough houses coming up for sale and the reason for that is that sellers [think], “if I don’t have to sell, why would I in a falling market?”.’ Rather than selling, many are renting out their properties.

Helen Marsh, a residential property partner at Mayfair firm Forsters, says that in the current market buyers do not ‘get to call the shots’ either: ‘There is often quite a lot of competition for the few things that are on the market.’

The result is longer transaction times: ‘We are doing fewer transactions because each one is so painfully long and people argue over every little thing. Obviously in a good market people just want things done but now people are querying absolutely everything and they are not taking any risks.’ The good news is that ‘our litigation department is always busier when the market is worse’, Marsh says, because that is when contract clauses get ‘tested’.

Anand says: ‘In a normal market you would allow for two months within which to exchange,’ assuming the mortgage offer, search results and replies to enquiries are available fairly swiftly. But 18 to 24 months ago transactions slowed sharply. ‘In several extreme cases,’ she adds, ‘it has taken six to 12 months and a few attempts to sell properties. Now, I would allow for four months within which to exchange.’

Claire Dunn is a conveyancing partner at Woodfines in Milton Keynes and her work includes transactions for shared-ownership properties. ‘We are tending to find that there are longer chains,’ she says.

Dunn sees this as a sign ‘of a little bit more confidence coming back to the market’, although ‘quite a lot of the properties are actually being reduced in price before they get a buyer. It’s turning into slightly more of a buyer’s market than it has been, which is not a bad thing’.

Exeter-based Darren Blackburn heads the residential property team at Ashfords. He observes that for property professionals, the volume of transactions is more important than fluctuations in sale prices. ‘It will be interesting to see what impact developments over the next year will bring in terms of volume of transactions,’ he says.

The number of residential property transactions in England and Wales recorded by HM Land Registry fell for the second consecutive year in 2018 by 5.3% to 856,420, ONS data shows. Last year also saw the lowest number of sales since 2013; the Royal Institution of Chartered Surveyors expects a further 5% fall this year.  

Is this the Brexit effect? Dunn does not think so: ‘A lot of people are saying, “there is no point in waiting around, whatever happens will happen”.’ For Dwight, political and economic uncertainty is not deterring families who need a bigger home or want to be within a certain catchment area (for example), but it is affecting those who have a choice whether to move.

But for Anand, Brexit is affecting the ‘perception’ overseas buyers and investors have of the UK: ‘They are asking “what is going on with this country?”.’ But there are other reasons for caution. ‘The government has introduced so many tax changes over the years, many of which do affect overseas buyers,’ she says.

Marsh contrasts the current environment with the housing crash of the early 1990s, when prices fell more steeply, but over a shorter period of time. ‘[The fall] hasn’t really been that dramatic, it has just been slow with no end in sight.’

Stamp duty changes are also significant. The stamp duty land tax (SDLT) was overhauled in 2014 when, as chancellor, George Osborne replaced the previous ‘slab structure’ with an incremental system like income tax, rising to 12% on homes worth more than £1.5m. In April 2016 an additional 3% premium was introduced for anyone buying another residential property.

To reduce SDLT tax avoidance by wealthy homebuyers, 15% stamp duty on residential properties purchased through corporate vehicles was introduced in 2012 for transactions worth more than £2m. That threshold that was lowered to £500,000 in 2014.

Marsh, who acts for private clients and developers, says: ‘There have been a few deals where the buyers didn’t quite understand what the stamp duty was going to be. The deal proceeded until they suddenly became aware they were paying 15% and they pulled out on that basis. People are looking for discounts to mitigate their stamp duty, which sellers are not interested in at all, except developers sometimes.’

“There have been a few deals where the buyers didn’t understand what the stamp duty was going to be. The deal proceeded until they suddenly became aware they were paying 15%”

Helen Marsh, Forsters

There is also an annual tax on so-called enveloped dwellings or ATED (introduced in April 2013). The ownership of enveloped dwellings sits within a corporate wrapper, such as investment vehicles and offshore entities. This was initially for properties worth more than £2m (reduced to £500,000 in April 2016). Anand says: ‘Many of our clients have de-enveloped, so they have taken the property out of the corporate wrapper that [it was] bought in and they are transferring it to the ultimate beneficiary, for example.’

Other tax changes affecting UK residential property include the 2015 extension of capital gains tax to non-UK residents, who will also soon be subject to a 1% SDLT surcharge on UK home purchases.

Unsurprisingly, residential property lawyers at the higher end of the market work increasingly closely with their tax colleagues. ‘That is another reason why transactions take a bit longer,’ Anand says, as clients seek to understand how much a property investment in the UK will cost them.

Longer transaction times are having an adverse impact on profit margins, which Dunn says are ‘continually being squeezed… it takes longer before we can actually bill clients’. Referral fees, when paid to estate agents, also have an impact on profits, according to Blackburn. But he adds: ‘We are fortunate that a large part of our business comes from returning clients and personal recommendations.’

Another potential hit on profits is the requirement, since last December, for SRA-regulated firms providing conveyancing, probate and other selected services to publish prices on their websites. Dunn says that ‘obviously price is important’ but there is a risk the focus on that alone may distract consumers from the quality of services. ‘Many people may think that conveyancing with one firm is actually the same as it is in another firm’, says Dunn.

There are other regulatory pressures; one is a much greater focus on anti-money laundering compliance. The UK is considered a ‘top destination for money-laundering’, according to Transparency International UK, which has identified 176 properties worth £4.4bn that have been bought with suspicious wealth. Heeding calls for greater transparency, last year the government introduced unexplained wealth orders that compel individuals, including non-EEA politically exposed persons, to explain their interest in any property worth £50,000 or more, and the source of wealth used to acquire it.

New money laundering rules – the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer Regulations) 2017 – came into force in June 2017, implementing the EU’s fourth anti-money laundering directive.

Marsh says: ‘We now always have to check people’s source of funds… and obtain evidence to back up what they are telling us. We are constantly on the watch for anything that we think is suspicious. It is horrible, because you have a new client, you are trying to build a rapport and you have to ask these incredibly nosy, distrusting questions.’

Law firms also need to contend with the ‘more stringent’ requirements of the Law Society’s Conveyancing Quality Scheme, Blackburn says. ‘We are going through the process of making sure we are compliant with them.’ New core practice management standards took effect for all CQS-accredited firms on 1 May, along with a revised conveyancing ‘protocol’, which sets out the Society’s ‘preferred practice’ in residential conveyancing transactions (see news).

Dwight, who sits on the Law Society’s Conveyancing and Land Law Committee and the CQS Technical Panel, led the group that revised the protocol, first introduced in 2011. ‘We were aware that life had moved on since and that email and the internet had become more of a part of conveyancers’ day-to-day experience,’ she says. The updated protocol allows bundles of contract documents to be sent by email provided each document is individually referenced.

It also tackles identity fraud, which is one of the biggest risks for conveyancers, as shown by the Court of Appeal’s decision in the linked appeals of Dreamvar v Mishcon de Reya and P&P Property Limited v Owen White & Catlin LLP. Last year’s judgment, which focused on solicitors’ liability in cases of identity fraud, prompted the Society to issue in May a new version of its Code for Completion by Post to ‘provide innocent purchasers with greater protection from fraudsters’. The Gazette understands there is no current plan to take an appeal to the Supreme Court.

One of conveyancers’ main interlocutors is HM Land Registry, which is seeking to make home buying and selling in England and Wales simpler and faster (see box).  

For example, it wants to reduce the average rate for requisitions (which is when it seeks further information from applicants) from 20% to 15%. The registry raises more than 3,000 requisitions daily, which cost between £2m and £3m in staff time and resource in 2017/18. ‘Many of these requests can be avoided with due care and attention. Name discrepancies between documents and the register, or documents not being executed properly account for 17% of all requests for information,’ says head of customer policy Andrew Robertson.

‘Avoidance of these simple administrative errors would enable caseworkers to process more applications and make the conveyancing process simpler, faster and cheaper,’ he says. In the SRA’s recent residential conveyancing thematic review 91% of firms acknowledged they had received requisitions that were avoidable.

The registry has launched free webinars to help customers avoid common mistakes that lead to requisitions, and has also developed checklists and other support materials. More than 12,000 customers have joined or watched the recorded webinars since the service began last October. ‘We have introduced account management for some of our bigger customers who submit large volumes of applications or complex applications,’ Robertson adds.

Meanwhile, the reality is that the organisation is ‘desperately understaffed. Where you could get a registration done in two to four weeks, registrations are now taking up to six months’, Anand says. ‘It is very difficult if you are trying to sell or to refinance, you can’t prove that you are in the property just yet because it is stuck in the system.’

In 2016, the government shelved plans to privatise the registry, which is part of the Department for Business, Energy & Industrial Strategy. In April 2019, chief operating officer Chris Pope acknowledged that ‘the previous economic downturn and subsequent under-investment in our organisation means that we simply don’t have the capacity that we need’, but added that ‘progressive recruitment and training programmes are beginning to address this shortfall’. In the year to 30 April, the registry processed nearly 27 million applications.

Practitioners have also highlighted the inconsistencies of requisitions raised, a problem that is being addressed through training with all caseworkers, Pope said.  

The registry is also working with local authorities in England to migrate their local land charges (LLCs) records to a centralised digital register to ‘eliminate regional variations in the speed, format and costs of LLC searches’. The programme, which started in April 2013, has ‘involved more work than anticipated’ and only five local authorities have migrated their data so far. There are approx 26 million LLCs in England, held by 326 English local authorities.  

Paul Albone, chief operating officer of property search provider tmgroup, says conveyancers are ‘at the beck and call of what the local authority can deliver, so you get a massive variation of service’. Instead, with a centralised digital system ‘the data is presented in a consistent format, for a consistent price and delivered within seconds rather than days or weeks,’ says Albone, whose company focuses on business-to-business services and is working with the registry on the project.

Marsh observes: ‘The local searches system is so outdated that it is almost like going to the country village and looking into their filing cabinet. We sometimes get handwritten search results.’

Not everyone is endorsing the initiative. The Society has warned of the risk that historical data held by local authorities would be lost. Blackburn, for his part, highlights the ‘benefits of dealing with things regionally’ especially since LLCs, which restrict or prohibit the use of land, often require interpretation. ‘You don’t really just want a name and a faceless voice at the end of the phone, if there is someone you know and you have dealt with them over the years, you can get solutions to problems more quickly.’

The next frontier of digitisation for practitioners in the field is blockchain and smart contracts. Land Registry has been testing both technologies for land registration and conveyancing (see box). Senior product manager Lauren Tombs says that with blockchain technology, each party can see ‘a current view of the transaction, data related to that transaction, any historical actions that had been taken, and actions that still need to take place before the transaction was complete’. Tombs adds: ‘By holding definitive and permanent records of a property transaction in the open, with each stage of the transfer recorded for all parties to see, there is no confusion on who needs to act next.’

With blockchain-enabled smart contracts a series of tasks can be completed automatically (for example the transfer of funds and updating the registry), according to Tombs. She believes blockchain technology will make transactions faster, more secure and transparent for all participants.

There is a big gap between what is possible and achievable. Smart contracts are ‘a really interesting idea, but very embryonic at the moment’, Albone says. And blockchain is ‘technically possible’ but ‘expensive’ to deploy on a large Scale. He adds: ‘That would be something that only a government organisation could probably do.’

Speed – or the lack of it – is a key theme for legal practitioners in the sector. Technology can increase the pace of transactions and so has the potential to boost margins. But the big leap will only take place if all links of the chain – including local authorities, building surveyors, mortgage lenders and conveyancers – improve their processes. Meanwhile, the current economic and political uncertainty will continue to act as a drag on conveyancing.

Marialuisa Taddia is a freelance journalist