The Clarks entered into a transaction for the purchase of a £560,000 plot of land from a developer, Gainsborough Homes Ltd. The entire developed site was burdened with two charges, the first a priority charge to Natwest Bank plc, and the second to a Mr Kenny. Natwest’s charge contained an express provision that it could set off the whole or part of Gainsborough’s indebtedness against any credit Gainsborough had with them. Lucas, acting for Gainsborough, provided various standard undertakings, including that they would discharge both charges on completion.
On 1 May 2008, Lucas transferred the completion funds to Gainsborough’s Natwest bank account. Lucas did not contact Natwest or Mr Kenny prior to completion. They mistakenly expected Natwest to pay some of the funds to Mr Kenny, in accordance with a practice established on standing instructions from Gainsborough in relation to an earlier development.
Unbeknown to Lucas, Gainsborough were in financial difficulty, owing Natwest around £2.7m and Mr Kenny over £1m. On 18 June 2008, Natwest appointed a receiver in respect of the site and placed Gainsborough into administration.
Whilst Natwest agreed to redeem their charge for the sum they had received, Mr Kenny did not, and the Clarks were unable to register their title to their property. They applied to the Court for summary judgment requiring Lucas to comply with the undertaking.
Lucas admitted the breach of undertaking but argued that:
- Compliance with it would be an impossibility and disproportionate because this would be punitive rather than compensatory.
- The amount due to Mr Kenny was unclear.
- They had acted in accordance with previous instructions.
- The Clarks might be entitled to be subrogated to Natwest’s rights in any event.
The Clarks argued that:
- As Gainsborough was developing a large site, it was well within Lucas’s contemplation that discharge of the entire charge might be necessary.
- There was no agreement between Natwest and Mr Kenny for apportionment of sale proceeds.
- Lucas were not authorised to act on Mr Kenny’s behalf in relation to the undertakings and no redemption figure had been sought.
- If the argument on subrogation was right, the Clarks would have to sell their property in order to mitigate their loss, which could not be fair. In any event, over £1m would still have to be paid in order to provide good title.
The High Court allowed the application to enforce the undertaking and granted summary judgment against Lucas, on the following basis:
- This was not a case of impossibility, as the undertaking was in standard form and compliance with it was within their control.
- There was no real dispute as to the sum owed to Mr Kenny.
- The fact that it might have been necessary to discharge the whole charge on completion could not be categorised as wholly unreasonable and should have been within Lucas’s contemplation.
- There was no real prospect of defending the claim on the basis of subrogation.
The general rule is that the courts will enforce solicitors’ undertakings, unless it can be shown that performance is impossible or it is otherwise inappropriate to order the undertaking to be performed. This case highlights that the courts will adopt a strict approach, even where there is apparent disproportion in enforcing compliance. It should also serve as a warning to vendors’ solicitors not to give undertakings lightly, particularly when acting for developers.