Real Estate Investment:Today

Guest Blog: When is a Fixed Price Not a Fixed Price?

By James Dakin, cofounder of Newmanor Law

Given the challenges facing the construction and commercial property sectors in the wake of the pandemic, the cost of everything in the supply chain, from land and bricks to leases and legal advisers is likely to come under closer scrutiny.

For those scrutinising costs, one question that all law firm clients should be considering is: When is a fixed price not a fixed price?  The simple and all too familiar answer is: When it’s an estimate. The difference may not be immediately obvious, but it is very important.

All lawyers have a regulatory obligation to be clear what work they are doing for their client and what the charging structure is. As a client you will get an engagement letter or a schedule setting this out and to avoid getting stung, you need to read it very carefully.

Practices differ from firm to firm, but in most cases, there will be three sections:

  1. A scope of work which sets out what the transaction steps are
  2. A set of assumptions the fee is based on
  3. The fee itself

Steps to paying the right amount

Step 1 – Check that your lawyer has included all the work you are expecting in the scope. For example, you might be expecting them to prepare a title report whereas the scope says they are intending to review someone else’s.

Step 2 – Review the assumptions. Are they clear enough that you know if the lawyers have strayed outside of them? An example of a nice, clear, fair assumption is: “the structure and terms of the transaction are as set out in the heads of terms dated []”. The meaning is clear and entirely compatible with a fixed fee.

But you may see much looser assumptions too, which are not compatible with a fixed fee.  Here are some examples:

  • “There are no complications or material issues arising”
  • “We are not required to produce unanticipated documentation”
  • “The transaction proceeds in normal course with all parties working diligently together to complete the transaction”
  • “The parties adopt a pragmatic approach to issues arising in respect of the transaction”

This kind of assumption is routinely used to justify a higher fee, when in reality it is just part of the usual process. Your lawyers will say they need more money because:

  • “The other lawyers have been so slow”
  • “They are being totally unreasonable”
  • “We are having to draft documents the other side should be drafting”

All of which is nonsense of course and this is where the problem lies. If a lawyer is an expert in the work you instruct him to do, he will know from his experience that transactions regularly have bumpy moments. The proper response is to push harder to get the deal done, not to demand more cash from your client.

Step 3 – Check how the fee is described. If it is described as an estimate or a quote, then you have not got the fixed fee you were expecting.  Even if it says the fee is fixed, that won’t be true in reality, if the engagement includes any of those vague get-out phrases in the list of assumptions.

It all comes back to something we all instinctively know: read the small print.

And if in any doubt, ensure you work with specialist law firms dedicated to the commercial property and construction sectors, who understand the certainty provided by genuine fixed-fee costs, with none of the mealy-mouthed provisions you see in most engagement letters. Remember, if the deal doesn’t change, the fee doesn’t change. Simple.

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