Are conveyancers over charging on ‘mum and dad’ assisted property transactions?

Introduction

The principle behind the insurance is that it protects the mortgagee’s (i.e. bank lending the money) title in the property if the donor of a gift or informal family loan goes bankrupt and  the donor’s creditors make a claim to the money as part of the donor’s assets.

But is it necessary?  Do all conveyancers actually understand the applicable law?

Background

The conveyancer is under a duty to both client and the client’s lender to ensure they obtain “a good and marketable title to the property and free from prior mortgages or charges and from onerous encumbrances which title will be registered with absolute title” (Solicitors’ Regulation Authority Handbook).

If there is a gift from a family member ( or a discounted purchase price when purchasing from a family member) or an informal loan the donor on the face of it will acquire an interest in the property. Gifted deposit insurance provides protection if the donor becomes insolvent and creditors of the donor make a claim putting the property at risk as well as the lender’s security.

The Law

The law behinds this is S339 of the Insolvency Act 1986 provides that if a bankrupt has within the previous five years “entered into a transaction with any person at an undervalue,” then “the trustee of the bankrupt’s estate may apply to the court for an order” to restore  the gift to the donor for the benefit of the creditors.

However S342(2)(a) offers the lender with protection stating that if an order is made under S339  this will not …. prejudice any interest in property which was acquired from a person other than that individual and was acquired in good faith and for value, or prejudice any interest deriving from such an interest”. Essentially the bank is protected from a Section 339 order by S.342 as long as it acts honestly and doesn't knowingly aid dishonesty. Its title in the property is therefore protected and in no way placed at risk .

The only time a  lender may not avail itself of this protection if the lender knew both that there was a gift/transaction at an undervalue and that the donor was already insolvent or a petition of bankruptcy had been presented when the gift was made. Hence the need for the conveyancer to carry our ID and bankruptcy checks against the donor.

Interestingly if this situation was allowed to arise then gifted deposit insurance would not assist in any event.

If the gift was specially made to put it beyond the reach of creditors, an order could be made under  Sections 423–425 of the Insolvency Act to restore the position to that before the transaction at an undervalue. Section 425 however would protect the lender if its interest was “acquired in good faith, for value and without notice of the relevant circumstances”.  Again unless the lender was aware of what was going on the lender would not be affected by the insolvency.

Council for Mortgage Lenders Handbook

This states:

‘If you are aware that the title to the property is subject to a deed of gift or a transaction at an apparent undervalue completed within five years of the proposed mortgage then you must be satisfied that we will acquire our interest in good faith and will be protected under the provisions of the Insolvency (No 2) Act 1994 against our security being set aside. If you are unable to give an unqualified certificate of title, you must arrange indemnity insurance (see section 9)

‘You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion’.

Practical Implications

Providing the checks on identification and bankruptcy come back all clear,  it would seem from this analysis that an unqualified certificate of title could be given to the lender where there is a gifted deposit.

Is there a need to obtain a letter of postponement from the donor, that is a ‘gift letter’.  Probably yes in terms of good practice though the Land Registration Act 2002 does provide that a mortgagee has priority over any claim that the donor may have for the return of the gift,

Conclusion

By blindly insisting on indemnity insurance which appears on the above analysis of the law to be wholly unnecessary it seems conveyancers are not acting in their clients best interests.   

At the time the Insolvency ( No2) Act 1994 ( which made amendments to S342 (2) (a)  was passing through the then House of Lords Lord Coleraine said:

“the saving in that section [of the Insolvency Act] for a third party purchaser for value and in good faith will no longer be negatived merely by the purchaser’s knowledge of an earlier transaction at an undervalue or preference … the effect of the clause should be to speed conveyancing and greatly reduce the need for insurance in the cases where problems arise” (Hansard 1994 vol 554 at para 348).

Clearly the insurance industry is also very much guilty in terms of selling and promoting an insurance which seems to offer no purpose other than as a comforter to conveyancers.

There should also be a call made on the Council for Mortgage Lenders to review and to amend the Handbook to make the requirements  for seeking indemnity insurance on a gifted deposit clear and more in line with the Insolvency legislation.

Source :   *Gifted deposits and indemnity insurance: a risk assessment, Nick Piška, Conv. 2015, 2, 133-147  (Subscription required)

 MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Lender and client relationship and the potential for conflict

Article by Georgie Harrington - Trainee Lawyer 

Where a client seeks the aid of a mortgage, they are no longer the only party legally represented. Where the same firm of solicitors represents the client and lender, there are many scenarios in which a conflict of interest may arise.

This article will focus on the unusual, yet extremely important scenario whereby the client creates a charge in the property in favour of the lender for the purpose of providing financial support and benefit to another party. This scenario is known to the conveyancing industry as “third party security”.

What is third party security?

A modern example is that of a second mortgage against a property to create a source of capital to finance the start-up of a new business. It is obvious to assume this arrangement may be between a married couple or partnership, but this is not always the case.

The potential for conflict

(1) The danger within such an arrangement is largely associated with the right the lender has to reclaim possession of the property from the third party for default in payment.

(2) Furthermore, a “client conflict” may arise if a solicitor opts to act for the third part, borrower and the lender.  Chapter 3 of the SRA handbook describes client conflict as: “any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict”.

Case Law

The topic of third party security cannot be discussed further without reference to the leading judgment of Royal Bank of Scotland plc v Etridge (No.2). The House of Lords declared how lenders are to operate under these circumstances as well as steps to be satisfied by the acting legal representative.

The case involved a wife acting as the third party, who sought her property for security to account for her husband’s debts. The loan was not repaid to the lender and repossession was claimed on the property. The wife attempted to sue the solicitors for professional negligence on the grounds that they had not acted within their duty to advise accordingly. The question considered by the Court of Appeal was: Had the wife been properly advised, would she have signed the necessary documents to enter into such a transaction? The Court of Appeal held that the solicitors firm were in breach of their duty as they has failed to evaluate and advise the wife of the risks.

Judgment requirements

Lender responsibility	Solicitor responsibility
Write to the third party informing that for their own protection, the lender will require written confirmation from the solicitors that the nature of the charge will be explained.	Explain to the client that the lender may rely on the written confirmation from them that the nature of the transaction and charge has been sufficiently explained.
Ask that the third party instruct a solicitor. It is for the solicitor to decide whether there is a potential conflict of interest in taking on the instruction for the third party, borrower and lender and whether this is in the best interests of the client.	Seek confirmation that the third party is happy for legal representation under the circumstances and advise accordingly thereafter of the legal and practical implications.
Provide the third party with the financial information necessary for advice to be provided accordingly.	Check that no earlier lending is secured under the third party’s guarantee.
Provide the solicitors with any information that is reasonably considered may evidence the fact that the third party has been mislead in coming to such a decision.	Explain the nature of the documents to be executed by the client and the consequences of entering into the transaction. The solicitor must obtain consent from the client to write to the lender confirming this has been explained to the client.
Do not proceed on the transaction without written confirmation from the solicitor.	Discuss the client’s financial means and whether any other assets may be the subject of repayment in place of third party security. The solicitor can at this point offer to negotiate the terms of the transaction with the lender under instruction of the client.
	Meet with the client face to face without the borrower present. An attendance note of the meeting is necessary.

Decision in Etridge

The consideration of Lord Neuberger M.R. was that the length of the client meeting in relation to third party security did not necessary satisfy the duty the solicitor has in advising the client. Mere advice to proceed was simply not sufficient: “…she should have been told in clear terms that a hurried short meeting was simply inappropriate, bearing in mind the importance, riskiness and probable pointlessness of the transaction she was about to enter into…”. The solicitor acting on behalf of the wife did not recall the meeting with her and therefore was not able to give any real evidence that the advice provided was satisfactory for the purposes of his duty to the client. All the solicitor was able to offer was that of what his usual practice with clients would be. The court founds that, had the wife been properly advised, the wife would not have signed the documents to the transaction.

Conclusion

The requirements listed within the table above were considered to bet he core minimum to be obliged by the lender and solicitor in their relationship and capacity to the third party, to ensure they enter into the transaction with realistic understanding of the implications and risks involved. Equally allowing the lender the comfort to make the necessary loan without fear that the transaction will be set-aside in the future. The solicitor must exercise their due skill and judgment in every individual case of such a nature and whether to act on the matter. It is a modern day requirement of a solicitors firm, acting in this capacity, to check their insurer’s conditions that they may even be covered to proceed in doing so.

MJP Conveyancing 

A Solicitor’s Dual Duty

When instructed in a purchase transaction in which a client is seeking to rely on the aid of a mortgage, it is important to note that a Solicitor owes a duty not only to their client, but also to the client’s lender. Does a Solicitor, however, owe a general duty to report any information which may materially affect the valuation of the proposed security for the Lender? 

The answer to this question is evident in the recent High Court judgement of E.Surv Ltd v Goldsmith Williams Solicitors, published on April 10^th 2014, which saw a conveyancing firm ordered to pay costs of £100,000.00 for failing to disclose information on the value of a property to their client’s lender. This article examines the decision of E. Surv Ltd v Goldsmith Williams Solicitors, which is likely to be of particular interest to lenders.

The case centres on Mr Gayler – the client – who bought a property in September 2005 at a cost of £390,000.00. The client sought to remortgage the property and consequently instructed E Surv Surveyors to value the property in November 2005, at which time he informed E Surv that he had bought the property six to twelve months earlier at a cost of £600,000.00. E Surv valued the property at £725,000.00. The client applied to a lender in December 2005 for a loan of £580,000.00 to be secured against the property, which was based on an approximate value of £725,000.00. E Surv’s valuation was not provided to the lender at the time of the application, yet the application erroneously stated that Mr Gayler had purchased the property in October 2005 for £450,000.00. During the course of their instructions, Goldsmith Williams Solicitors – who acted for client and lender alike – obtained the Land Registry’s Official Copies for the property, which disclosed that Mr Gayler had indeed purchased the property for £390,000.00 in September 2005; the Solicitors did not divulge this information to the Lender. The remortgage transaction completed on February 13^th 2006 on the basis outlined above. Mr Gayler defaulted on his mortgage payments and the lender took possession of the property, selling the same at a significant loss. Consequently, the lender pursued the Surveyors and Solicitors, but only followed through their action against the Surveyors for their supposed negligent valuation. The Surveyors agreed a settlement with the Lender for £200,000.00, only to later pursue contribution proceedings against Goldsmith Williams – it is this resultant case with which this article concentrates. This case centred around two principal issues: whether the solicitors were under a duty to advise the lender as to the recent disposition of the property and correct purchase price, as well as whether the surveyors could prove that, had the solicitors done so, they would have issued a revised valuation to the lender. Whilst the solicitors argued that there was no causative effect as between any breach on their part and the lender’s decision, the Court held that the solicitors breached their duty by failing to report the purchase price, with the surveyors evidencing that, on the balance of probabilities, the bank would not have proceeded had this information been communicated. The Court ordered the solicitors to pay 50% of the surveyors’ cost to the lender - £100,000.00. The solicitors have since stated that they will be seeking to appeal.

In anaylsing the impact of the judgement made, it is important to examine a solicitors’ duties to a lender during the course of a transaction. The Council of Mortgage Lender’s Handbook (CML), which was introduced in 1999, provides comprehensive instructions to solicitors when acting on behalf of lenders in residential conveyancing transactions; in addition to this, there is also the Building Societies Association Handbook (BSA Handbook), which was brought into force in 2010. Prior to the introduction of the CML handbook, a solicitor’s duty to report matters relevant to the lender’s valuation was derived from common law and had been held to be a part of his duty of care and skill. This ‘Bowerman Duty’ was outlined in Mortgage Express v Bowerman [1996] PNLR 62, which held that ‘if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision, then it is his duty to point this out”. Nevertheless, the case of E Surv v Goldsmith Williams focused on provisions 4.1.1.1 and 5.1.1 of the CML Handbook, which respectively note the following: 

4.1.1.1: You must take reasonable steps to verify that there are no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain, and, if there are, you must tell us immediately

5.1.1: Please report to us immediately if the owner or registered proprietor has been registered for less than six months.

It is important to note that selling or remortgaging a property so soon after a disposition of the same does not fit within the usual pattern of residential home ownership;  you would need to question why the proprietor is looking to dispose of the property so quickly after its purchase. There are, of course, certain situations which have been excluded from provisions 4.1.1.1 and 5.1.1, which include, but are not limited to, a sale of a property by way of a personal representative of the proprietor, or a receiver or trustee-in-bankruptcy. As aforementioned, one of the key issues in this case was whether the Solicitors were obliged to inform the lender of the fact that Mr Gayler had purchased the property within the last 6 months for £390,000.00. Clearly, under the CML, there is no obligation on the Solicitor within provisions 4.1.1.1 and 5.1.1 to report to the lender the purchase price of the property. Therefore, a crucial question of the case was whether the ‘Bowerman Duty’ survived despite the introduction of the CML, or whether the obligations listed therein are exhaustive, leaving no scope for any further duties. However, the Court held the following:

‘…in my judgment what the Lenders Handbook, read with the Practice Rules and certificate of title, is intended to do is to identify and delimit the precise scope of the specific activities which the solicitor is being retained to do, in circumstances where the solicitor is faced with the difficult position of acting for two parties with potentially conflicting interests. It is not intended to exclude the general obligation to exercise reasonable care and skill in the performance of such activities…’

What can we draw from the judgement of this case? It is clear that from this case that the CML handbook does not negate solicitors’ wider duties of reasonable care and still owed to the lender, or indeed the client; the ‘Bowerman Duty’ should thus be read in conjunction with the CML guidelines. E Surv Ltd v Goldsmith Williams serves to find a happy medium between meeting the client’s and lender’s expectations with the responsibility in acting as a solicitor, as the solicitor has not been placed under an extended burden to obtain further information. What the case does underscore to a Solicitor, however, is the importance of reading and reviewing the information obtained carefully, so that any potentially prejudicial matters affecting the valuation of a property are brought to the attention of the lender.   

A big thank you to Bethany Slaughter a Trainee Solicitor with MJP Conveyancing for this insightful contribution 

Leasehold Property and the CML Handbook

When acting for a client who is purchasing a property with the aid of a mortgage, a conveyancer is under an obligation to act within accordance of the duty of care to their client but also to the lender, writes Alice Seager, trainee with MJP Conveyancing.

The duty to the lender  is governed by the Council of Mortgage Lenders, who describe themselves as "the representative voice for the residential mortgage lending industry". 

They are  an industrial body representing mortgage lenders in the UK - its members consisting of banks, building societies and specialist lenders. It is estimated that the Council of Mortgage Lenders (CML) represents 90% of mortgage lending within the UK

Leasehold transactions are long accepted to involve extra work for conveyancers - it is imperative that onerous obligations are brought to the attention of clients. There are issues such as ground  rent and service charge etc to be brought to consider - but further the CML hand book imposes further conditions which are required in a leasehold transaction.

As such conveyancers are obliged to ensure that the lease applicable to the title of a leasehold property is "CML Compliant". The effect obligation renders the process of purchasing leasehold property to be arguably a complex one. This is particularly the case with older leases drafted prior to the introduction of the CML handbook.

The Basic Requirement of CML:

CML requires conveyancers to confirm that there is a good and marketable title to the property. Meaning that the property is free of any restrictions, covenants, charges  etc which are materially detrimental to the value of the property.

It is arguable that leasehold properties by their nature tend to be inclusive of more restrictions and covenants than a typical freehold transaction. Therefore there are more aspects to consider when determining whether or not it is possible to guarantee that a property has a good and marketable title to a prospective lender.

CML Leasehold Requirements:

The first issue that a conveyancer should consider when reviewing leasehold title is the class of title that the Land Registry have granted. Ideally, this should be title absolute. Meaning that the title deeds are in order and that no other individual has a claim to the land. In respect to leasehold property, this means that the lease has been validly granted and that the lease under which the land is held is vested in the freeholder.  

Where an inferior class of title is granted the CML provides that good leasehold title will be acceptable, provided certain other requirements are fulfilled. Good leasehold title is granted when the lessor's title is not registered with title absolute or the title is unregistered. I.e the leasehold title is registered but the freehold is not. 

In this instance a conveyancer should be satisfied that there is evidence of the freehold title which dates back 15 years. Although the CML are providing instances where good leasehold title is acceptable - in practise this is not necessarily of much assistance to a prospective purchaser. If it is possible to provide evidence of the freehold title back dating 15 years, then it is highly likely that the Land Registry would upgrade the preferred class of title absolute and remedy the problem.

It is a further requirement of CML in leasehold transactions that the lease includes an enforceability covenant rendering it an obligation on the landlord to enforce other lessees covenants. The effect of not having such covenant in place is that a lessee, who is for example suffering  nuisance from a fellow lessee does not have the ability to force the landlord to resolve the problem. 

Conveyancers are required to further ensure that the responsibility for insuring the property is that of the landlord, one or more of the tenants or the management company. Conveyancers must be satisfied that there is a sufficient insurance policy in place for the leasehold property. There is no consistent approach to the issue of insurance, as times evolve the definition of "insurable risks" changes. For example, when older leases dating back to the 1970s and 1980s were drafted the need to insure against the risk of terrorism was not one contemplated.

If the Lease is not CML compliant?

If throughout the course of a transaction, it is deemed that a lease is potentially not compliant with CML requirements - the first course of action is to notify the lender and obtain their instructions. The onus is then often reverted back as the lender instructs the conveyancer to act in order to protect their interest.

The defect in the lease will then require rectification and there are few options available to clients in this situation. The first option is for the lessee and the landlord to enter into a Deed of Variation to alter the terms of the lease in order to comply with CML requirements.

Alternatively, lenders will often accept indemnity insurance in order to "remedy" the defect with the lease. However, prospective purchasers should note that this route will merely offer a "quick fix". Wherever possible conveyancers should seek to obtain a Deed of Variation to truly correct the defect.  

It can therefore be concluded to establish that a lease is CML compliant "is not the be all and end all". 

There are practical implications of the various covenants which must be taken into consideration by conveyancers when reporting to clients intending to purchase a leasehold property and these implications typically do not concern the CML.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk