Accepting undertakings on completion
The issue of whether or not to accept an undertaking is a minefield for conveyancing solicitors.
The Law Society's conveyancing and land law committee offers guidance
The first instance decision in Patel v Daybells [2000] All ER(D) 1004 caused consternation among conveyancers.
It held that it was negligent for a buyer's solicitor to accept an undertaking for form 53 (now DS1), save in exceptional circumstances.
The Court of Appeal ([2001] EWCA Civ 1229) has now upheld the decision that the solicitor in the case was not negligent, but reversed the reasoning - the acceptance of a solicitor's undertaking for a DS1 will not normally be negligent.
But does this mean a return to business as usual?
The Court of Appeal held that 'conformity to a common (or even universal) professional practice is not an automatic defence against liability; the practice must be demonstrably reasonable and responsible'.
This involves considering the risks involved and how to avoid them.
The Court of Appeal was satisfied that the legal profession had considered the risks of accepting an undertaking and that in the standard case it was reasonable to rely on the existence of compulsory insurance, the compensation fund and the summary procedure for enforcing undertakings when assessing the extent of that risk.
Other relevant factors were: the Council of Mortgage Lenders' (CML) advice to its members to discharge a mortgage even where insufficient funds were sent, if this was caused by the lender's error; and the problems which would ensue if the buyer's solicitor had to communicate directly with the seller's lender.
Exceptional cases
The 'exceptional circumstances' in which it might be negligent for a buyer's solicitor to accept an undertaking were not specified by the Court of Appeal, although the court made it clear that the fact that the seller's solicitor was a sole practitioner did not make the transaction exceptional.
The court referred in detail to the expert evidence on behalf of the buyer's solicitor that it would not be normal or advisable to rely on an undertaking in two situations, but did not expressly endorse these as the relevant 'exceptional circumstances'.
The two situations mentioned are: where the amount required to redeem the seller's mortgage exceeds the minimum level of solicitors' indemnity insurance (currently 1 million per claim); or where the mortgagee is not a member of the Council of Mortgage Lenders.
Minimising risks
The risk of accepting an undertaking for a DS1 is that it might not be forthcoming (for example, because of the fraud or negligence of the seller's solicitor or because of problems in identifying the amount required to redeem the mortgage).
Default by the seller's solicitor is dealt with by the requirement for compulsory insurance and, ultimately, the compensation fund.
Only where the figures exceed the compulsory level of insurance might the buyer's solicitor need to take more steps to deal with that risk.
The risk of a dispute with the lender should not normally be a problem where the lender is a member of the CML.
Even disputes not covered by the CML's advice may not put the buyer's solicitor at risk - the Law Society's recommended form of undertaking puts an absolute obligation on the seller's solicitor to discharge the relevant mortgage.
Therefore, it is the seller's solicitor who is at risk if the DS1 is not forthcoming - his obligations can be summarily enforced and are backed by compulsory insurance and, in certain cases, the compensation fund.
In each of the exceptional cases mentioned in Patel v Daybells the matter comes back to the safeguards put in place by the profession.
The only variable is the level of insurance cover and that is only relevant in the case of large mortgages.
Normally the buyer's solicitor does not know the amount of the debt (and the Court of Appeal disapproved of the idea that the buyer's solicitor should have to make such enquiries).
It is common to ask in preliminary enquiries for confirmation that the sale price exceeds the amount secured on the mortgage.
Provided the sale price is not more than 1 million, such confirmation should give the buyer's solicitor the necessary comfort to accept an undertaking from the seller's solicitor.
In larger transactions, the buyer's solicitor may wish to take additional steps before or instead of accepting an undertaking.
The buyer's solicitor could ask the seller's solicitor to get written confirmation from the lender that he has been appointed the lender's agent for the receipt of the redemption money.
This places the risk of default or dispute with the lender and avoids the buyer having to investigate either the details of the mortgage or the seller's solicitor's insurance.
The buyer's solicitor could insist on sending the redemption money direct to the lender.
The buyer's solicitor should ask to see the redemption statement as independent evidence of the figure.
The Court of Appeal disapproved of the buyer making such enquiries in the standard case but in an exceptional case, where large sums are involved, this may be inevitable.
As this information is confidential to the seller, the seller's solicitor should get instructions before revealing it.
However, this solution does not deal with the problem of a dispute over the amount required to redeem.
It may also be difficult to arrange in the case of an 'all moneys' mortgage.
If this course is followed, standard condition 6.7 should be amended (or, if using the standard commercial property conditions, expand condition 6.7).
In either case, the issue must be addressed before exchange.
Where the amount of the mortgage debt exceeds the minimum indemnity insurance (as will often be the case in commercial transactions), a buyer's solicitor might only accept an undertaking for DS1 if coupled with a warranty from the seller's solicitor that his insurance cover exceeds the amount required to redeem the mortgage.
There is no obligation to accept an undertaking in place of performance of the obligation.
Indeed, solicitors have often been unwilling to accept an undertaking for the DS1 in the case of a mortgage to a non-institutional or overseas lender or in the case of a private loan.
However, if that is the buyer's solicitor's position, a contract condition that the DS1 must be available on completion will be necessary.
In many cases, this will not be a realistic option as institutional lenders' procedures do not include issuing the DS1 in escrow.
Before the buyer's solicitor accepts an undertaking where the expert evidence in Patel v Daybells stated it would not be normal practice to do so, it is essential to explain the risks to the buyer and get instructions that the buyer is willing to take them.
Even where the lender is separately represented, the buyer's solicitor should consider whether there are any exceptional circumstances making it unwise - or potentially negligent - to accept an undertaking (or at least without evidence of the lender's solicitor's authority to accept the redemption money).
The use of electronic notifications of discharge (END) presents a particular problem as there is never a paper DS1 to be handed over.
The buyer's solicitor is always reliant on an undertaking by the seller's solicitor to forward the redemption money and the END form to the lender, who then sends the discharge notification directly to the Land Registry.
Even where the transaction might fall into the category of exceptional cases, the buyer's solicitor will have no choice but to accept the undertaking and will have to take such steps as are available (for example, split payments, evidence of the seller's solicitor's authority, or evidence of sufficient insurance cover).
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