Acting for lender and borrower - Practice Rule 6: Additional changes to practice rule 6(3) (solicitor acting for lender and borrower) | News

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IntroductionPractice rule 6(3) (solicitor acting for lender and borrower) was substantially amended on 29 September 1998 in order to reduce the risk of conflicts arising when a solicitor acts for both lender and borrower in an institutional mortgage.The changes to practice rule 6(3) were scheduled to come into effect on 1 April 1999 and were printed in the Gazette (see [1998] Gazette 21 October 42) with an explanatory note.The commencement date was subsequently deferred until1 June 1999 to give lenders more time to change their procedures to comply with the rule.

The delay in implementation was noted in the Gazette (see [1999] Gazette 13 January 34).

However, recent developments mean that this version of the rule will not be implemented.Recent developmentsA number of major lenders (Halifax, Abbey National, Alliance & Leicester, Nationwide, Cheltenham & Gloucester, Woolwich and National Westminster), under the auspices of the Council of Mortgage Lenders (CML), have produced a set of standard mortgage instructions called 'the lenders' handbook'.

The Law Society was involved in extensive discussions on the final form of this handbook to achieve a document acceptable to both solicitors and lenders.The opportunity has also been taken to make a number of changes to practice rule 6(3) to take account of comments received from solicitors, lenders and the CML.The Council of the Law Society therefore made the Solicitors' Practice (Lender and Borrower) Amendment Rule 1999 on 22 April 1999, and the Master of the Rolls concurred on 29 April 1999.

The final version of practice rule 6(3) comes into effect on 1 October 1999.Changes to the ruleThe final version of practice rule 6(3) is set out below.

Most of the changes made give greater detail on the type of instructions a lender may issue and therefore assist the interpretation of the rule.Solicitors should note the following changes in particular:-- the scope of the identity checks which a lender may require has been expanded but it is for the lender to specify exactly what is required (see paragraph (3)(c)(i));-- paragraph (3)(c)(x) is new and covers tenanted properties;-- paragraph (3)(c)(xviii) allows for the redemption of any mortgage over a separate property so long as it is precisely specified by the lender;-- paragraph (3)(c)(xxv) is new and covers the retention of information in the solicitor's conveyancing file;-- a new note (iii) explains how a lender may use a short form of report on title which incorporates the approved certificate by reference - indeed, the Halifax is now doing this in advance of the rule coming into effect;-- a new note (iv) makes it clear that the approved certificate of title need only be used where the property is to be occupied as a private residence by the owner - mortgages on properties which are to be let to tenants are regarded as commercial;-- the approved certificate of title has been amended in line with the changes made to paragraph (3)(c) of the rule;-- certificate (2)(iii) of the approved certificate of title is new and limits confirmation of the valuer's assumptions to matters of title.The rule v the handbookThe lenders' handbook will be distributed to firms by the lenders.The lenders' handbook contains a certificate of compliance with practice rule 6(3) and an acknowledgement that its instructions are subject to the limitations of the rule.The interpretation of practice rule 6(3) is ultimately a matter for the courts.

However, a solicitor who acts on the lenders' handbook would not be subject to any disciplinary action if it transpired that any of the instructions goes beyond the limitations of the rule - see note (ii) to practice rule 6(3).ImplementationThe final version of practice rule 6(3) will come into effect on 1 October 1999.

Practice rules do not apply retrospectively and this version of the rule will, therefore, apply to any transaction where mortgage instructions are first issued on or after 1 October 1999.RoadshowsThe Law Society hopes to arrange a number of roadshows on the changes to practice rule 6(3).

Details will be published when available.RULE 6(3) OF THE SOLICITORS'PRACTICE RULES 1990(incorporating changes made by the Solicitors' Practice (Lender and Borrower) Amendment Rule 1998 and by the Solicitors' Practice (Lender and Borrower) Amendment Rule 1999)'(3) (Solicitor acting for lender and borrower)(a) A solicitor must not act for both lender and borrower on the grant of a mortgage of land:(i) if a conflict of interest exists or arises;(ii) on the grant of a private mortgage of land at arm's length;(iii) if, in the case of an institutional mortgage of property to be used as a private residence only, the lender's mortgage instructions extend beyond the limitations contained in paragraphs (3)(c) and (3) (e), or do not permit the use of the certificate of title required by paragraph (3)(d); or(iv) if, in the case of any other institutional mortgage, the lender's mortgage instructions extend beyond the limitations contained in paragraphs (3)(c) and (3)(e).(b) A solicitor who proposes to act for both lender and borrower on the grant of an institutional mortgage of land, must first inform the lender in writing of the circumstances if:(i) the solicitor or a member of his or her immediate family is a borrower; or(ii) the solicitor proposes to act for seller, buyer, and lender in the same transaction.(c) A solicitor acting for both lender and borrower in an institutional mortgage may only accept or act upon instructions from the lender which are limited to the following matters:(i) taking reasonable steps to check the identity of the borrower (and anyone else required to sign the mortgage deed or other document connected with the mortgage) by reference to a document or documents, such as a passport, precisely specified in writing by the lender;-- following the guidance in the Law Society's 'green card' warning on property fraud and 'blue card' warning on money laundering;-- checking that the seller's solicitors or licensed conveyancers (if unknown to the solicitor) appear in a current legal directory or hold practising certificates issued by their professional body;-- and, in the case of a lender with no branch office within reasonable proximity of the borrower, carrying out the money laundering checks precisely specified in writing by the lender;(ii) making appropriate searches relating to the property in public registers (for example, local searches, commons registration searches, mining searches), and reporting any results specified by the lender or which the solicitor considers may adversely affect the lender; or effecting search insurance;(iii) making enquiries on legal matters relating to the property reasonably specified by the lender, and reporting the replies;(iv) reporting the purchase price stated in the transfer and on how the borrower says that the purchase money (other than the mortgage advance) is to be provided; and reporting if the solicitor will not have control over the payment of all the purchase money (other than a deposit paid to an estate agent or a reservation fee paid to a builder or developer);(v) reporting if the seller or the borrower (if the property is already owned by the borrower) has not owned or been the registered owner of the property for at least six months;(vi) if the lender does not arrange insurance, confirming receipt of satisfactory evidence that the buildings insurance is in place for at least the sum required by the lender and covers the risks specified by the lender; giving notice to the insurer of the lender's interest and requesting confirmation that the insurer will notify the lender if the policy is not renewed or is cancelled; and supplying particulars of the insurance and the last premium receipt to the lender;(vii) investigating title to the property and appurtenant rights; reporting any defects revealed, advising on the need for any consequential statutory declarations or indemnity insurance, and approving and effecting indemnity cover if required by the lender; and reporting if the solicitor is aware of any rights needed for the use or enjoyment of the property over other land;(viii) reporting on any financial charges (for example, improvement or repair grants or Housing Act discounts) secured on the property revealed by the solicitor's searches and enquir ies which will affect the property after completion of the mortgage;(ix) in the case of a leasehold property, confirming that the lease contains the terms stipulated by the lender and does not include any terms specified by the lender as unacceptable; obtaining a suitable deed of variation or indemnity insurance if the terms of the lease are unsatisfactory; enquiring of the seller or the borrower (if the property is already owned by the borrower) as to any known breaches of covenant by the landlord or any superior landlord and reporting any such breaches to the lender; reporting if the solicitor becomes aware of the landlord's absence or insolvency; making a company search and checking the last three years' published accounts of any management company with responsibilities under the lease; if the borrower is required to be a shareholder in the management company, obtaining the share certificate, a blank stock transfer form signed by the borrower and a copy of the memorandum and articles of association; obtaining any necessary consent to or prior approval of the assignment and mortgage; obtaining a clear receipt for the last payment of rent and service charge; and serving notice of the assignment and mortgage on the landlord;(x) if the property is subject to a letting, checking that the type of letting and its terms comply with the lender's requirements;(xi) making appropriate pre-completion searches, including a bankruptcy search against the borrower, any other person in whom the legal estate is vested and any guarantor;(xii) receiving, releasing and transmitting the mortgage advance, including asking for any final inspection needed and dealing with any retentions and cashbacks;(xiii) procuring execution of the mortgage deed and form of guarantee as appropriate by the persons whose identities have been checked in accordance with any requirements of the lender under paragraph (3)(c)(i) as those of the borrower, any other person in whom the legal estate is vested and any guarantor; obtaining their signatures to the forms of undertaking required by the lender in relation to the use, occupation or physical state of the property; and complying with the lender's requirements if any document is to be executed under a power of attorney;(xiv) asking the borrower for confirmation that the information about occupants given in the mortgage instructions or offer is correct; obtaining consents in the form required by the lender from existing or prospective occupiers of the property aged 17 or over specified by the lender, or of whom the solicitor is aware;(xv) advising the borrower on the terms of any document required by the lender to be signed by the borrower;(xvi) advising any other person required to sign any document on the terms of that document or, if there is a conflict of interest between that person and the borrower or the lender, advising that person on the need for separate legal advice and arranging for him or her to see an independent conveyancer;(xvii) obtaining the legal transfer of the property to the mortgagor;(xviii) procuring the redemption of (A) existing mortgages on property the subject of any associated sale of which the solicitor is aware, and (B) any other mortgages secured against a property located in England or Wales made by an identified lender where an identified account number or numbers or a property address has been given by the lender;(xix) ensuring the redemption or postponement of existing mortgages on the property, and registering the mortgage with the priority required by the lender;(xx ) making administrative arrangements in relation to any collateral security, such as an endowment policy, or in relation to any collateral warranty or guarantee relating to the physical condition of the property, such as NHBC documentation;(xxi) registering the transfer and mortgage;(xxii) giving legal advice on any matters reported on under this paragraph (3)(c), suggesting courses of action open to the lender, and complying with the lender's instructions on the action to be taken;(xxiii) disclosing any relationship specified by the lender between the solicitor and borrower;(xxiv) storing safely the title deeds and documents pending registration and delivery to or as directed by the lender;(xxv) retaining the information contained in the solicitor's conveyancing file for at least six years from the date of the mortgage.(d) In addition, a solicitor acting for both lender and borrower in an institutional mortgage of property to be used as a private residence only:(i) must use the certificate of title set out in the Appendix, or as substituted from time to time by the Council with the concurrence of the Master of the Rolls, ('the approved certificate'); and(ii) unless the lender has certified that its mortgage instructions are subject to the limitations contained in paragraphs (3)(c) and (3)(e), must notify the lender on receipt of instructions that the approved certificate will be used, and that the solicitor's duties to the lender are limited to the matters contained in the approved certificate.(See also note (iii) below.)(e) The terms of this rule will prevail in the event of any ambiguity in the lender's instructions, or discrepancy between the instructions and paragraph (3)(c) or the approved certificate.Anti-avoidance(f) A solicitor who is acting only for the borrower in an institutional mortgage of property must not accept or act upon any requirements by way of undertaking, warranty, guarantee or otherwise of the lender, the lender's solicitor or other agent which extend beyond the limitations contained in paragraph (3)(c).Notes(i) An 'institutional mortgage' is a mortgage on standard terms, provided by an institutional lender in the normal course of its activities; and-- a 'private mortgage' is any other mortgage.(ii) A solicitor will not be in breach of paragraphs (3)(a)(iii)-(iv) or (c) if the lender has certified that its mortgage instructions and documents sent pursuant to those instructions are subject to the limitations set out in paragraphs (3)(c) and (e), and certifies any subsequent instructions and documents in the same way.

If there is no certification, a solicitor acting in an exclusively residential transaction must notify the lender that the approved certificate of title will be used and that the solicitor's duties to the lender will be limited accordingly (see paragraph (3)(d)(ii)).

In other types of transaction, the solicitor should draw the lender's attention to the provisions of paragraphs (3)(c) and (e) and state that he or she cannot act on any instructions which extend beyond the matters contained in paragraph (3)(c).(iii) As an alternative to printing the approved certificate for each transaction, it is acceptable for a lender to use a short form certificate of title which incorporates the approved certificate by reference.

The form must include in the following order:-- the title 'Certificate of Title';-- the contents of the details box in the order set out in the approved certificate (use of two columns is acceptable) but with details not required shaded out or stated not to be required; and-- the wording 'We, the conveyancers named above, give the Certificate of Title set out in the Appendix to Rule 6(3) of the Solicitors' Practice Rules 1990 as if the same were set out in full, subject to the limitations contained in it'.Administrative details, such as a request for cheque, may follow the Certificate of Title.(iv) The approved certificate of title is only required for a transaction where the property is to be used as a private residence by the owner.

The certificate need not, therefore, be used for 'buy to let mortgages' on properties which are not intended for owner-occupation.(v) 'Solicitor' in paragraph (3)(b)(i) means any principal in the practice (or an associated practice), and any solicitor conducting or supervising the transaction, whether or not that solicitor is a principal; and 'immediate family' means spouse, children, parents, brothers and sisters.'Solicitor' in sub-paragraphs (i)-(xxv) of paragraph (3)(c) means the practice instructed and any solicitor conducting or supervising the transaction.(vi) The lender must be informed of the circumstances, in accordance with paragraph (3)(b) so that the lender can decide whether or not to instruct the solicitor.(vii) A lender's instructions (see paragraph (3)(c)(xxiii)) may require a wider disclosure of a solicitor's circumstances than paragraph (3)(b) requires; and a solicitor must assess whether the circumstances give rise to a conflict.

For example, there will be a conflict between lender and borrower if the solicitor becomes involved in negotiations relating to the terms of the loan.

A conflict might arise from the relationship a solicitor has with the borrower - for example, if the solicitor is the borrower's creditor or debtor or the borrower's business associate or co-habitant.APPENDIX CERTIFICATE OF TITLEdetails boxTO: (Lender)Lender's Reference or Account No:The Borrower:Property:Title Number:Mortgage Advance:Price stated in transfer:Completion Date:Conveyancer's Name & Address:Conveyancer's Reference:Conveyancer's bank, sort codeand account number:Date of instructions:WE THE CONVEYANCERS NAMED ABOVE CERTIFY as follows:(1) If so instructed, we have checked the identity of the Borrower (and anyone else required to sign the mortgage deed or other document connected with the mortgage) by reference to the document or documents precisely specified in writing by you.(2) Except as otherwise disclosed to you in writing :(i) we have investigated the title to the Property, we are not aware of any other financial charges secured on the Property which will affect the Property after completion of the mortgage and, upon completion of the mortgage, both you and the mortgagor (whose identity has been checked in accordance with paragraph (1) above) will have a good and marketable title to the Property and to appurtenant rights free from prior mortgages or charges and from onerous encumbrances which title will be registered with absolute title;(ii) we have compared the extent of the Property shown on any plan provided by you against relevant plans in the title deeds and/or the description of the Property in any valuation which you have supplied to us, and in our opinion there are no material discrepancies;(iii) the assumptions stated by the valuer about the title (its tenure, easements, boundaries and restrictions on use) in any valuation which you have supplied to us are correct;(iv) if the Property is leasehold the terms of the lease accord with your instructions, including any requirements you have for covenants by the Landlord and/or a management company and/or by a deed of mutual covenant for the insurance, repair and maintenance of the structure, exterior and common parts of any building of which the Property forms part, and we have or will obtain on or before completion a clear receipt for the last payment of rent and service charge;(v) we have received satisfactory evidence that the buildings insurance is in place, or will be on completion, for the sum and in the terms required by you;(vi) if the Property is to be purchased by the Borrower:(a) the contract for sale provides for vacant possession on completion;(b) the seller has owned or been the registered owner of the Property for not less than six months;(c) we are not acting on behalf of the seller;(vii) we are in possession of: (A) either a local search or local search insurance and (B) such other searches or search insurance as are appropriate to the Property, the mortgagor and any guarantor, in each case in accordance with your instructions;(viii) nothing has been revealed by our searches and enquiries which would prevent the Property being used by any occupant for residential purposes;(ix) neither any principal nor any other solicitor in the practice giving this certificate nor any spouse, child, parent, brother or sister of such a person is interested in the Property (whether alone or jointly with any other) as mortgagor.WE :(a) undertake, prior to use of the mortgage advance, to obtain in the form required by you the execution of a mortgage and a guarantee as appropriate by the persons whose identities have been checked in accordance with paragraph (1) above as those of the Borrower, any other person in whom the legal estate is vested and any guarantor; and, if required by you:-- to obtain their signatures to the forms of undertaking required by you in relation to the use, occupation or physical state of the Property;-- to ask the Borrower for confirmation that the information about occupants given in your mortgage instructions or offer is correct; and-- to obtain consents in the form required by you from any existing or prospective occupier(s) aged 17 or over of the Property specified by you or of whom we are aware;(b) have made or will make such Bankruptcy, Land Registry or Land Charges Searches as may be necessary to justify certificate no.

(2)(i) above;(c) will within the period of protection afforded by the searches referred to in paragraph (b) above:(i) complete the mortgage;(ii) arrange for stamping of the transfer if appropriate;(iii) deliver to the Land Registry the documents necessary to register the mortgage in your favour and any relevant prior dealings;(iv) effect any other registrations necessary to protect your interests as mortgagee;(d) will despatch to you such deeds and documents relating to the Property as you require with a list of them in the form prescribed by you within ten working days of receipt by us of the Charge Certificate from the Land Registry;(e) will not part with the mortgage advance (and will return it to you if required) if it shall come to our notice prior to completion that the Property will at completion be occupied in whole or in part otherwise than in accordance with your instructions;(f) will not accept instructions, except with your consent in writing, to prepare any lease or tenancy agreement relating to the Property or any part of it prior to despatch of the Charge Certificate to you;(g) will not use the mortgage advance until satisfied that, prior to or contemporan eously with the transfer of the Property to the mortgagor, there will be discharged (A) any existing mortgage on property the subject of an associated sale of which we are aware and (B) any other mortgages made by a lender identified by you secured against a property located in England or Wales where you have given either an account number or numbers or a property address;(h) will notify you in writing if any matter comes to our attention before completion which would render the certificate given above untrue or inaccurate and, in those circumstances, will defer completion pending your authority to proceed and will return the mortgage advance to you if required;(i) we confirm that we have complied, or will comply, with your instructions in all other respects to the extent that they do not extend beyond the limitations contained in paragraph (3)(c) of rule 6 of the Solicitors' Practice Rules 1990.OUR duties to you are limited to the matters set out in this certificate and we accept no further liability or responsibility whatsoever.

The payment by you to us (by whatever means) of the mortgage advance or any part of it constitutes acceptance of this limitation and any assignment to you by the Borrower of any rights of action against us to which the Borrower may be entitled shall take effect subject to this limitation.signature boxSIGNED on behalf ofTHE CONVEYANCERS .

.NAME of Authorised Signatory .

DATE of Signature .