Guidance on practice rule 6(3)

Guidance on practice rule 6(3)

Practice rule 6(3) - solicitor acting for lender and borrower in commercial transactionsThe new version of rule 6(3) of the Solicitors' Practice Rules 1990 came into effect on 1 October 1999.

The rule has always applied to both residential and commercial conveyancing transactions.

It has always required separate representation in a private mortgage at arm's length (where the terms have been individually negotiated) and, subject to the overriding principle that a solicitor can never act for two parties when there is a conflict of interest, allowed joint representation in an institutional mortgage (a mortgage on standard terms).Additionally, since 1 October 1999, the rule allows joint representation only if the lender's mortgage instructions do not extend beyond the matters set out in paragraph 6(3)(c).

An anti-avoidance provision (paragraph (f)) applies the same restrictions to any requirements imposed on the borrower's solicitor when the parties are separately represented in an institutional mortgage.Effect of anti-avoidance provisionAs indicated in previously published notes ([2000] Gazette, 30 March 47 and 15 December 47), the anti-avoidance provision created an anomaly in that:l Commercial conveyancers acting just for the borrower in a private mortgage continued to be free to give whatever form of certificate of title was considered appropriate, including the 'industry standard' City of London Law Society's land law sub-committee certificate (CLLS certificate) - so long as no retainer was thereby created between solicitor and lender, as the rule requires separate representation;l Commercial conveyancersacting just for the borrower in an institutional mortgage had to ensure that any certificate they gave did not extend beyond the limitations set out in the rule.

This anomaly caused problems for commercial conveyancers, because it was not clear whether or not the CLLS certificate went beyond the rule.

The CLLS certificate is designed for use in commercial transactions where the parties are separately represented but the borrower's solicitor provides a certificate of title to the lender.

The certificate is of general application and is used across the country.'Private' and 'institutional' mortgagesA further problem was that the expressions 'private mortgage' and 'institutional mortgage' as used in the rule caused confusion.

The expression 'private mortgage', when used colloquially, has a narrower meaning than that used in the rule.Therefore, the Law Society Council has made an amendment rule - new paragraph (f)(ii) and notes (i) and (viii) - which came into effect on 27 April 2001.

The expression 'private mortgage' has been replaced by 'individual mortgage'.

The expression 'institutional mortgage' has been replaced by 'standard mortgage'.

A standard mortgage is specifically defined in a revised note (i).

Any mortgage not falling within this definition is an individual mortgage.In addition, where a solicitor is acting only for the borrower but gives a certificate of title to the lender, the rule amends paragraph (f) and inserts a new note (viii) to allow, in cases where the property is not to be used solely as the borrower's private residence, the use of any form of certificate of title recognised from time to time by the Law Society Council.

Paragraphs (a)(iii) and (d) and note (iv) have also been amended for consistency of expression.

Note (iv) has been expanded to clarify the distinction between 'residential' and 'commercial.On 2 May 2001, the council recognised the CLLS certificate and the short form report on title also issued by the City of London Law Society's land law sub-committee for voluntary use in this type of transaction.

The 4th edition of the CLLS certificate is printed in the revised volume 38 of Butterworth's Encyclopedia of Forms and Precedents.

Both the CLLS certificate and CLLS report are available on the City of London Law Society's Web site at: www.citysolicitors.org.uk.

There is a link to this site from the Law Society's Web site at: www.lawsociety.org.uk - see 'commercial' under 'specialisms'.Additions or amendments which arise from the individual transaction may be made to the text of any recognised certificate but, to the extent to which they create an increased or additional obligation, they must not extend beyond the limitations contained in paragraph (c).The result of the change to paragraph (f) is that solicitors acting only for the borrower in a standard mortgage where the property is not to be used solely as the borrower's private residence can use either a recognised form of certificate or any other form of certificate which complies with paragraph (c).

In cases of separate representation where the property is to be used solely as the borrower's private residence, a recognised certificate may not be used and any certificate given must comply with paragraph (c).Solicitors acting for both lender and borrower in a standard mortgage are unaffected by this change.

In cases where the property is to be used solely as the borrower's private residence, the approved certificate set out in the appendix to the rule must continue to be used.

In cases where the property is not to be used solely as the borrower's private residence, any certificate given must comply with paragraph (c).As before, solicitors acting for the borrower in an individual mortgage at arm's length may continue to give certificates of title in whatever form they wish, provided no retainer is created between borrower's solicitor and lender.

This is because the rule requires separate representation for this type of mortgage and the rest of the rule does not then apply.Other issuesGuidance is now given in new notes (ix-x) on checking corporate capacity and obtaining collateral security as these are tasks routinely carried out as part of commercial lending transactions.The amended version of the rule is printed at the end of this note.

Significant changes are highlighted in bold print.l For additional information,contact the Law Society's professional ethics department, tel: 0870 606 2577.Rule 6(3) of the Solicitors' Practice rules 1990 (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 an individual mortgage of land at arm's length; (iii) if, in the case of a standard mortgage of property to be used as the borrower's 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 standard 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 a standard 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 a standard 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 enquiries 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 National Housebuilding Council (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 a standard mortgage of property to be used as the borrower's 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)(i) Subject to paragraph (3)(f)(ii), a solicitor who is acting only for the borrower in a standard 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).

(f)(ii) Provided the property is not to be used solely as the borrower's private residence, paragraph (3)(f)(i) does not prevent the borrower's solicitor from giving any form of certificate of title recognised from time to time by the Council of the Law Society (a 'recognised certificate').

Additions or amendments which arise from the individual transaction may be made to the text of a recognised certificate but, to the extent to which they create an increased or additional obligation, must not extend beyond the limitations contained in paragraph (3)(c).Notes(i) A mortgage is a 'standard mortgage' where (1) it is provided in the normal course of the lender's activities; (2) a significant part of the lender's activities consists of lending; and (3) the mortgage is on standard terms.

An 'individual mortgage' is any other mortgage.l A mortgage will not be on standard terms if material terms in any of the documents relating to the mortgage transaction are negotiated between the lender's solicitor and the borrower's solicitor contemporaneously with effecting the mortgage.

In commercial transactions, the element of negotiation will often relate to the facility letter or facility agreement rather than the mortgage deed itself.l Provided there has been no contemporaneous negotiation of material terms between the parties' solicitors, a mortgage will be on standard terms where the lender uses a prescribed form of mortgage deed.

Minor variations, such as the usual clause limiting the liability of trustee mortgagors, are not regarded as material and do not alter the nature of these terms as standard.l In addition to its normal standard terms, a lender may have a different set or sets of standard terms applicable to specialised types of borrower, such as registered social landlords.

Provided these terms are applied by the lender to all equivalent specialist borrowers or have been agreed between the lender and a specialist borrower as applicable to all transactions between them, they will constitute standard terms for the purposes of the rule.l The lender and the borrower must be separately represented on the grant of an individual mortgage at arm's length (see paragraph (3)(a)(ii)).

The rest of the rule is not then applicable.l A solicitor may act for both lender and borrower in a standard mortgage, provided (1) there is no conflict of interests; (2) the mortgage instructions do not go beyond the limits set out in paragraph (3)(c); and (3) in the case of a property to be used solely as the borrower's private residence, the approved certificate of title set out in the appendix is used (see paragraphs (3)(a)(iii)-(iv) and note (iv)).l The limitations of paragraph (3)(c) also apply to a standard mortgage where the lender and the borrower are separately represented (see paragraph (3)(f)(i) which includes certificates of title).

However, paragraph (3)(f)(ii) allows the borrower's solicitor, in a transaction where the property is not to be used solely as the borrower's private residence, to give a certificate of title in any form recognised by the Law Society.

A solicitor also remains free to give any other form of certificate which complies with the rule.l There may be cases where the lapse of time between the mortgage offer and completion (for example, when new properties are added) results in use of an earlier edition of a recognised certificate.

That is acceptable.(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 a transaction involving the charge of property to be used solely as the borrower's private residence 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:l the title 'Certificate of Title';l 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; andl 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 is only required for a transaction where the property is to be used solely as the borrower's private residence.

The approved certificate need not, therefore, be used for investment properties such as blocks of flats, business premises such as shops (even if living accommodation is attached), or '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 of the Supreme Court or registered European lawyer who is conducting or supervising the transaction, whether or not he or she 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 of the Supreme Court or registered European lawyer 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.

(viii) In relation to paragraph (3)(f)(ii), the limitations contained in paragraph (3)(c) will not apply to the insertion into a recognised certificate of any information required by that certificate.

For example, where the recognised certificate requires details of the parties' repairing obligations under a lease of the property, the borrower's solicitor may provide a summary of the relevant terms of the lease despite the general limitation contained in paragraph (3)(c)(ix).

However, any additions or amendments to the text of a recognised certificate to suit a particular transaction must not, to the extent to which they create an increased or additional obligation, extend beyond the limitations contained in paragraph (3)(c).(ix) Many lenders require their solicitor to check the vires of corporate borrowers and that the correct procedures have been followed to ensure the validity of the mortgage.

Paragraph (3)(c)(xiii) enables lenders to impose duties on solicitors in relation to the execution of the mortgage and guarantee.

Within this context it is perfectly proper for a lender to require a solicitor to obtain such information as the circumstances may require in relation to the capacity of, or execution of documents by, the borrower, third party mortgagor or guarantor; for instance, by way of certified copy minutes or an opinion from a foreign lawyer as to the validity and enforceability of the security or guarantee given by a foreign registered company.There is no reason why solicitors should not assist corporate clients by drafting minutes or board resolutions.

Solicitors should not, however, themselves certify the validity or passing of resolutions unless they were present at the meeting and have verified that it was convened and held strictly in accordance with all relevant requirements.(x) Paragraph (3)(c)(xx) allows a solicitor to accept instructions from a lender to carry out administrative arrangements in relation to any collateral security.

This expression includes associated debentures, collateral warranties, second charges, rent assignments, charges over rent income and deeds of priority.The administrative arrangements necessarily include the preparation and execution of the relevant documents and subsequent registration.Appendix(Approved certificate for standard residential mortgage where solicitor acting for lender and borrower not reproduced here).