The classic letter of obligation does not need to have any specific words, although it does need to fall within certain parameters. There are certain recommended styles issued by the Law Society. The letter contains an obligation on a solicitor to clear the record in the period from the date of a search to a date 21 days after settlement and also, if appropriate, to deliver a discharge of one or more security.

Is there anything needed to make the obligation classic apart from the actual obligation itself?

There are four conditions which must be complied with, where applicable. These are:-

· a search must have been carried out immediately prior to the date of entry including, in Sasine cases a search in the computerised presentment book. The CML Handbook provides that the search in the Personal Registers be no more than three working days’ old but in all other cases the Conveyancing Committee of the Law Society of Scotland (“the Committee”) accepts that both Property and Personal Register searches can be up to seven days’ old (five working days’ old); In calculating the number of days, the Committee considers that you should count from the settlement date back to the date to which the Search is certified as being correct (as opposed to the date on which it was issued).

· proper enquiry must be made of the client as to whether or not there are any outstanding securities. Even where the client is a receiver or liquidator or other insolvency practitioner the enquiry must be made of both the insolvency practitioner and of the original owner even although no response is received;

· the solicitor granting the obligation must be unaware of any other security; and

· the solicitor granting the obligation must in the case of an undertaking to deliver a discharge, have sufficient funds to pay off the loan(s).

If these conditions have been satisfied then the letter of obligation is a classic one.

What is the effect of a claim on a classic letter of obligation?

A claim can be made in the normal way but there is no penalty excess and no loading under the master policy for a claim under a classic letter of obligation.

What if these conditions are not complied with?

If the conditions are not complied with then the letter of obligation is called a “failed classic” and the normal excess and loading applies. It is “classic” because it contains the classic items but it is “failed” because the conditions (set out at 2 above) have not been satisfied.

What about where the letter of obligation contains other obligations, particularly where a solicitor has no control over the situation?

In this case the letter (or more accurately the relevant obligation in the letter) is called a “non-classic”. Where a claim is made against such an obligation there will be a “double deductible”. That means that double the normal excess will be applied to it. The grant of such non-classic obligations should, needless to say, never be given.

What about a letter of obligation which contains both classic and non-classic items? Does the whole thing become failed or non-classic?

A classic letter of obligation is always classic and has the same protections. If the letter contains other non-classic obligations then the classic elements of the letter remain protected and the non-classic elements will suffer the double deductible.

Is there an implied obligation on a solicitor to give a letter of obligation?

While there is no legal obligation to give a letter of obligation where missives are silent, there is a professional duty on a solicitor to grant a letter of obligation unless the solicitor advises to the contrary at the earliest possible opportunity. This expression “at the earliest possible opportunity” does not have a particular meaning but it is interpreted as being before conclusion of missives. This is because if a solicitor finds out before conclusion of missives that no letter of obligation will be given he or she can advise the client who can make an informed decision of whether or not to enter into the missives or to contract for a Register House settlement.

In some cases however, there are exceptions. Where someone conveys property as a gift the grantee takes it “warts and all” and is simply obtaining what is within the ownership of the granter of the gift and to the extent that the granter had power to grant it. There is therefore no obligation on the solicitor to give a letter of obligation in such a case.

Is it possible to contract out of giving a letter of obligation?

It is indeed possible to contract out of giving the obligation and this is most commonly found in articles of roup where one takes the title as it stands. It might seem rather odd not to give a classic obligation in such circumstances since a classic obligation attracts no excess or loading but for a classic letter to be given there needs to be a search and in a roup situation it may be contracted that no search is given. Where that is agreed in advance and where there is no search it is not appropriate to give a letter of obligation and there is clear notice in advance.

Do letters of obligation apply to the Charges Register?

The letter of obligation may contain a provision to show a clear search in the Charges Register and company file but there is no obligation on the solicitor to give a personal obligation to that effect and it should only be given on behalf of the client.

Whether the company is a UK company or a foreign company or an LLP or another corporate body one should never give a personal obligation for any company search.

However in missives, solicitors frame the clause obliging the client to supply company searches. It is reasonable to say that these searches should be brought down to the nearest reasonable point and in the committee’s view it is reasonable to order a charges search no more than three working days before settlement brought down to the date to which the registers have been brought down at the time of such order. (There is no objection to the parties contracting for a search more recent than that if circumstances require). If there were a breach of this then the clients’ claim would be a normal claim in negligence for the search having been brought down too early. Liability for the “gap” period (between the date of the search and settlement and indeed until 21 days after settlement) is, however, a clients’ risk.

What happens when the letter of obligation is breached?

A letter of obligation is a contract between the seller’s solicitor and the purchaser, not the purchasers’ solicitor. The remedy for the breach therefore is for the purchaser to sue the selling solicitor. If however, the obligation given by the solicitor mirrors an obligation in the missives then the seller and the seller’s solicitor are jointly and severally liable.

When does the letter of obligation prescribe?

Gretton & Reid are of the view that the obligation to deliver a clear search is an obligation in relation to land and therefore has a 20 year prescriptive period. However, Johnston in his book on prescription and limitation thinks this is a more doubtful position and one could argue for a five year prescriptive period on the grounds that it is just a contractual obligation. The prescriptive period however does not begin to run until the breach but that is likely to be soon after settlement since it covers only the “gap” period.

How long should the period be within the letter of obligation?

The Law Society and the insurers have agreed that the obligation may be given for a period of up to 21 days after settlement. However, practitioners must take all steps to stamp and register at the earliest possible opportunity. The Law Society of Scotland negotiated very hard for personal presentation for SDLT certificates and this is available if one feels it necessary.

Should letters of obligation be given in a transfer of matrimonial property on divorce?

If there is a consideration for the property then a letter of obligation should be granted (subject to the issues at 7 above). If the grant of a disposition is a gift then there should be no letter of obligation. In the vast majority of matrimonial cases there will be a consideration - one party will be “buying out” the other or even just giving up rights.

What does one do when one is conveying a property under the Adults with Incapacity Legislation?

In such a case the letter of obligation should state at the heading the name of both the adult and the guardian. They should jointly be referred to as the client.

Are there any further checks one should make?

If there is a high value transaction then one should consider whether the PI cover of the firm granting the letter of obligation is adequate. Although the letter may be classic and the insurers may be expected to pay out on it, they would only pay out to the extent of the cover.

Should there be an obligation to deliver a land certificate within a specific period?

If one gives an obligation to deliver a land certificate within a specific period then that is outwith one’s control as only the Keeper has control of when the land certificate will be delivered. It is therefore perfectly reasonable to undertake to deliver the land certificate to the lender “as soon as received”. Although slightly contradictory to the style of letter of obligation in the practice book issued by the Registers of Scotland the Committee is happy with this aspect.

Should an in-house lawyer give a letter of obligation?

An in-house lawyer is not covered by the master policy and therefore should not give a letter of obligation. However, it is only reasonable that the in-house solicitor must contract out in this situation and advise prior to missives being concluded that no solicitor’s personal obligation will be given.

What are the pitfalls when acting for an insolvency practitioner?

There is really no harm in the solicitor of the insolvency practitioner giving the classic letter of obligation as long as they comply with the conditions which would include an attempt to contact the previous owner. Some receivers’ solicitors are concerned that there might be a “Sharp v Thomson” type disposition in a drawer delivered but unrecorded. The Keeper however has confirmed that he will not exclude indemnity on that ground. The insurers do not add any further loading or penalty in those circumstances although they do expect the lawyer acting for the insolvency practitioner at least to make enquiries of the former directors or owner even although there may be no response.

If I am acting for a borrower, can I give a letter of obligation to the lender if I am not receiving a letter of obligation from the Seller’s solicitor?

Just because there is no “back to back” obligation from the other side, so long as the purchaser to lender obligation complies with the “classic rules” then any claim will be honoured as a classic obligation.

What do I tell the client if no letter of obligation is to be given?

Often with house builders’ missives provide for letters of obligation not to be given or for these to be granted on behalf of the builder. This is unsatisfactory and has been raised with Homes for Scotland. There appears to be no immediate prospect of the situation changing. If a letter of obligation is not to be given then the client must be advised of the risks.

When do I get the letter of obligation when entering into a lease?

Very often a tenant takes entry on missives but the lease is not signed up until later. A letter of obligation can be granted at entry. If there is any doubt arrangements should be made to have the lease signed by all the parties in time for entry. If that is not possible then the Keeper will accept the missives (provided they comply with the self proving rules) for registration in the Land Register.

If the lease is for less than 20 years then the letter of obligation should just be given at entry, as a real right is obtained at that point.

Can I grant a letter of obligation on a second registration where the land certificate has not been issued?

The obligation to deliver a land certificate with no exclusion of indemnity is a clients’ obligation. The solicitors’ letter of obligation simply covers the “gap” period and therefore this situation is no different from any other.

Can I give an obligation to deliver a discharge of a notice of potential liability for costs, even although I withhold funds?

A letter of obligation should not be granted unless one is in control of the situation, so only where you are sure you can implement it should an obligation be given in such circumstances. In this case it would be appropriate where the factor has given confirmation that he will grant a discharge in exchange for a fixed sum and that sum has been retained at settlement.

Does ARTL make any difference to letters of obligation?

There is no change in relation to the classic letter of obligation except that with a paperless transaction or an electronic Land Certificate, it is acceptable to change the terminology so that after the words “Land Certificate to be issued” you may add the words “in either paper or electronic format.

What happens when the format of the forms change?

If the format of the form changed as they have done recently, then it is perfectly acceptable to substitute the numbering. So, far example, in relation to a registered interest, references to questions “1 to 8” can now be “1 to 10”.

What is the Letter of Obligation position when selling a company?

If property is acquired on the sale of a company then there is no conveyance of the property and no letter of obligation need be given. However, sometimes the purchaser's solicitor has to give a letter of obligation to its clients' funder. That is treated no differently from any other so long as it is in classic format and the checks have been carried out. The purchaser of the company may be able to obtain the appropriate property warranties from the seller of the shares. This will be the case very often but even if it is not, it does not affect the position with the letter of obligation.