Division C: Letters of Obligation and Advance Notices

1. How will the Land Registration etc. (Scotland) 2012 Act (the "2012 Act") affect Letters of Obligation?

From 8 December 2014 (the "designated day"), the following changes will affect letters of obligation:

(a) Will letters of obligation be used when settling conveyancing transactions after the designated day?

In the vast majority of transactions, letters of obligation will no longer be appropriate after the designated day.

Sometimes though, it may still be appropriate to use a letter of obligation when settling a conveyancing transaction after the designated day (e.g. for the grant of a lease which is not a long lease or where an undertaking to deliver a discharge is required). 

 (b) What changes will there be to the format of letters of obligation after the designated day?

Any letter of obligation issued after the designated day must reflect the 2012 Act regime. For example, references to Forms 10/12 and Forms 11/13 Reports must be changed to their 2012 Act equivalents (respectively, "Legal Report" and "Legal Continuation Report").

The Property Law Committee's view is that where the client is already contractually bound to exhibit/deliver an updated search in the Charges Register and Company file disclosing nothing prejudicial (usually this will be dealt with in missives), then this obligation need not be repeated in any letter of obligation.

Bear in mind also that under the 2012 Act:

  • The Keeper's "indemnity" will be replaced by the Keeper's "warranty";
  • A new land registration application form is introduced (and it is anticipated that land registration application forms will no longer be adjusted and agreed between parties' solicitors); and
  • Land (and Charge) Certificates will no longer be issued, but instead Title Sheets in the Land Register will simply be updated or created, as the case may be.

Letters of obligation which deal solely with delivery of a discharge may be appropriate sometimes where an Advance Notice is being used to protect the main transactional deed (e.g. disposition).

(c) How will the Master Policy cover for letters of obligation be affected after the designated day?

For the rest of the insurance year Nov 2016 to Oct 2017, there will be no change to the Master Policy regarding the grant of letters of obligation. Once practice develops under the 2012 Act, the position may be reviewed at renewal of the Master Policy in 2017.

(d) Will the guidance below still be relevant after the designated day?

Much of the guidance below will still be relevant to any letter of obligation issued after the designated day. Where the 2012 Act regime impacts upon that guidance, this is indicated below. 

2. View of the Property Law Committee

The Property Law Committee is of the view that conveyancing transactions should be settled with a letter of obligation being granted by the solicitor personally. The practice is to grant the obligation on behalf of the client in relation to the charges register and company file. The view was expressed that selling solicitors should take care when granting letters of obligation that they only deal with matters over which they have control.

2012 Act: After the designated day, in the vast majority of transactions, letters of obligation will no longer be appropriate.

Sometimes, it may still be appropriate to use a letter of obligation when settling a conveyancing transaction (e.g. for the grant of a lease which is not a long lease or where an undertaking to deliver a discharge is required). Where that is so, any obligation regarding Property and Personal registers will continue to be granted by the solicitor personally. Solicitors granting letters of obligation should take care that they only deal with matters over which they have control.

The Property Law Committee's view is that where the client is already contractually bound to exhibit/deliver an updated search in the Charges Register and Company file disclosing nothing prejudicial (usually this will be dealt with in missives), then this obligation need not be repeated in any letter of obligation.

3. What is a classic letter of obligation?

The classic letter of obligation does not need to have any specific words, although it does need to fall within certain parameters. There are various styles, including those produced by the Property Standardisation Group. The letter contains an obligation on a solicitor to clear the record in the period from the date of a search to a date 14 days after settlement and also, if appropriate, to deliver a discharge of one or more security.

2012 Act: Any classic letter of obligation issued after the designated day must reflect the 2012 Act regime. In the vast majority of transactions, a letter of obligation will not be appropriate.

4. 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 Property Law 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.

5. Under what circumstances can a firm grant an undertaking to deliver a discharge after settlement?

The Scottish Standard Clauses provide that a seller will procure that his solicitors will grant an undertaking either (a) to deliver a discharge of any outstanding standard securities with associated registration forms within 28 days of the date of settlement or (b) to exhibit within 35 days of the date of settlement a copy of the relevant Title Sheet showing that any security disclosed in the legal report exhibited prior to settlement has been discharged. 

Whilst the grant of such undertakings are a matter for negotiation between the parties, the Property Law Committee considers that, provided the solicitor granting the obligation is in a position to make full repayment of monies due to the lenders at the point of settlement and is not in possession of an executed discharge at settlement, there is no reason why a selling solicitor ought not to grant, and a purchasing solicitor accept,  such an undertaking whether or not the Scottish Standard Clauses form part of the contractual documentation.

6. 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.

7. 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 above) have not been satisfied.

8. 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.

9. 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.

10. 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.

2012 Act: After the designated day, there will no longer be a professional duty to give a letter of obligation where missives are silent.

11. 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.

2012 Act: After the designated day, where missives are silent there will no longer be a professional duty to give a letter of obligation.

12. 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 14 days after settlement) is, however, a clients' risk.

2012 Act: The Property Law Committee's view is that where the client is already contractually bound to exhibit/deliver an updated search in the Charges Register and Company file disclosing nothing prejudicial (usually this will be dealt with in missives), then this obligation need not be repeated in any letter of obligation.

13. 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.

14. When does the letter of obligation prescribe?

The prescriptive period of five years does not begin to run until the breach but that is likely to be soon after settlement since it covers only the "gap" period.

15. 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 14 days after settlement.  However, practitioners must take all steps to stamp and register at the earliest possible opportunity.  With SDLT online, this is much easier these days.

16. Should letters of obligation be given where there is no monetary consideration?

If there is a consideration for the property then a letter of obligation should be granted (subject to the issues above). If the grant of the disposition or lease or other document is disposing of the property is in the nature of a gift then there should be no letter of obligation. However, where there is a consideration which is not conventional (such as a transfer of matrimonial property where one party is giving up rights or buying the other out or in the case of a disposal of land where one party is taking on onerous obligations (for example "cleaning up" contaminated land) then that would be treated as an onerous transaction and a letter of obligation should be given.

2012 Act: In the vast majority of transactions, letters of obligation will no longer be appropriate. Sometimes, it may still be appropriate to use a letter of obligation when settling a conveyancing transaction (e.g. for the grant of a lease which is not a long lease or where an undertaking to deliver a discharge is required).  See also comments above in paragraphs 9 and 10.

If the grant of the disposition, lease or other document disposing of the property is in the nature of a gift then there should be no letter of obligation.

17. Should I provide a letter of obligation when my client grants a Section 75 Agreement to a Local Authority?

The Property Law Committee does not consider the grant of a s75 Agreement to be an onerous transaction.  While there is insurance for a letter of obligation in such circumstances a "double deductible" will be made, as the letter is not classic.  It is recommended that a letter of obligation should not be given in such circumstances.

18. Who is the "client" for the purposes of any letter of obligation granted when 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.

19. 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.

20. 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.

2012 Act:  This guidance will not remain relevant because Land Certificates will no longer be issued under the 2012 Act regime. Instead Title Sheets in the Land Register will simply be updated or created, as the case may be. Also, in the vast majority of transactions letters of obligation will no longer be appropriate.

21. 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.

2012 Act: An in-house lawyer is not covered by the master policy and therefore should not give a letter of obligation. After the designated day there is no longer a professional duty to grant a letter of obligation where missives are silent.

22. 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.

2012 Act: In the vast majority of transactions after the designated day, letters of obligation will no longer be appropriate. Sometimes, though, it may still be appropriate to use a letter of obligation when settling a conveyancing transaction and in those situations, 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 Property Law Committee assumes that the Keeper will not limit or exclude her warranty on that ground and that her prior policy will remain in place.

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. See also comments above in paragraphs 10 and 11.

23. 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.

2012 Act:  In the vast majority of transactions after the designated day, a letter of obligation will not be appropriate. Both dispositions and registrable standard securities can be protected by Advance Notices and so this guidance is unlikely to remain relevant.

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

Often 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.

2012 Act: In the vast majority of transactions, a letter of obligation will no longer be appropriate. However, it will continue to be appropriate in some situations (e.g. upon the grant of a lease which is not a long lease). In those situations, if a letter of obligation is not to be given then the client must be advised of the risks.

25. 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.

2012 Act: A letter of obligation will continue to be appropriate for the grant of a lease which is not a long lease. It will not be appropriate for the grant of a long lease.

26. 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.

2012 Act: Land Certificates will no longer be issued under the 2012 Act regime, but instead Title Sheets in the Land Register will simply be updated or created, as the case may be. Any letter of obligation issued after the designated day must reflect the 2012 Act regime.

In the vast majority of transactions letters of obligation will no longer be appropriate.

27. 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.

28. 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".

2012 Act: A disposition can be protected by an Advance Notice, so where ARTL is being used a letter of obligation will no longer be appropriate (except perhaps during the transitional week referred to above).

Land Certificates will no longer be issued under the 2012 Act regime, but instead Title Sheets in the Land Register will simply be updated or created, as the case may be. Any letter of obligation issued after the designated day must reflect the 2012 Act regime.

29. 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, for example, in relation to a registered interest, references to questions "1 to 8" can now be "1 to 10".

2012 Act: From the designated day, there will be a new land registration application form. It is envisaged that this new form will not require to be adjusted and agreed between the parties, so this guidance will no longer be relevant.

30. 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.

2012 Act: In this type of transaction, a letter of obligation granted by the purchaser's solicitor to its client's funder is unlikely to be appropriate because a registrable standard security in favour of the funder can be protected by an Advance Notice.

31.  How should a Letter of Obligation be dealt with when the Land Certificate is returned by the Keeper (following registration of the purchaser’s title prior to 8 December 2014)

Where a Land Certificate has been issued without exclusion of indemnity and all other undertakings contained in the letter of obligation have been fulfilled, the purchaser's solicitor should either return the letter of obligation marked as fully implemented or confirm to the seller’s solicitor in writing that the obligations contained therein are held as fully implemented.

32. Signing of Advance Notices

Advance Notices will usually be submitted electronically, through a closed IT system dependent on the use of a FAS number with Registers of Scotland. However, some forms for Advance Notices must be submitted on paper because electronic submission is not possible (e.g. an application for a First Registration Advance Notice or Advance Notice of Part, where a plan is required).

Solicitors, on behalf of their clients, in the normal course of a conveyancing transaction may either (a) electronically submit such forms; or (b) sign and submit such paper forms.

Back to Table of Contents