Ahead of the SGM debate on whether to enforce separate representation of mortgage borrowers and lenders, the Journal invited a property lawyer on each side to put their case

Yes: Vote for a healthier property market

At the SGM of the Law Society of Scotland (LSS) on 23 September, members have the opportunity to vote for separate representation (“sep rep”) and, in doing so, create a healthier property market for all concerned.

The Law Society of Scotland working party, composed of Scotland’s leading conveyancing practitioners, which considered all aspects of this issue in great depth, recommended sep rep, with only one member dissenting. In March 2013, at the LSS AGM, there was a significant majority of votes from the floor in favour of sep rep. No further poll was taken, but of the 423 proxies granted, more than 360 (85%) were in favour of proponents of sep rep (Ross Mackay, Ian Ferguson and Michael Sheridan).

Between the working party report and the LSS consultation, all the salient points have been explored in more depth than can be reproduced here. I will review the two main points and add a few observations of my own.

1. Removing conflict of interest

This was the first recommendation of the working party, which said: “The exclusion of dual representation would help to ensure that all parties to the transaction obtain truly independent advice and would enhance the probity and integrity of that transaction. This would undoubtedly be in the interests of both the profession and clients.”

This sentiment was echoed in the LSS consultation by the Scottish Legal Complaints Commission, which said: “Clarification of the responsibilities of solicitors should help remove any possibility of a conflict of interest arising and will, therefore, we believe, positively impact upon the number of complaints received in this area. We also consider that it will help clarify fundamental principles in line with the rule of law.”

It is hard to argue against greater probity, integrity and clarity.

2. The alarming increase in lender claims

The working party gave figures on the level of this threat to the Master Policy: “In 2006-07 just 25% of all intimated claims relating to residential property were lender-related. By 2010-11, this proportion had risen to 66%, of which over 80% were attributable to non-compliance with lenders’ reporting requirements under the CML Handbook.”

The root cause of these complaints is the conflict of interest referred to above. The actual cause is solicitors trying to do their best by their purchasing client, but failing to recognise that they also have a duty to report to their lending client.

This failure to report is a breach of our contract with the lender that is founded on regularly, and successfully, by lenders when they claim against the Master Policy. The cost of these claims is, of course, passed on to the profession by way of increased PI premiums.

The LSS noted in its consultation that if sep rep goes through, it will issue a practice note restricting what members can warrant in reports on title to title matters only.

A standard form of report on title will avoid a duplication of effort by the purchaser’s and lender’s solicitors. It will also prevent lenders getting round sep rep and attacking the Master Policy by extracting CML Handbook-type terms from solicitors.

Additional points

  • In commercial transactions, where sep rep was introduced almost overnight in 1994, the market found a way to continue doing business. The same will happen in the residential market.
  • The number of claims from lenders in commercial transactions is tiny in comparison.
  • Sole practitioners and other firms who have been discriminated against by being removed from lenders’ panels would be put back on the same footing as all other firms.
  • We will no longer have to spend huge amounts of time complying with the minutiae of each lender’s CML Handbook, driven by the fact that, if we miss something, we might be prosecuted by the LSS and sued by the lender.
  • Not having to pay Santander for the pleasure of them wasting inordinate amounts of our time registering under their panel management system, will be a cause for celebration.

No: If it ain't broke...

My argument against sep rep is focused on the inevitable unacceptable consequences of any system that consequently evolves, which requires the input of a mortgage lender’s solicitor who has no accountability to the client and a detachment from the client’s objectives. In turn, the client’s solicitor dare not allow the client to be bound by a formal contract without first having the lender’s solicitors’ confirmation of satisfaction with all matters they consider relevant. The result will be that no missives will be concluded until the lender’s solicitors’ process has been completed.

What the distorted system will produce is a prolonged period of time during which no legal commitment is entered into by either party, the consequences of which will be detrimental to the core values and benefits of our current system, which will become more akin to the English system with its well-publicised flaws.

In a buoyant market, such as was experienced in Aberdeen five or six years ago, a seller’s property could literally be worth thousands, if not tens of thousands of pounds more in a matter of weeks. Without the commitment of a binding contract, some sellers would see the opportunity of cashing in from an uplift in the market by reneging on agreed deals.

The reverse of this situation, i.e. a declining market, will open a window of opportunity for buyers to reconsider their position. They may also use the opportunity to attempt to renegotiate the deal or to consider other properties which come on the market in the interim period at a better price. These events may well become commonplace, and will totally undermine the process we now enjoy and which serves clients’ interests so well.

Who will benefit?

Where does the drive for sep rep come from, given that no particular party involved benefits from it?

The client loses the certainty of knowledge as to how they stand with regard to their purchase or sale, and the relative costs to the purchaser will be higher. The client’s solicitor’s role becomes little more than a postbox between the seller’s agent and the mortgage lender’s agent until confirmation of clearance of funds, at which point there will be a frenzy of activity to complete.

Is it even in the interests of the firms which seem to favour sep rep and who hope to profit from such additional work? Along with such volume business comes low fees, and management by less qualified and lower paid staff applying case management systems similar to those applied by the lenders. Those involved would know little of the transaction other than what is presented to them on a computer screen. We are already the victims of that level of “service” from lenders.

Surely the primary objective of any solicitor is to achieve their client’s goal. We should therefore look to what both purchaser and seller expect of the system when they undergo a transaction after agreement is reached on the basics of a deal. The legal system should provide to both parties the protection that the other will honour their part of the deal, reinforced by appropriate penalties if they do not.

The message to any buyer should be that when they offer for a property in Scotland, a seller can expect them to perform their obligation to pay the price on the due date. The seller in accepting the offer has the reciprocal obligation of honouring their missive obligations to the purchaser. Critically, those obligations should be consolidated in legally binding form at the time of agreement. This will not happen with sep rep.

There is no reason why a solicitor cannot represent the interests of both their client and the mortgage lender, since both have the same objective. If reform is needed, the way forward is surely for there to be closer liaison between the profession and mortgage lenders with regard to the refinement of obligations set out in standard clauses and their embodiment of the CML requirements.

Not only must we retain our system, we must look to encourage practitioners to conclude missives more quickly, which should be possible given the increased information now available to both buyer and seller before they decide to transact (as provided in the home report), the ease of interpretation of land certificates, and the incorporation of reasonable and balanced standard conditions in the missives. 

The Author
Graham Gibson, Kirklands, Perth Peter Anderson, andersonbain, Aberdeen Make sure you vote! A form of proxy will be sent to members with the papers for the SGM. One can also be downloaded from www.scottishlawagents.org/news/separate-representation  
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