From the Professional Practice team: an update on letters of obligation; and acting in a transaction between cousins

What letters of obligation are still classic?

Q. Are there any changes to the requirements for a letter of obligation to be considered classic for practice year 2017-18?

A. The definition of a letter of obligation and the special conditions attached (to ensure that a letter of obligation is considered classic and therefore for the self-insured amount not to apply) have been updated in the Master Policy for practice year 2017-18. 

A letter of obligation is now defined in terms of the Master Policy as “a letter of obligation granted prior to 8 December 2014 or a letter of obligation or undertaking granted on or after 8 December 2014 given by a solicitor or regulated person in connection with the settlement of a transaction for the disposal for onerous consideration of any interest in property or the granting of security over any such property by a client of that solicitor or regulated person as more fully defined at paragraphs 3 and 4 of the Law Society guidance on letters of obligation and advance notices:”.

Further, the self-insured amount shall not apply to any claim made against the insured in respect of a letter of obligation provided that the following special conditions apply:

(A) the insured can evidence that proper enquiry has been made of the client regarding outstanding securities (where relevant);

(B) immediately prior to settlement of the transaction in question, an up-to-date search or legal report was obtained which was clear except as regards any security, inhibition, charging order or similar to be discharged (“similar” shall not be deemed to include notices of payment of repair, or improvement grants). If such an up-to-date search or legal report discloses a notice of payment of repair and/or improvement grant this does not prevent a classic letter of undertaking being granted;

(C) the insured is not aware of any outstanding security (other than as detailed in special condition (B) above);

(D) the insured has not failed to discharge a security, or procure that such discharge is recorded or registered, in circumstances where the insured has had control of sufficient funds to discharge that security.

(A)-(D) will appear within the special conditions section of the Master Policy at point 3.

It was proposed that there would be an additional special condition this year, namely, special condition 3E, where “in respect of a letter of undertaking granted on or after 8 December 2014, the insured had no reasonable alternative available to the letter of undertaking in order to achieve settlement of the transaction on the contracted-for date of settlement”.

Some firms will have a copy of the Master Policy with special condition 3E included in their renewal. Please note however that special condition 3E has been removed and will not appear in the final version of the Master Policy for 2017-18. 

The ability to grant letters of obligation (covered by the Master Policy) will be reviewed prior to the renewal of the Master Policy for 2018-19. 

Acting for cousins in a property purchase

Q. We have been asked to act for both the seller and the purchaser in a residential property transaction where the seller and purchaser are cousins. Can we act for both parties?

A. Practice rule B2.1.4 provides for scenarios where it is possible for a solicitor to act for both parties in certain specified transactions where there would otherwise be a conflict of interest (categories (a)-(f)). These exceptions only apply where no dispute arises or might reasonably be expected to arise between the parties.

The category (c) scenario states that solicitors can act if the parties are related by blood, adoption, or marriage or civil partnership.

As outlined in the Society’s guidance notes, whilst the “parties related by blood” scenario is not restricted to any particular degree of relationship, it is unwise to stray beyond the forbidden degrees of marriage/civil partnership.

Therefore, because cousins can get married, we would not include “cousins” within the category (c) exception. Unless there were other factors, we would advise the firm to act for either the seller or the purchaser but not for both.

Share this article
Add To Favorites