Requests by Lenders for Files where a Solicitor has acted for borrower and lender - March 2012
The issue of requests by lenders or their solicitors for copies of files where the same solicitor had acted for lender and borrower in a purchase was discussed recently at the Professional Practice Committee.
When a borrower defaults on a secured loan, the lender repossesses the property with a view to selling it. If the lender sustains a loss on the sale it may, and often does, look to see whether it has a remedy against the solicitor who acted on its behalf in putting the security in place. Lenders know that solicitors carry Professional Indemnity Insurance against which the lender will hope a sustainable claim can be made. In the majority of cases the lenders are looking to see whether the solicitor has complied with the lenders' contractual instructions, in particular the UK Finance Mortgage Lenders Handbook.
The first step lenders take in looking at a possible claim is to ask for a copy of the solicitor's file. In the context of such a request the crucial question is to establish what the lender is entitled to demand to see, and whether solicitors are contractually obliged to send a copy of their file to a lender in such a situation.
The Committee agreed that Senior Counsel's Opinion should be obtained on this important matter, and that is now available.
In summary, counsel was asked to advise on three separate situations -
a) Where the terms of neither the UK Finance Mortgage Lenders Handbook. nor the BSA Mortgage Instructions apply (the basic case);
b) Where the UK Finance Mortgage Lenders Handbook. (or the BSA Mortgage Instructions) does apply; and
c) Where the purchaser/borrower client has given consent to disclosure of the whole file to the lender.
Counsel's preliminary comment is that such a request from a lender is undoubtedly a "fishing expedition" which would not be permitted by the Court in a petition brought under section 1 of the Administration of Justice (Scotland) Act,1972.
He then confirmed the Society's position published in the Guideline on Ownership and Destruction of Files that in considering a request from a lender for the contents of the file, the solicitor has to divide up the documents into three categories: documents that are the property of the borrower client, documents that are the property of the lender client and documents which belong to the solicitor himself. The timing of instructions from the lender is relevant, as no documents in the file can belong to the lender until the lender instructs the solicitor, although the lender may have a valid right to sight of some of them.
The initial instructions from the borrower will belong to the solicitor himself as the addressee of the letter or email. So also do private notes and memoranda written for the solicitor's own benefit; not by way of a record of material events, but as preparatory work designed to put the solicitor in a position to provide advice or draft the necessary documents.
In Counsel's view, much of the conveyancing work in the file will be work in which both the lender and the borrower will have a legitimate interest.
The basic case
The lender will own only the correspondence (including e-mail) into which it entered with the solicitor, any documents it sent the solicitor with its instructions, correspondence between third parties and the solicitor directed to the constitution of the standard security, any notes of meetings or telephone conversations on that subject, the drafts of the standard security (as also the drafts and engrossments of any other securities it was to receive to secure its lending) and a copy of the appropriate Land Certificate to show the requisite entry in the Charges Section of that Certificate.
The documents concerned with the conclusion of the contract of sale of the heritage and the transfer of that heritage (in the condition, and with the validity of title thereto, for which the borrower had contracted) are in counsel's view documents owned by the borrower client who has the primary, and greater, interest in them. The lender has a legitimate interest in matters relating to the purchase which may affect its position and about which the lender needs to know for the purpose of protecting its security. It should be informed about such matters by its solicitor, but that that does not entitle the lender to sight of the underlying documentation, which belongs to the borrower.
In counsel's opinion, no implied authority is deemed by the law to exist by which the borrower is held to grant the lender permission to receive, or even to see, all the underlying legal material which belongs to the borrower and the contents of which are confidential to him.
Where the UK Finance Mortgage Lenders Handbook./BSA Mortgage instructions apply
The material provisions are clause 14.3.2 of the C.M.L. Handbook and clause E28 in the B.S.A. Mortgage Instructions, which are in the same terms.
Counsel states that these clauses do not amount to a contractual permission to the solicitor (still less a contractual obligation on him) to disclose the whole file to the lender on the footing that all the documents comprised therein are as much the lender's property as they are the borrower's. In counsel's words "It is critical to the construction of the common clause to bear in mind that it forms part of the contract between the solicitor and the bank, and that the borrower is not party thereto. It cannot, therefore, detract from the property rights of the borrower."
He adds "In short, I do not think that these two provisions widen the rights of the bank to see contents of the solicitor's file which the bank does not already have the right to inspect as their owner. They make no material difference to the position outlined in the basic case."
Where the borrower client has consented to release of the file, or a copy of it.
Counsel saw this in a different light. With the exception of those documents in the file which belong to the solicitor, (to which the consent of the borrower client to release does not apply), the solicitor is obliged to allow the bank to see the whole contents of the file. It is a client's prerogative to waive his rights to confidentiality. As such a waiver must be "voluntary, informed and unequivocal" [Millar v Dickson 2002 SC(PC) 30], the solicitor has a duty to both clients to advise the borrower about the meaning and possible consequences of the waiver.
Counsel added however "Aside from material in which the lender has a proprietary interest, it can be entitled to see material belonging to another person only with the consent of him to whom the material belongs. Since actual (as opposed to deemed) contractual arrangements are very variable in their terms, on a basis which would be of general application, I can only advise that the solicitor consider carefully the correct construction of any arrangement said to embody or imply such consent in order to judge whether it does in fact convey such a consent, and, if it does, to determine its scope."
Finally on this aspect, the solicitor must check through the whole file to satisfy himself that in exhibiting the contents to the lender he will not disclose material which does not fall within the ambit of that consent.